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Fearing losses, banks are quietly dumping real estate loans

nytimes.com

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Re: Fearing losses, banks are quietly dumping real estate loans

#11

Post by TuringNYC »

creer wrote: post #8
toomuchtodo wrote: post #4

Earlier quoted context omitted.

They may not be future underwater loans. Buyers are speculating on a distressed asset someone is willing to let go at a discount. Might be worth nothing, but also might be worth something. Banks have more stringent regulatory requirements with regards to these loans than speculators. From the piece: > For investors, the attraction of snapping up discounted commercial real estate loans is that the loans could be worth…

> Might be worth nothing In the US it's more or less impossible for the loans to be worth "nothing". They are usually secured by the property itself. But the loan itself is worth less if it's in default, rather than not quite yet in default. So it can be a better deal for a bank to sell it away now rather than later.

>> In the US it's more or less impossible for the loans to be worth "nothing".

Totally disagree. A loan can absolutely be worth nothing, especially if it is a 2nd/subordinated lien.

Imagine you buy a house for $1000 with $800 borrowed ($700 first lien, $100 second lien.)

If the home goes down in value 30%, the second lien is worthless. The administrative and legal cost of recovering the second lien may be greater than the recoverable value of the second lien, which in this case is $0.

Re: Fearing losses, banks are quietly dumping real estate loans

#12

Post by renewiltord »

qwertyuiop_ wrote: post #2

These articles don’t provide the complete picture. Who are the buyers of these loans and what is their motivation knowing full well these are future underwater loans.

Other real estate firms. Example: back in the day Veritas bought a bunch of distressed properties including many rent-controlled homes; they recently defaulted on $1 b of loans on them; the buildings are sold to Prado Group.

Re: Fearing losses, banks are quietly dumping real estate loans

#13

Post by doodaddy »

Just moments ago I read that regulators are raising flags about banks' plans for unwinding their derivatives portfolios. Then I come here to read this. Likely happenstance. Maybe no connection. But a little jarring. Then again, they say there are no coincidences!

https://www.reuters.com/business/finance/us-bank-regulators-...

Re: Fearing losses, banks are quietly dumping real estate loans

#14

Post by vineyardmike »

qwertyuiop_ wrote: post #2

These articles don’t provide the complete picture. Who are the buyers of these loans and what is their motivation knowing full well these are future underwater loans.

They won’t all end up underwater, and they’re not necessarily being sold at full price. Banks have additional duties to maintain their portfolio for additional regulatory reasons that don’t apply to other institutions. We saw this play out for First Republic last year.

Other investors clearly think that the loans have some value. Some loans may not go into default, but banks down want depreciated assets on their books, other lenders may prefer to restructure the loans at higher interest etc.

A lot of commercial loans require certain rental rates, which is why you’ll sometimes see large vacancy instead of price reductions. This could be one tool that allows that to change. Maybe with a price cut the tenants will be viable, but the bank would rather offload that risk to someone willing to restructure the loan.

Re: Fearing losses, banks are quietly dumping real estate loans

#15

Post by nine_zeros »

qwertyuiop_ wrote: post #2

These articles don’t provide the complete picture. Who are the buyers of these loans and what is their motivation knowing full well these are future underwater loans.

> Who are the buyers of these loans and what is their motivation knowing full well these are future underwater loans.

There are many investors who would like to buy the loan for cheap due to their risk tolerance and/or recouping time horizon and/or non-obvious benefits.

Firstly, it is clear that publicly listed banks have to remove loss makers from their loan portfolio because it affects their quarterly earnings. This is the reason why they'd take a small loss now than a large loss later.

Among the buyers, there could be someone who wants to own the land and the building for future generations - and buying the loan for cheap and foreclosing it might get them an amazing real estate. They could potentially keep this valuable thing in a trust for future generations - aka their time horizon may be over 50 years to recoup it.

Other investors might already be a roster of clients who want cheap office space but might not be able to buy the undervalued building. Buying the loan for cheap lets them get some cash flow and later foreclose on the building so that the roster of clients can be filled in for future use.

Others have funds of corrupt money from foreign lands they want to put to taxable use.

The real value seems to be that there are buyers who want the building but don't want to meet the buyers at the price, so they'd rather buy the loan and hope the current owners foreclose.

Re: Fearing losses, banks are quietly dumping real estate loans

#16

Post by timr »

TuringNYC wrote: post #11
creer wrote: post #8

Earlier quoted context omitted.

> Might be worth nothing In the US it's more or less impossible for the loans to be worth "nothing". They are usually secured by the property itself. But the loan itself is worth less if it's in default, rather than not quite yet in default. So it can be a better deal for a bank to sell it away now rather than later.

>> In the US it's more or less impossible for the loans to be worth "nothing". Totally disagree. A loan can absolutely be worth nothing, especially if it is a 2nd/subordinated lien. Imagine you buy a house for $1000 with $800 borrowed ($700 first lien, $100 second lien.) If the home goes down in value 30%, the second lien is worthless. The administrative and legal cost of recovering the second lien may be greater tha…

You're describing a situation where the second lien is underwater. This is not itself the value of the loan.

Just in the obvious case, if the borrower continues to pay, the lien is worth the future value of its cashflows. Not everyone who goes underwater on a loan simply stops paying.

In the US, even loans in default tend to have some value, because speculators are willing to buy the debt and attempt collection.

Re: Fearing losses, banks are quietly dumping real estate loans

#17

Post by fnordpiglet »

doodaddy wrote: post #13

Just moments ago I read that regulators are raising flags about banks' plans for unwinding their derivatives portfolios. Then I come here to read this. Likely happenstance. Maybe no connection. But a little jarring. Then again, they say there are no coincidences! https://www.reuters.com/business/finance/us-bank-regulators-...

To be clear, I owned a big bank risk platform for about 10 years and this is an ever reoccurring story and nothing I read in the article you linked feels concerning or abnormal. Particularly on the living wills, stress testing, and capital reserves it’s a bit of a game of chicken between regulators and the regulated. The reality is things are considerably better than they were in 2007.

Re: Fearing losses, banks are quietly dumping real estate loans

#19

Post by fnordpiglet »

toomuchtodo wrote: post #4
qwertyuiop_ wrote: post #2

These articles don’t provide the complete picture. Who are the buyers of these loans and what is their motivation knowing full well these are future underwater loans.

They may not be future underwater loans. Buyers are speculating on a distressed asset someone is willing to let go at a discount. Might be worth nothing, but also might be worth something. Banks have more stringent regulatory requirements with regards to these loans than speculators. From the piece: > For investors, the attraction of snapping up discounted commercial real estate loans is that the loans could be worth…

Yea this is a crucial point. The capital reserve requirements since the financial crisis on these assets is crazy high for a systemically important institution. Offloading to a less regulated entity would significantly improve the value of the position.
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