Where Are All The DealsEveryone is asking when will the lendersstart to sell paper and REO in a meaningful way. The answer is- notfor a long time. The problem is twofold. First the banks are sodamaged that they cannot bear the hit to capital that a truerecognition of current value would require. While the suspension ofmark to market was necessary to avoid a complete collapse of thebank balance sheets in 2008, it created an Alice In Wonderlandworld. Now everyone is living in the land of make believe. Almostall real estate is worth 40% less than at the peak in 2007, and 40%less than it is being carried. We are not going back to thosefrothy values for a very long time-maybe 10 years on an inflationadjusted basis. So now we have been forced into extend and pretendloan extensions to continue the fairy tale. If there were no suchextensions, then the lenders would have to recognize reality, andwe would be back to the problem of lender capital being hard hit byrecognition of true values. Many lenders are also under theillusion that they can repeat what a few did in 1993-94, which wasto hold the assets and later book a material profit on later sale.Lastly they looked at the huge profits many opportunity funds andindividual investors made in the RTC deals, and they think theyshould now reap those profits by holding the REO andloans.Borrowers remain in denial. They grossly overpaid in thefroth period, and they cannot now accept that they have been wipedout, so they also are making huge bets that their equity valueswill return if they just put in more through a loan reduction andextension of two years. They never look at the reality of the lackof any return on investment on the new equity which will be theresult, and they live in hope of substantial inflation in the nexttwo years to bail them out. They think that all that cash theypulled out when the refinanced their properties is really theirmoney and they fail to accept that was their profit, and now it istime to turn over the asset and move on with that cash still intheir pocket. They would be far better in many cases to use thecash they are paying to the lender for an extension, and insteaduse it to buy a new asset at today's deep discounted values.Servicers have told me they view that cash as really theirs, andthey are forcing borrowers to disgorge it by loan pay downs andextend and pretend.Special servicers are not lenders. They areessentially high yield investors running distressed debt shops.Most will not see it that way, but it is what is happening. Realexample: A servicer told me this week that they had taken back adistressed hotel. They invested $1 million of funds in the trust torenovate and reflag the hotel. Then they resold it for a $4 millionprofit. He did a good thing for the trust, but this is not theactions of a traditional lender. This mentality and action on thepart of special servicers, combined with extend and pretend, meanshundreds of billions of potential REO sales will not happen for along time.Everyone needs to finally accept that this delaying oftruth is going to continue for a long time. Eventually truth willprevail and the extend and pretend periods will run out. Thespecial servicers and lenders and auditors cannot continue thisdelusion forever. Assets need to be moved out of the hands of weakand unskilled owners, to the hands of well funded and skilledoperators. No financial crisis has ever been cured by make believeand ignoring real value recognition. The RTC, in retrospect, was awonderful solution. It will not happen this time. The regulatorsneed to force the small and regional banks to take the hits, andthen close the weak lenders who will then fail. That is notpolitically palatable so it is not going to happen. We have a verylong way to go as a result.

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Joel Ross

Joel Ross began his career in Wall St as an investment banker in 1965, handling corporate advisory matters for a variety of clients. During the seventies he was CEO of North American operations for a UK based conglomerate, and sat on the parent company board. In 1981, he began his own firm handling leveraged buyouts, investment banking and real estate financing. In 1984 Ross began providing investment banking services and arranging financing for real estate transactions with his own firm, Ross Properties, Inc. In 1993 Ross and a partner, Lexington Mortgage, created the first Wall St hotel CMBS program in conjunction with Nomura. They went on to develop a similar CMBS program for another major Wall St investment bank and for five leading hotel companies. Lexington, in partnership with Mr. Ross established a hotel mortgage bank table funded by an investment bank, and making all CMBS hotel loans on their behalf. In 1999 he formed Citadel Realty Advisors as a successor to Ross Properties Corp., focusing on real estate investment banking in the US, UK and Paris. He has closed over $3.0 billion of financings for office, hotel, retail, land and multifamily projects. Ross is also a founder of Market Street Investors, a brownfield land development company, and has been involved in the acquisition of notes on defaulted loans and various REO assets in conjunction with several major investors. Ross was an adjunct professor in the graduate program at the NYU Hotel School. He is a member of Urban Land Institute and was a member of the leadership of his ULI council. In 1999, he conceived and co-authored with PricewaterhouseCoopers, the Hotel Mortgage Performance Report, a major study of hotel mortgage default rates.