By Hook Harmeling, Senior Director
There are many factors to consider when a lender is attempting to sell a distressed note. If you are in the note buying business, you have probably heard references to short sales or discounted payoffs (i.e. DPOs) as an alternative to simply selling a note outright. It really depends on the bank, the banker and the situation as to which alternative the selling institution will select in order to dispose of a loan. While most banks (and bankers) try to keep personal issues out of the decision-making process, let’s face it, the bank may simply not care to deal with a borrower whose note is in default or distress.
When buying and selling notes became “popular” as a vehicle to quickly raise cash for the lender, the majority of the transactions were just simple note sales. These were typically quick close transactions, on an “as is / where is” basis. The lender could quickly sell a loan, raise capital, reduce its criticized loans and reduce loan loss reserves. The lender generally recovers the smallest amount of capital back from these sales and often times this is a vehicle for the bank to rid themselves of the borrower and the loan. A loan sale is usually a sign that the lender no longer wants to deal with the borrower or the distressed loan it carries on its books.
A DPO is perhaps the easiest solution, but much like a loan sale, once the payoff has occurred, the selling institution, in most cases, has just given up its rights to pursue the borrower for any deficiency. This is still a common method, particularly on non-recourse loans as there is no guarantor to look to for additional compensation. This can also be a popular option for a lender that does not expect to see the original principal back or has already written the loan down on its books.
For full recourse loans however, the short sale option may be preferred by the selling institution. A short sale is a tri-party agreement that allows the bank to get the loan off their books by forcing a settlement agreement between borrower and the bank, so they are not “chasing the guaranty” for years to come. This is actually the best result for all parties, as a true settlement is reached without having to go to court. This may also be the most equitable way to go about working through problematic loans, as all sides know what they are getting at settlement. In a simple loan sale, the borrower could potentially be put in a bad position as you never know who may eventually end up as your lender. A short sale removes these unknowns, but also allows the lender to recoup more dollars.
One thing is for sure: the borrower is not driving the bus on which option works best for the lender. The lender is in control and the lender is going to go with whatever option maximizes recovery or minimizes loss.
Over the past 24 months, Metropolitan Capital Advisors (MCA) has been involved in over $250,000,000 of loan workouts, recapitalizations, note purchases, short sales and DPOs. Many of these situations required a unique capital markets perspective that does not fall into the realm of the day-to-day finance intermediary. MCA has been successful in assisting institutions, borrowers and investors with developing a tactical plan to capitalize the acquisition of distressed assets and notes. As every situation involves a unique set of circumstances, we invite you to contact our firm directly to explore the ways MCA may be of assistance with a note sale, a distressed asset acquisition and/or everything in between.