“It's a Small World After All”

NEWPORT BEACH, CA-2012 proved to be another strong year for real estate portfolio loan sales in the US. Although 2011 will likely maintain the record for peak activity with approximately $42 billion in sales, 2012 activity remained strong with $25 billion in transactions and several interesting trends surfaced:

Average loan portfolio size declined. Loan pool size in 2011 averaged $129 million, excluding the record-breaking $11.1 billion in sales from the Anglo Irish Bank, and 2012 registered a moderate decline in loan pool size, averaging about $100 million.

Average loan amounts also declined.  In 2012, the average loan amount dropped to an average of $1 million, representing a significant change from 2011.  

Geographic concentration of portfolios is unchanged. The Southern U.S. continued to be the strongest source of non-performing loans (NPLs) in 2012, accounting for 46% of pools, followed by the Midwest with 19% and West with 13%.

Pressure on banks to sell more NPLs persists. In 2012, an estimated $400 billion in loans matured. With borrowers' continuing challenges resolving their loans, the amount of banks' distressed loans grew, resulting in increased loan sale activity. Motivation to sell was supported by successful transactions throughout the year.

Performance characteristics improved. There were more performing and sub-performing loans for sale in 2012, due to banks' willingness and ability to manage their balance sheets through successful, well-priced loan transactions.

Top loan sale advisors estimate that in 2013, Small balance loan portfolio sale activity in smaller loan pools will increase, with a majority under $100 million. According to Mission Capital, this is influenced by the growth in small balance lending which occurred from 2003-2007. This evolving trend creates a new set of challenges for loan buyers accustomed to larger loan portfolios with higher average balances. In response to these changes, buyers and sellers need to prepare for the evolving needs and invest in a system more suitable to managing smaller balances. While it is uncertain which portfolios will be marketed in 2013, the data suggests even smaller loan pools going forward and a trend of smaller loan averages.

The loan sale market is anticipated to stay robust in 2013 and beyond, with over $1 trillion of commercial real estate loans expected to mature through 2015. Although NPL's will likely continue to dominate portfolios, banks will continue to explore performing and sub-performing loan sales, as long as the market remains enthusiastic.