Investment Banking in an Economic Meltdown

Investment banks are hunkering down to preserve capital, primarily because there are grave concerns about current property valuations, says Charles Krawitz, Senior Loan Sales Asset Manager, Fifth Third Bank, in an interview for The Alter Group podcasts on real estate.  Banks are reluctant to lend $10 million to a property that might be worth only $8 million, and with good reason.  Multifamily housing currently is the least distressed asset class, thanks to Fannie Mae, Freddie Mac and FHA financing that is creating a market for loans on these properties.

Distressed assets fall into three tranches – buildings, loans and securities.  According to Charles, if a property is struggling and the cash flow is impaired, there is a commercial lending problem.  In a CMBS structure, the loan has been sliced and diced so many times that it’s likely to be toxic and beyond restructuring.  Fully 1.8 percent of commercial loans cannot be restructured, and $400 billion in loans are rolling over this year alone.  The challenge is to pin down values in a distressed market when there are no comparable sales statistics.

One smart thing that the government has done is expand loans to small businesses through the Small Business Association (SBA).  With interest rates so low, this is very beneficial to small businesses, Charles notes.  Capital is once again flowing – though not in a tsunami – but that’s very good news.  The government will be an equity partner, and it’s likely that certain approved vendors will be part of this program.  A lot of questions remain, but it’s a very strong effort on the government’s part.