Bid and Ask Prices on Distressed Still Wide

The demand for distressed assets is growing, and the supply is massive and growing, but finding the price point where the two match has been difficult, explained James Lockhart, the vice chairman of distressed asset buyer WL Ross & Co.

The former top regulator for the government-sponsored enterprises told attendees at the National Mortgage News Buying and Selling Distressed Mortgage Portfolios Conference in New York that there are some deals happening but growth has been slower than predicted.

There are some $10.8 trillion in distressed residential real estate assets, of which 52% are owned by the GSEs. On the commercial side, there is $3.5 trillion, with banks holding most of those.

The amount of serious delinquencies is starting to slow down, but Lockhart is not sure whether it is because the economy is improving or that there is no one left to default.

He did note the Home Affordable Modification Program is making progress, although not as much as had been hoped when the program was set up.

A big part of the problem is that one-quarter of all mortgages are now underwater. In Nevada, the number is 70%.

There are some 8,000 banks in the U.S. and a lot of them are sitting on distressed assets without knowing what to do with them, Lockhart said.

Thus banking regulators have their hands full. The Federal Deposit Insurance Corp. has identified 775 troubled banks with $431 billion of assets on their books.

He noted that smaller banks have a higher percentage of their assets in commercial real estate, while at the same time they have the least ability to manage them. "It's amazing how bad the underwriting (at these institutions) was," he said.

There are lots of problems out there, but for those interested in buying distressed assets, there are lots of opportunities, Lockhart declared.

He repeated his position about there being problems for buyers and sellers reaching a price point. Buyers need to better understand the costs of how to work out the problem assets.

When asked if the government is making the banks sell distressed assets, he noted that now regulators are no longer concerned about "Armageddon" coming to the banking industry, regulators are getting more forceful in this area. They have not yet forced any asset sales, but there are banks undertaking actions on their own.

Lockhart mentioned the recapitalization of Sterling Financial Corp., Spokane, Wash. The buyers of that bank are not there to work the bank through the problems but to make acquisitions. His own company has such ambitions with its purchase of interests in a small bank in Michigan and in BankAtlantic in Florida.

He noted FDIC has cranked up its asset sales process and it is seeing more aggressive bids.

Still, the FDIC needs to create a structure to get the private sector more involved, as there are many banks that are in limbo that can't sell distressed assets.

It would rather see more situations like Sterling where capital comes into the institution instead of the institution having to be taken over.

In fact, Lockhart said it would be great if some sort of private version of the Resolution Trust Corp. could be created, if a structure could be formed.

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