A community bank sells a non-performing commercial real estate loan by packaging the loan file, sharing it with one or more qualified buyers, agreeing on a price, and assigning the note, mortgage and guaranties to the buyer at closing. The buyer then takes over collection, workout or foreclosure. For a single loan, the process can often be completed in weeks rather than the many months a contested foreclosure can take.
When does selling the loan make sense?
Selling makes sense when the bank's expected recovery from working the loan out, after time, legal fees and carrying costs, is not clearly better than a price it can get today. It also makes sense when the loan is taking up a disproportionate share of a small special assets team's time, or when the bank wants to reduce classified assets before an exam or year-end.
It is often a good fit for loans where the borrower is unresponsive, the guarantor has limited assets, the collateral needs work, or foreclosure is likely to be contested. In those cases the bank would be trading a known price for an uncertain path.
What does a buyer need to see?
A buyer needs enough information to understand the loan, the collateral and the path to recovery. At a minimum: the unpaid principal balance, interest rate, maturity, payment history and current default status; the collateral address, property type and occupancy; and whether a foreclosure or bankruptcy is pending.
Before closing, a buyer will review the note, mortgage, assignment chain, guaranties, any modifications or forbearance agreements, the title policy, and any recent appraisal, broker opinion of value or rent roll. A clean, organized file speeds everything up and usually improves pricing because the buyer is taking less unknown risk.
How is a non-performing loan priced?
Buyers generally start from what they expect to recover, not from the loan balance. That means estimating the as-is value of the collateral, subtracting the expected costs and time to get control of it (legal fees, taxes, insurance, repairs, property management), and then discounting for risk and the return the buyer needs.
Because of that, two loans with the same balance can trade at very different prices. A loan secured by a leased building with a cooperative borrower is worth more than one secured by a vacant building with an active bankruptcy. Every situation is priced on its own facts; there is no standard percentage.
What are the steps from first call to closing?
First, the bank shares a summary under a confidentiality agreement. The buyer gives indicative pricing. If that is in range, the bank opens the full file, the buyer completes diligence and a loan sale agreement is signed. At closing, the buyer wires the price and the bank delivers the endorsed note, an assignment of mortgage and an allonge or assignment of the other loan documents.
The bank's counsel and the buyer's counsel handle the documents. The bank also needs internal approvals, which is often the longest step. Building that into the timeline from the start avoids surprises.
Does the bank have to sell the whole portfolio?
No. Many community banks sell one loan at a time. Some buyers only bid on pools, but smaller direct buyers, including Belcz Group, buy individual commercial loans. Belcz Group buys single loans with unpaid balances of $250,000 to $3,000,000 secured by property in New York, New Jersey and Connecticut.
What should the bank watch out for?
Confirm the buyer has funds and does not need financing to close. Ask whether pricing is firm or subject to further review, and what would change it. Make sure the loan sale agreement is clear about representations, what happens to escrow balances and how payments received after the cut-off date are handled. And have counsel review any borrower notices required by the loan documents or by law.