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Real Estate Finance and Investment
Loan Sale Spotlights Demise of Extend And Pretend
September 24, 2010
The Royal Bank of Scotland's upcoming #3 billion property loan sale is the poster child for the end of extend and pretend, the strategy of extending a troubled or defaulted loan in order to avoid a write down or foreclosure. "The lenders, faced with E80 billion of commercial mortgage-backed securities set to mature in 2014, [recognize] that extending loans further will only push them into the 2014 mire," said Paul Lloyd, senior director of loan servicing at CB Richard Ellis in London.
U.S. lenders are echoing Lloyd's sentiments, citing an increase in the amount of debt capital, low interest rates and an understanding by banks that losses can't be delayed indefinitely. "We are seeing legacy lenders start to move away from pretend and extend activity and actually start to take losses," said Spencer Haber, ceo of H/2 Capital Partners. "The day of reckoning is arriving," he added, noting that distressed lenders are coming to terms with losses and, afraid of more to come, are starting to complete writedowns.
Anthony Orso, ceo of Cantor Commercial Real Estate, said that lenders are unwinding these loans simply because liquidity is coming back. A year ago, lenders had no opportunity to get bad loans off the books. "That is changing. 2011 will be a pretty robust year," he added. The firm is one of a number of U.S. lenders that announced plans over the past three months to make a big commitment to commercial real estate lending (REFI, 9/6).
Jeffrey Giller, cio of Clairvue Capital Partners, a newly formed investment company that aims to recapitalize overleveraged funds, said that the company was in part formed on the idea that extend and pretend was ending. "Our business doesn't have a place if lenders are extending and pretending," he said. "We created Clairvue with the certainty that extend and pretend was going to end. And in fact, it has." --Graham BippartDOWNLOAD PDF