Many appraisers are becoming familiar with the problems ofvaluing real estate assets in a turbulent market with few actualsales taking place. Increasingly, however, appraisers are beingasked to step into the murky waters of loan valuation. Ernst &Young LLP recently conducted a survey on the distressed debtmarket. The survey included real estate investment and opportunityfunds, private equity, institutional investors and real estatedevelopers. The results may shed some light on current real estateloan valuation issues. For instance, more than half of investorrespondents to the survey bid on or priced US nonperforming loanportfolios in the last year, but fewer than 20% completed thetransaction. The survey portrays a US nonperforming loan market inwhich investors last year were eager to buy, but sellers wereunwilling or unable to sell.

Mark Grinis, the leader of Ernst & Young's Real EstateDistress Services Group, said, "The question on everyone's mindtoday is whether the US distressed loan market in 2010 and 2011will be the same as 2009, characterized chiefly by buyers waitingfor sellers to turn up and transact." He added, "The continueddevelopment of an efficient market for nonperforming loans here inthe US will depend on sellers being prepared to enter the processover the next six months."

Still, investors remain bullish about the opportunity to put outsignificant sums into NPL purchases in 2010 and 2011. More thanhalf of the investors surveyed believe that conditions in the NPLmarket will be favorable enough for them to enter this year, withalmost 40% focusing on the second half. Behind this projection maybe a feeling that by the second half of the year, the country'seconomic recovery may be apparent and a bottoming of the commercialreal estate market may be under way. What are these investors mostinterested in buying? In terms of loan type, 73% preferreddistressed whole loans backed by office, retail, industrial andmultifamily properties. About 30% favored distressed residentialloans such as single family and condo loans as well as constructionloans. More than 25% of respondents preferred loans backed by hotelproperties, nearly 21% would seek out distressed CMBS loans andalmost 16% would choose land loans. None favored residential MBSloans. The capital is clearly there for a market to developquickly. When asked how much they had allocated to invest in NPLportfolios, more than two-thirds of respondents said they wouldhave up to $500 million each available for purchases. Almost 5% ofrespondents allocated $500 million or more for such investments.However, the critical piece of the puzzle for a robust market indistressed loans in 2010 is still absent, according to the report.Despite an increase in troubled loans and growing Congressionalscrutiny of financial institutions' loan exposure, banks generallyhave been slow to deal with their problem loan portfolios, mostlikely due to a fear of incurring losses from loan write-offs,reductions in earnings or erosion of capital. According to recentFDIC data, US banks' provisions for loan loss reserves totaled$61.1 billion in the fourth quarter 2009. The survey suggests thatrespondents believe regional banks and thrifts are the most likelyactive sellers of commercial real estate loans in 2010.

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