Only real estate investors who are flexible, prepared to pivot and adopt new acquisition strategies will likely still be standing and profitable this time next year. Are you ready?

Shutting Down Access to the Foreclosure Pipeline

Foreclosures, short sales and REOs have provided real estate investors with easy money from flipping houses and locking into great spreads on rental properties for the last couple of years. However, those who fail to anticipate the coming changes face a drought in inventory and cash flow rapidly drying up.

Besides the immense amount of competition from a flood of newbies jumping in to cash on in of the foreclosure crisis changes in bank procedures and homeowner attitudes threaten to cut off the pipeline of distressed property deals so many have been enjoying a free ride on.

While some areas of the country may still be struggling to find their footing others like Miami and Sacramento already have a serious shortage of good inventory with any appetizing deals being snagged in a few days if not hours of going on the market.

Add to this reports by major mortgage lenders like Bank of America that just a tiny fraction of homeowners offered up to $20,000 to complete short sales and move out actually showed interest and it is clear that chasing individual sellers, even with the promise of big relocation checks is becoming more difficult.

Sweeping changes anticipated by lenders and the government to address the accumulation of distressed assets, stem the flow of foreclosures and protect home values from dipping further present the biggest hurdles. A switch in focus to allocating a large percentage of REOs exclusively to bulk sales means cutting smaller investors and real estate investing companies out of the business, or at least making it far more difficult for them to turn a profit.

The Battle Over REOs

If you have $100 million to throw down on a sweet portfolio of bulk REOs then you probably won’t have much difficulty in adjusting to these changes. Those who don’t likely won’t find major lenders interested in speaking with them at all. Clearly buying flips from bigger real estate investors who buy and break up these portfolios will erode much of your profits. So how should you be anticipating to pivot and locate the best deals on distressed properties or is it time to shut up shop and find another way to make money?

Successful Real Estate Acquisition Strategies for 2012 & Beyond…

All hope is not lost. Those who don’t have eight or nine figures to throw around just yet will need to find access to smaller community banks where they can get direct access to decision makers and it is easier to negotiate smaller deals as well as perhaps diversifying into working with commercial foreclosures. The challenge is how do you find them and acquire the right contact information?

Currently the only product on the market which truly delivers up to date REO and late and non performing loan information for these distressed property sources as well as contact plugins providing phone numbers and email addresses for bank contacts which can provide the leverage investors need in the form of detailed inside data is BankProspector. This software will obviously become one of the most valuable assets for anyone who wants to continue to enjoy big profits from the real estate market in the coming years. Well worth checking into for forward thinking investors, though don’t forget to begin honing new exit strategies to stay ahead of the competition too.

BankEast acquired by U.S. Bank

BankEast was a $261MM bank at the time that the failed they had just over $36MM in late and non performing real estate loans and REO. Their capital adequacy ratios were .45 and .89 for tier 1 and total respectively (if you don’t know what this means or why you should care when you’re working with banks then sign up for the free email mini course).

BankEast leaves behind $10,583,000 in commercial real estate, just $495,000 in multifamily, $22,852,000 in construction, and $2,223,000 in residential REO and troubled loans. Substantially all of these assets will undoubtedly be liquidated by U.S. Bank under an FDIC loss sharing agreement. The FDIC press release makes no mention of this however the Purchase and Assumption Agreement do reference residential and commercial loss sharing.

Patriot Bank of Minnesota acquired by First Resource Bank

The FDIC said this of the agreement in their press release

The FDIC and First Resource Bank entered into a loss-share transaction on $79.4 million of Patriot Bank Minnesota’s assets. First Resource Bank will share in the losses on the asset pools covered under the loss-share agreement. The loss-share transaction is projected to maximize returns on the assets covered by keeping them in the private sector.

Patriot Bank’s troubled assets consisted mainly of construction loans and REO although they did also have a modest amount of commercial real estate ($3.9MM).

First Guaranty Bank & Trust of Jacksonville acquired by CenterState Bank

First Guaranty is the second failed bank that CenterState Bank in Florida has acquired recently, the other was Central Florida State Bank.

First Guaranty had roughly $120MM in troubled real estate assets the bulk of which are loans on  non owner occupied commercial real estate however they also struggled with and left behind construction, multifamily, residential, and agricultural late and non performing loans and REO.

The FDIC had this to say about it:

The FDIC and CenterState Bank of Florida, National Association entered into a loss-share transaction on $292.9 million of First Guaranty Bank and Trust Company of Jacksonville’s assets. CenterState Bank of Florida, National Association will share in the losses on the asset pools covered under the loss-share agreement.

I should think Florida’s investors should be talking to CenterState for sure.

Tennessee Commerce Bank acquired by Republic Bank

Tennessee Commerce Bank bequeathed just over $60MM in problem real estate loans and REO either the FDIC or to Republic Bank. More than half of the assets were commercial real estate almost all of said total was comprised of nonaccrual  loans on owner occupied commercial real estate.

Notably Tennessee Commerce also had more than $18MM in multifamily split evenly between non-accrual loans and REO.

The FDIC said this:

As of September 30, 2011, Tennessee Commerce Bank had approximately $1.185 billion in total assets and $1.156 billion in total deposits. In addition to assuming all of the deposits of the failed bank, Republic Bank & Trust Company agreed to purchase approximately $203.9 million of the failed bank’s assets. The FDIC will retain most of the assets for later disposition.

Presumably some of these assets will eventually show up on the FDIC’s Real Estate Assets for Sale list, but don’t look for that to happen too fast…

Click on any of the thumbnails below for a larger view.

As you may already know by now three banks were closed on on January 20th. In this post we’ll take a look at warning signs that existed and the REO and non-performing loan portfolios they left behind.

The banks that failed were located in Pennsylvania, Georgia, and Florida:

• American Eagle Savings Bank (previously regulated by the OTS, no data available)- Boothwyn, PA acquired by Capital Bank, N.A.
• The First State Bank – Stockbridge, GA acquired by Hamilton State Bank
• Central Florida State Bank – Belleview, FL acquired by CenterState Bank of Florida, N.A.

All three of the banks suffered to one degree or another from bad real estate investments and the acquiring institutions will take these assets on to their balance sheets under loss share agreements.

American Eagle Savings Bank

Unfortunately we’re still waiting for the banks that were previously report through the OTS (now the OCC) to report in a more standard way so that their data is available so for the moment we don’t have details on American Eagle Savings’ problem portfolio. American Eagle Savings was a single branch outfit so don’t expect to see too much coming out of there. Here’s what the FDIC had to say about it.

As of September 30, 2011, American Eagle Savings Bank had approximately $19.6 million in total assets and $17.7 million in total deposits. In addition to assuming all of the deposits of the failed bank, Capital Bank, National Association agreed to purchase essentially all of the assets.

The First State Bank

Click to Enlarge

The First State Bank of Stockbridge last reported $516MM in assets. The total for their late and non performing loans and REO including commercial, multifamily, construction and residential assets was… ready?… $190,042,000! That means that 36.8% of this bank’s assets were late, non performing, or OREO.

Needless to say their ratios were down the tubes and if you were working with them you’ve wasted your time. The good news is that their assets will transfer to Hamilton State Bank so you should contact them and let them know you’re familiar with some of the assets.

The FDIC and Hamilton State Bank entered into a loss-share transaction on $419.5 million of The First State Bank’s assets. Hamilton State Bank will share in the losses on the asset pools covered under the loss-share agreement. The loss-share transaction is projected to maximize returns on the assets covered by keeping them in the private sector. The transaction also is expected to minimize disruptions for loan customers.

The First State Bank’s troubled assets included $40MM in commercial real estate assets, $131MM in construction related assets (real estate), and $18.6MM in residential assets. Go get em!

Central Florida State Bank

Click to Enlarge

Central Florida State Bank was quite small with approximately $79.4MM in total assets of which about 21% were late an non performing real estate loans or REO. The bank was taken over by CenterState bank of Florida ($1.9B in assets).

The bank left behind $16.8MM in late and non performing real estate loans and REO including $7.7MM in commercial real estate assets, $111,000 in multifamily assets, $7.2MM in troubled construction loans and REO, and $1.8MM in residential problems.

The FDIC said this of the assets:

The FDIC and CenterState Bank of Florida, National Association entered into a loss-share transaction on $53.6 million of Central Florida State Bank’s assets. CenterState Bank of Florida, National Association will share in the losses on the asset pools covered under the loss-share agreement. The loss-share transaction is projected to maximize returns on the assets covered by keeping them in the private sector. The transaction also is expected to minimize disruptions for loan customers.

The people I’m talking to expect that the smaller banks will continue to get squeezed out this year. If you’re out there servicing or buying from community and regional banks do your homework and don’t invest a bunch of time with banks that can’t or won’t sell.

You can do the work yourself or you can have our BankProspector software do it for you, but either way expect guard your time this year and pursue the best qualified prospects.

An Auctioneer’s Nightmare
It seems the Occupy movement has turned to foreclosure vigilantism. I pretty much exclusively sell commercial, construction, and multifamily REO and foreclosures so I’m not likely to have this happen, but if it happens to you we want to hear about it here.
SOUTHGATE: More than 100 show up to protest couple’s foreclosure WITH VIDEO

Look for BIG Foreclosure Numbers in 2012
Looking at the most recent residential non performing loan figures it seems pretty obvious that with $212 Billion in late and non performing residential loans and a scant $10 billion in residential REO we’d have to be at the tip of the iceberg. I mean… what percentage of loans are actually getting worked out these days? Even if it was HALF of total that leaves us with $100B and there’s $91B in the process of foreclosure as we speak so… there’s a minimum of 10X what’s on the market today, as REO, in the pipeline (as a quick back of the napkin report) on the immediate horizon.
The Street: Bank Foreclosures to Surge

File Under ‘Big Stupid Banks’
Apparently Ohio is dealing with a large number of banks starting the foreclosure process, maybe even completing it, evicting homeowners, and then finding out that in Ohio, it aint worth the trouble because the so much of the property is borderline worthless.

Yikes!

You won’t see smaller regional and community banks being this dumb. There are official guidelines for bankers dealing with this very problem. I recently read a release on REO management and disposition guidance from the OCC which, in part, said (in essence) if you do the math and it makes more sense financially to forgive the lien then to foreclose then go ahead and forgive the lien. BUT WAIT! I have an even better idea, bundle that stuff up and sell it ridiculously cheap to investors who can do one-on-one workouts with the owners to help them find payments they can afford. Now we’re talking, everybody wins.
Sen Brown Calls for End to Bank Owned Abandoned Homes

New Bank Data Compiling Now
January is a reporting month. That means that the quarter closed on 12/31 and banks have until the end of the month to file their Call Reports. During this time you’ll see that there is not a full data set for the most recent quarter, but if you use the Period Selector on the left sidebar you can still get a complete list of banks. In case you didn’t know, the REO and non performing loan portfolio data we have is pulled nightly from the FFIEC database of call reports.

We’ve also had a number of features added but I won’t get into these on this post.

I have a few resources I want to point you to that are spread out across this site. Maybe we’ll work to consolidate this into a more complete assemblage in the future.

One question I get constantly, in fact somebody called me in the middle of writing this post, is ‘how will I get to the right people and will they talk to me?’. There’s no magic bullet for this. I’ll refer to my recent post ‘Will REO Asset Managers Talk to You?‘. But my advice is to call high, be credible, and lead with WIIFM. The titles you’re looking for though are often ‘workout’ or ‘special assets’, I’ve even seen ‘Loan Trader’. If you’re using Linkedin for leads you might want to read my post about getting started with Linkedin for prospecting and how to get more leads with Linkedin.

I’ve covered some topics like how to know when banks won’t sell, a primer on buying non performing notes, why you should be expecting more deal flow soon. I’ve also had guests who have talked about the number 1 indicator that a bank is selling non performing assets, and how to use the bank data to estimate potential NPN deal volume.

If you trawl this site you’ll learn about how loss share agreements impact distressed asset deal flow with banks that have them and how the big boys handle their loan sales process. You’ll probably want to know if the bank is even healthy enough to sell or if they’re more likely just another ‘can kicker’.

Way back when, I had a chat with a leader in distressed commercial real estate in New England who talked about what amounts to a distressed assets mastermind group, I even chatted with an expert in putting together funds about the 6 components to a successful distressed assets fund.

I hope some of this is helpful and gives you enough to chew on if you’re looking for more information. The experts I’ve had the pleasure of interviewing have provided some invaluable insight in the business and I hope you learn from them.

Oh, and by the way I have a free email mini course where I tell you everything you need to know over the next two weeks about how to use free public bank data to find and qualify banks with REO and non performing loans.

In Massachusetts, for example, you can find early info on residential properties by tracking the Servicemembers Civil Relief Act notices that are filed and recorded with the registry, not so with commercial.

Over the last 5 years most of my transactional work has been non-residential foreclosure and REO sales for banks. By non-residential I mean commercial, multifamily, and construction loans that went bad.

Once we start advertising an auction I get all kinds of calls from people who want to buy the property pre-auction, or who want to stop the auction by buying the note. Most of the time if I’m running ads then you’re too late for that and your best bet is to show up at the auction.

Some investors, however, go upstream. It’s not uncommon for me to be talking to potential bidders who knew that the sale was coming before I even got the file. The number of files that I never even see because a deal was done before it reached me, I can’t say.

There are several reasons for a lender to sell a note to you:

1. Reduced liability, any errors in the foreclosure process are now yours.
2. Uncertain pricing, at auction the eventual sales price is unknown
3. Immediate capital, foreclosures can take a while especially if the borrower files bankruptcy
4. Reduced headache,if the lender forecloses and takes the property in as REO the management and foreclosure expenses can be significant, they’re not set up to own real estate
5. Clean hands, some community bankers would rather avoid the publicity especially if the borrower is well known locally, they’re not the bad guy if you have the note

Going Upstream for Commercial Foreclosures

#1 Distressed Owners

Nine times out of ten an owner is going to market his property if he’s in trouble in an effort to avoid foreclosure. Often the listing will be overpriced because he’s under water. Most of the time when I hear from a private seller who’s considering an auction he’ll have had the property marketed both for sale and for lease, sometimes for extended periods, almost always over priced.

There’s a possibility you can find your way through a short-sale with an owner in a position like this but there’s a lot of work involved for a single deal that’s, let’s face it, not likely to happen. If your negotiations fail, however, it doesn’t mean it has to be all for not.

If you can learn who the lender is (in some states the recording mechanism makes that easier than in others) you could parlay your short-sale attempt into a note purchase from the lender by using your knowledge of the property and the market to get an audience.

#2 Lender Counsel

Some attorneys just process paperwork and some are actually deal makers. Attorneys who represent banks don’t tend to represent just one.

If the practice is heavy into commercial foreclosure representation you can bet that they have a number of close bank relationships. In fact you’re very likely to see the same few firms’ names on most of the notices of default published in your local paper. If the firm a is a foreclosure factory pumping out notice after notice for the largest lenders you’re wasting your time.

If, however, you see the same names repeatedly representing banks for commercial foreclosures for credits at community and regional banks then you might have someone you should talk to.

Commercial workout officers depend heavily on the bank’s counsel. If you find someone who is a deal maker and you prove yourself to be a much needed source of capital who can perform in sticky situations you could find yourself pretty busy with a few of the right connections.

#3 Community or Regional Bank Commercial Workout Departments

Unless you’re looking for high 8 and 9 figure deals you’re probably wasting your time trying to pursue the top 10 or 20 banks. Fear not, there are still some 3,500 plus banks with commercial foreclosures most of which are your more accessible community and smaller regional banks.

If you can find out who your target banks are and who you should be talking to inside a handful of banks you are in a position to develop a serious pipeline where you will get a call (or an email) when the lender has loans that are going south. If you’re a commercial REO broker this is when you’ll be called upon for a BPO.

You may have noticed that all three of these routes end with the bank, and that’s no mistake because as you know, the bank is in the driver’s seat these days.

The way banks handle their CRE defaults internally varies. In some banks there are dedicated departments named ‘Commercial Workout’ , ‘Special Assets’, or something more sneaky like ‘Global Restructuring’ (that’s a real one), also ‘Special Assets’. Sometimes the REO asset manager isn’t involved in the workout process at all. Some small banks use the ‘Line’, the commercial loan officers, to handle their own problem (not a good idea in my opinion, but common) loans.

If there is an obvious entry point then start there, if not then you can avoid a lot of the guessing by calling high. If you’re not comfortable calling the president then call an SVP of Commercial Real Estate or ‘Commercial Lending’.

When you call high you’re going to get bumped down eventually but at least you’ll know you’re in the right place. A word of caution, it seems everyone that’s not a teller or a branch manager is a VP at a bank so you shouldn’t be under the impression that you’re talking to a decision maker (necessarily) if that’s contact’s title.

Commercial foreclosures will be with us for a while and this is most certainly the best opportunity since the RTC days. Start looking for ways to upstream your deal sourcing now and get yourself positioned to win.

Bank Contacts

Previously when you got bank contacts from the Jigsaw plugin all the contacts went into one big ‘Contacts’ bucket. Now your contacts are automatically associated with and attached to the bank (see the image below).

We also haven’t had a ‘notes’ section in BankProspector 2.1, probably should have earlier, now we do.

This means that all your research and contact activities can happen in 1 place. No more jumping around different websites and applications. Fire up BankProspector, find your target banks, find your contacts, make your calls, connect, or send your emails from right where you are with all their data right in front of you. Simple.

This change however leaves many of us with (sometimes large) numbers of contacts that are sitting in the aforementioned bucket not associated with any bank record. We’ve have created a fix for this. In your ‘My Contacts’ panel on the bank record you’ll see a note next to each contact that says ‘Link to this bank’. We’re asking members that they go ahead and associate their contacts with the appropriate banks by clicking this link.

We are shooting to remove the ‘My Contacts’ bucket from the individual bank pages (but leaving the separate contacts page) by the end of January. This change will result in improved performance and ease of use for everyone. New members will not have to do this at all and can disregard.

Like other states construction REO makes up the majority of the bank owned real estate accounting for 49% of the total. First National Bank in Edinburg TX holds the number 1 spot. Forty percent of banks reported some construction OREO.

Commercial REO balances rose nearly 14.5% and comprise 30% of the whole. First National in Edinburg also owns the most commercial REO.

Residential REO balances rebounded by 13% after having shrunk by the same in the previous quarter. Beal Bank has the biggest residential REO balance sheet in Texas. Only 3% of banks reported any owned multifamily with Patriot Bank in Houston holding the top slot.

Commercial Foreclosures Set to Increase

After a brief reprieve last quarter, banks in Texas saw their early stage, 30-89 day late, commercial real estate defaults increase pointing to more trouble in the future. Non performing loans that were 30-89 days late or 90+ days late and still accruing, together, reached their highest level in more than a year increasing by almost 20%. Non accrual balances eased slightly. Overall late and non performing CRE loans grew modestly. Comerica Bank has the largest portfolio of non performing commercial real estate loans of all banks based in Texas.

Defaulted Construction Loans Drag On

Texas like just about every other state went heavy into construction loans which were the first of the asset types to see broad default. The good news (?) is that they’ve already booked in and now own a lot of the construction problems. Banks seem to be refusing to accept the value of their construction projects evidenced by the fact that it appears they own a lot and they aren’t selling any. No doubt this is due to the fact that they will take a bath on most of them. Better to leave it on your balance sheet and pray for a while I guess?

Residential Loans a Persistent Problem

While banks worked through some of their non accrual more homeowners fell behind on their loans for the first time than in each of the previous 2 quarters. Only 90 banks reported residential loans in the process of foreclosure but 292 banks reported late stage non performing residential loans (non accrual). It’s notable that Wells Fargo Bank in Houston owns a large portion of the residential loan portfolios owned by TX banks, however they actually saw fewer homeowners with 30-89 day late loans.

Modest Multifamily Problems

Just 24 banks in TX reported non accrual multifamily loans for a scant $100MM. bank in Texas only own about $35MM in multifamily REO.

Bank owned construction projects continue to dominate the bank’s OREO balance sheets representing just over 45% of the total volume and being reported by 132 of 245 banks.

Commercial REO came in at 30% of the pie with 110 banks reporting some volume.

Fewer than a third of banks are reporting residential reo making up up 15.4% of the total.

Bank owned multifamily properties came in at just 8.3% with only 11% of banks having problems and farmland made up the remaining sliver.

The sum total of reported REO from California’s banks currently sits at $1.74B.

Fewer Commercial Properties Headed to Foreclosure

California banks saw a reduction in the total volume of early stage commercial real estate defaults (30-89 days late) of about 8.4% from the previous quarter which is just slightly better than the US average for Sep 2011. Later stage non performing commercial real estate loans (non accrual) fell by a similar amount.

Even as S&P is downgrading banks nationwide, banks are reporting improvements in CRE loans. It is interesting to note, however, that the commercial REO only represents about 13% of the total volume of distressed CRE assets currently reported.

This points to a LOT more bank owned commercial foreclosure inventory showing up on the market in the not-too distant future or else broader non performing loan sales. The assets have to go somewhere…

Construction Loans Still a Plague, But Less So…

Construction loans collapsed early in the cycle and if you’ve been trying to get one you know that banks aren’t giving them. Banks in California have been steadily reducing their construction loan exposure and consistently writing down losses but we’re not seeing much in the way of sales. Of course financing is the reason there aren’t substantial construction REO sales at this point, on both sides, meaning end product residential loans are difficult but construction loans are near impossible. Sort of self fulfilling isn’t it… Late and non performing construction loans and REO topped $2.4B for CA banks for Sep 2011.

Early Stage Residential Default Soars

Residential first position loans 30-89 days late, the first stage of default, jumped by 23.8% for CA banks. Residential REO bumped up slightly, and over all distressed residential loans and bank owned property rose about 4%.

Right now only 7% of the trouble has actually made it’s way to market as 0REO. Another way to say this is that there’s potential to see 14X the current volume of bank owned residential properties on the market with CA banks… Fifty banks reported $1.38B in residential loans in the process of foreclosure.

Multifamily Continues as a Bright Spot

Everywhere you look it seems multifamily (5+ residential units) is the big winner right now. California banks are seeing substantially reduced early stage defaults (30-89 day lates). Fewer than half as many banks reported 30-89 day late loans as they did non accrual (late stage non performing). Roughly 22% of the total volume of problems already found it’s way in as REO.

Next quarter we hope to start to take a look at where lending is increasing, or decreasing.

As we look across the stats for the US it seems pretty clear that we have a long, long way before we’re out of the woods and California’s banks are no exception. At the same time if you’re well positioned right now it’s these circumstances that produce serious wealth one or two decades from now.

When I got my start in this business, a little more than a decade ago (seems like yesterday), I remember working with investors who had bought during the ‘RTC‘ days, or I should say trying to work with them … They’d turn up their noses at a lot of the returns I’d show them and tell me about the old days… of course I was sure (until 2006) that they were reminiscent dreamers who were missing the boat, we’d never see RTC type discounts again… right?

The reduction, while maybe encouraging if you own a bank, doesn’t of course tell the whole story of the commercial real estate market.

This past quarter saw a number of banks dispose of  pools of loans and 30 banks were closed. Assets sold to non-bank institutions and any assets that were not taken under loss sharing agreements simply leave the aggregate number. In other words, when assets come under FDIC receivership or are sold outside of the banking system the volume disappears. Recent Colony Financial and Sabal acquisitions are examples. In fact the transaction volume of these two investors alone explains some of the ‘improvement’.

Substantial charge-offs also contributed to the overall reduction. Charge-offs in this situation are a good sign of (hopefully) healthy institutions admitting the reality of the value of their portfolios.

Banks report commercial real estate loans as either ‘Owner Occupied’ or ‘Non Owner Occupied’ and they report loans 30-89 days late, 90+ days late, non-accrual and REO. Here’s the breakdown of the percent change by loan type last quarter to this:

• Owner Occupied 30-89 Days Late +3.59%
• Owner Occupied 90+ Days Late +11.43%
• Owner Occupied Non Accrual -2.24%
• Non Owner Occupied 30-89 Days Late +2.21%
• Non Owner Occupied 30-89 Days Late +6.97%
• Non Owner Occupied 30-89 Days Late -7.05%
• Commercial REO +1.88%

*BankProspector numbers represent approximately 93.7% of banks but exclude those banks formerly regulated by the OTS now regulated by the Office of the Comptroller.