A number of my friends have assignments to advise lenders onwhat they have on their book and what to do to fix the problemloans. They are finding an amazing lack of knowledge at thelenders, and bad files even on large loans. The special servicersare overwhelmed and have staffed up in some cases with young peoplewho are not really capable of understanding the real estate. Inaddition, special servicers are under no pressure to take action.Their fees stop if they foreclose and sell, and the bondholders arestill hoping that time will heal all wounds. Because they areoverwhelmed, it takes them months to get to try to understand anyone asset, while the borrower is in a hurry to fix his problem orgive back the keys and get out from under.
Some of the big problems in trying to fix the loan book are docsare often missing, they are poorly drafted, some key items ofcollateral were not secured, intercreditor agreements do not reallywork well in some cases, and often the bank loan officers or peopleat special servicers do not know or understand the asset. In anumber of cases they do not even understand what they need to know.While we all know a lot of loans were made with no realunderwriting, the problem now is the people who are supposed todeal with the problems do not know how to underwrite either. Inshort, the lack of knowledge at lenders of all types which causedthe mess, is not changed, and many lenders do not really want tohave a consultant tell them they should write down their book whichwill mean capital deficiencies.
Further complicating the fix is the number of small banks whomade local loans, and now the bank is out of business or will bewithin a year. These banks cannot make new loans and likely do nothave any staff capable of intelligent restructuring. There havealready been 240 banks closed by the FDIC over the last 18 monthsor so, and there are likely another 200-400 to go. If the economycontinues to be slow to improve, which is likely, and with theconfusion sewn by FinReg, the number of closed banks willprobably be closer to the high end. In the meantime getting newloans for small and mid size assets is difficult, and findinglenders for secondary cities is very hard. There may be a lot ofcapital around, but it is not for the vast number of smaller assetsthat are way over levered.
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