William David Tobin is one of two principals of Mission Capital Advisors
, a financial advisory firm that specializes in structuring sales of performing, subperforming and nonperforming loans.
He has transactional experience in loan-sale advisory, investment banking and commercial real estate debt, and equity raising. From 1994 to 2002, Tobin was associated with the Carlton Group
, where he started and ran a loan-sale advisory, heading all business execution and development.
For this edition of In This Corner
, Tobin gives a few different views of the adjusting economy and reveals what the banks are doing to stoke its recovery.
Has activity in the secondary market for mortgage whole loans picked up?
Activity has dramatically picked up since the fourth quarter of 2008. This is in large part due to speculation on the part of funds and high net worth individuals in loan assets, as well as in the stock and debt of the underlying financial institutions. As banks have become more healthy and their financial projections more visible, they have stoked the economy by simultaneously lending and selling distressed loans at a discount. This creates a virtuous cycle of investment activity in that investors are investing in credit-impaired assets, rehabilitating them and then refinancing right-sized debt.
How is pricing for nonperforming loans relative to 2009?
At a fundamental level, two factors determine debt prices. The first is the underlying collateral value. The second is the liquidity available to finance the asset.
In early 2009, we faced asset depreciation in housing markets of anywhere from 25% to 50%, slightly more in Florida and Arizona, as well as a liquidity discount of anywhere from 10% to 20%. The liquidity discount has largely dissipated and asset prices have stabilized and risen in certain markets.
A normally distributed non-performing single-family mortgage portfolio trading at 35% of unpaid principal balance in April of 2009 is trading at 45% to 55% during the fourth quarter of 2009 and the first quarter of 2010. Those prices have stopped rising as the effect of the end of the first-time homebuyer tax credit has manifested itself.
Have the commercial and residential markets diverged?
Actually not really. The residential market is inextricably linked to the commercial market.
When housing development and new home sales stalled in 2007 and 2008, due to an end of the easy-money train, the surrounding retail, office and land developments cratered. This meant that loans on those projects defaulted and that excess new commercial inventory would start to depress rental and occupancy rates, as well as the value and performance of pre-existing commercial property and occupancy. As excess housing inventory gets absorbed and those new homeowners start spending money in the local retail properties and visiting doctors and lawyers and working in the neighborhood, the distressed commercial property will perform better.
Is land trading again to homebuilders? What does that signify?
There has been activity on the part of investors and national and local homebuilders in places like the Inland Empire, Illinois, Phoenix, Massachusetts and Texas.
What is trading are finished lots with fully completed horizontal development. Paper lots have generated less interest and unentitled land is still the most challenging.
The one asset type that is not trading is agricultural land slated for residential development far outside the urban, suburban and exurban core. These assets will likely revert to agrarian use long before they will be developed. But in 10 years, even these properties will see the development they were once slated for.
What has Mission Capital's focus been for the past 12 months?
Mission's primary business is advising banks, financial firms, funds and the federal government on the sale of commercial, consumer and business loan portfolios, performing, sub-performing and non-performing. Our deal pipeline has been robust in that business.
However, we also advise the same clients on loan and loan-portfolio valuation and this skill set, which is the foundation of a successful sale business, has been invaluable during this tumultuous period.
Why is loan and loan portfolio valuation so important?
During the credit crunch, which we define as June 2007 to the present, our models have consistently valued assets accurately, even during the depths of late 2008 and early 2009. This helps our clients in financial forecasting, capital raising and transaction execution. Many of our clients have successfully raised capital in conjunction with our valuation projections and asset sales.
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