The Importance of Efficiency in Secondary Markets

By Alvin Sarter, Managing Member, Treuhold Capital Group LLC

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Large amounts of mortgage debt, both residential and commercial, will default over the next 5 years. Many of these defaults will be maturity based and others will due to the inability of borrowers to cover their debt service due to declining rents in most markets across the country. In addition, securitized debt, now pooled in the CMBS and RMBS markets, are about to implode with more product coming through the floodgates. Capital markets are frozen and available leverage is at stringent loan to value and debt service coverage ratios, making refinancing much more difficult without significant deleveraging by borrowers who are already financially stretched.

More and more banks want to or need to clear their balance sheets of these problem loans and no longer want to engage in time consuming and costly loss mitigation in house. Investors are seeking access to these types of products to diversify their portfolios.

So, how does one get efficient access to this market, both as a seller and as a buyer? It has always been difficult for smaller institutional investors and individuals to source community banks, servicers, special servicers, and non-financial institutional holders of performing, sub-performing and non-performing debt. It has been equally difficult for small community banks and other sellers of individual loans or small portfolios to access the smaller institutional investors and individuals that may present them with the most efficient way of dealing with these assets. More banks are marketing their debt product through auctions, with most sellers reserving the right not to sell if its threshold prices are not met, leading to weeks of wasted time and expense performing due diligence. Many portfolio sellers also stratify their portfolios making it extremely cumbersome for the small investor.

As a non-institutional buyer of individual notes and small portfolios, I suggest the following small changes to make the market more efficient which will improve the process and outcomes for the seller, buyer, and, ultimately, the economy as a whole. Direct access for sellers to connect with the decision makers selling the loans would be more efficient and cut down on cost and energy. Additionally, current practices of relying on data tapes containing information superfluous to a buyer’s decision to purchase or not are antiquated, instead a buyer should be supplied with precise data needed to analyze whether a bid is appropriate or not, and at what levels.

The creation of an efficient market for problem loans would enable Lenders to raise needed capital, improve their liquidity and resume normal lending practices.

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