Bank Execs Have Reservations About Government Being Equity Partner in Legacy Loans Program
- Jun 04, 2009
Guy Ackermann (pictured) is a partner in the Real Estate, Finance & Construction Group of Plante & Moran, a public accounting and business advisory firm that provides financial, human capital, operations, strategy, technology and family wealth management services. Ackermann has more than 27 years of experience representing real estate owners and developers in arranging financing, creating joint ventures, consulting for the acquisition and disposition of real estate and more. He talks to MHN Online News Editor Anuradha Kher about original plans for the now-delayed Legacy Loans Program, whether he thinks the program has the potential to work in the way it’s currently structured, and why he believes the Derived Investment Value (DIV) methodology should be used to value the troubled assets on banks’ balance sheets.MHN: How will the legacy loans program help financing in the multi-housing sector? Ackermann: While support for the Legacy Loans Program is dwindling as of late and the timing for its rollout is now being delayed, the program’s purpose as originally envisioned was to get the banks to start lending again by having a public-private investment fund purchase bad assets on the banks’ balance sheets. In theory, it would cleanse the banks’ balance sheets of these legacy assets and provide them with fresh capital to start lending again, which would be good not only for the apartment sector but all sectors. If the banks start lending again it could be good news for loans that were originated before the run-up occurred that have had time for some rent appreciation to occur and may not have been highly leveraged or purchased at a compressed cap rate. The collateral value in that case will support refinancing. The concern will be centered on loans made during the real estate bubble of 2005 through 2007. It is unlikely that the value of that collateral will support a new loan without a significant equity infusion. MHN: How will distressed and illiquid assets like high-risk residential mortgages and commercial real estate loans be removed from the balance sheets of financial institutions? Ackermann: Under the Legacy Loans Program’s original guidance, the banks were supposed to bring pools of loans to an auction and sell them to the public-private investment fund in exchange for cash and/or cash and a financial instrument, guaranteed by the FDIC. MHN: What impact will that action have on the broader economy? Ackermann: The credit markets employ a lot of people, both directly at the banks, as well as through the credit the banks provide allowing business owners to grow and expand. Getting the markets moving again can only be a good thing. MHN: You believe that given its wide array of potentially eligible troubled assets, the Legacy Loans program should use the Derived Investment Value (DIV) methodology to value those assets. What is the DIV methodology and how do you think it will help? Ackermann: The DIV methodology is a series of cash flow methods that were used to value the assets based upon a determination of the status of the loan. It provided a consistent framework to assist both sellers and buyers in valuing the assets. It would help the buyers and sellers because they would all be working from the same page with a common valuation formula. MHN: Do you think the legacy loans program will be effective in cleaning up banks’ balance sheets? Ackermann: I have sat on many industry panel discussions on the topic of distressed debt of late, and I talk with many top bank executives regularly. The money is out there on the buy side. Their main reservation on the Legacy Loans Program is centered on having the government as their equity partner. On the sell side of the program, the banks seemed hopeful that the program would work, but were concerned that even with the leverage being provided, the bid-ask spread would not be narrowed enough to allow them to sell. Of course, the program is now delayed, but if this program is rolled out, or another is rolled out with the same goals in mind, these issues would need to be addressed.