S&L; Asset Fire Sale May Lose 40 Cents Per Dollar : Thrifts: The variance between book value and actual price could add billions to the government bailout.
The federal government is likely to lose as much as 40 cents on the dollar in selling its current crop of savings-and-loan assets, an investigation by The Times shows.
The losses are expected to be far greater than they have been during the last two years, and are likely to add tens of billions to the current $160-billion estimated price tag for the government bailout of the ailing thrift industry.
A massive computer review of the records of the Resolution Trust Corp., which oversees the S&L; rescue effort, shows a widening gap between the dollar value that the failed S&Ls; had assigned to the mortgages, securities and properties that the government seized when it closed the institutions and the amount of money that the government is apt to recoup when these assets are sold.
The review covered all such assets that the RTC has either placed under private management contracts or opened for bidding.
The study shows that the RTC estimates these assets will bring about $25 billion when they are sold--$15 billion less than the $40 billion listed on S&L; books.
Projecting that same 60% recovery rate to another $124 billion in assets for which asset-management contracts have not been solicited suggests that the losses are likely to grow by another $49 billion--assuming the real estate market remains in a slump.
This somber assessment--gleaned from RTC documents that detail current and prospective contracts for management of the seized assets--casts doubt on more optimistic Bush Administration estimates of the S&L; bailout cost and indicates that Congress once again will have to ante up more money.
Treasury Secretary Nicholas F. Brady told Congress last month that the Administration hoped to use the proceeds that the government receives from selling S&L; assets to repay some of the $100 billion in temporary working capital that it wants to borrow from the Treasury to acquire assets from more failed thrifts.
If the S&L; assets are sold for less than expected, those loans could not be fully repaid and Congress would have to appropriate tax dollars to make up the shortfall.
The Administration has never made public precisely how much it expects to lose on the sale of all the assets the government has acquired through S&L; failures. Part of the problem is the difficulty of forecasting what will happen in the real estate market. Still, there has been no indication from the Administration that overall recovery rates for S&L; assets will be nearly as low as 60 cents on the dollar. Also, The Times study signals that recovery rates are deteriorating significantly.
The Times analysis indicates that the RTC is likely to get less for S&L; assets now available for sale than it did for assets sold during the last two years. The agency has disposed of $163 billion in assets during its two-year life, including substantial amounts of easy-to-sell securities and home mortgages, which can be sold in packages.
The RTC reported earlier this year that it has achieved recovery rates of 97% on securities, 98% on mortgages, 96% on other loans and 75% on real estate. All these figures are for the relatively good assets.
The Times reviewed records of contracts that the RTC has signed with private companies for maintaining, operating and selling various forms of S&L; assets, including real estate and loans.
Among other things, the records show the prices at which the RTC expects its hired managers to be able to sell these assets. The records also list the values for these assets that the failed S&Ls; had stated on their books.
The RTC records show that as of July, the agency had awarded contracts for the management of assets that the seized S&Ls; had valued at $23.9 billion and is soliciting bids on additional assets that these thrifts had listed at $16.2 billion.
The RTC and the banks, accounting firms, real estate professionals and others it has hired to manage and dispose of assets are almost universally pessimistic about the prospects for recovering anything near the listed values for the seized assets.
“Our basic product is real estate related loans,” said L. William Seidman, chairman of the Federal Deposit Insurance Corp. and the man overseeing the thrift cleanup. Only 25% to 30% of the loans are marketable, he said. “There is not a market for loans on shopping centers, auto repair shops and golf courses.”
Most of the loans are likely to go into foreclosure, giving the government direct ownership of these hard-to-sell pieces of real estate, said Rob Adair, chairman of BEI Management Inc., one of the firms with RTC contracts.
The inventory of distressed loans and properties will grow inexorably, Seidman warned, because additional S&Ls; are expected to fail in the next year, bringing another $100 billion in shaky assets under RTC control.
The Times’ review of RTC records underscores Seidman’s worries. For example, the RTC expects NCNB Texas National Bank and its affiliates to receive no more than $2 billion on the sale of loans and real estate that a group of failed Texas thrifts had valued at $3.5 billion.
J. E. Robert Companies, specializing in distressed property, has been told by the RTC that it is likely to get a $1.5-billion sales price on apartments, shopping centers and raw land in Texas that failing thrifts had valued initially at $2.4 billion.
Coopers & Lybrand, a major accounting firm, is expected to achieve sales revenues of $1.6 billion on property originally valued at $2.2 billion.
Altschuler, Melvoin & Glasser, another accounting firm that is handling delinquent loans on apartment complexes and office buildings in Arizona, is projected by the RTC to get $610 million for $1.3 billion in loans.
Analysts say that even if the current recession in the real estate market ends within the next few years, there is scant chance that these assets will be sold for 100 cents on the dollar.
The reasons are twofold:
First, the RTC is competing with dozens of banks and S&Ls; that are eager to unload their own portfolios of distressed loans and foreclosed real estate.
Second, the agency already has sold its most attractive properties and loans and is primarily left with a portfolio of the least-desirable assets.
David Cooke, executive director of the RTC, estimates that at least two-thirds of all RTC assets are in this category. Much of what remains is “garbage” that may prove difficult to sell at all, he said.
“As time goes on, we get closer and closer to the bottom of the barrel of leftovers,” RTC spokesman Stephen Katsanos said.
At a recent auction in Atlanta, the RTC was forced to sell a group of single-family homes that once sold for about $130,000 each for between $35,000 and $38,000, because of a depressed market.
The RTC is facing a dilemma. If it sells now, in the depressed real estate market, it will have to cut sales prices sharply. If it holds onto its properties until the market improves, the cost of managing the assets will mount.
So far, sales have been so sluggish that the agency has adopted an automatic formula for discounting.
The procedure begins with an updated appraisal of a property’s value--which in the current depressed market is likely to result in a deep discount from the price that the failed S&L; carried on its books.
After six months, the price can be trimmed 20%, and then 20% more after another six months. If the asset still has not sold in 18 months, the price drops another 10%.
And if it does not sell at that price, the RTC can get another appraisal. As a result, large discounts are expected.
The real estate glut has produced casualties all over the country.
In the North Hills neighborhood in Pittsburgh, Pa., the RTC has hired NDC Asset Management to rent and maintain the Willow Tree garden apartment units, which were built to be sold as condominiums before they fell into the government’s hands.
RTC records list the property at a book value of $28 million, with an estimated recovery value of $3 million.
Although contractors traditionally receive a bonus if they sell assets for more than the government’s projected recovery value, many analysts see this as an all-but-impossible goal in a glutted market. The estimates of how much the government expects to recoup are made by RTC officials who are familiar with local markets.
The General Accounting Office, the congressional watchdog agency, warned recently that aggressive discounting heightens the prospect that the RTC will suffer substantial losses on property.
Although the General Accounting Office did not provide specific numbers, Comptroller General Charles A. Bowsher said that the depressed real estate market in many areas “may never support the valuations that were assigned to them when they first entered the government inventory.”
Mendy Nudelman, a partner at the Altschuler, Melvoin & Glasser accounting firm, agrees. Many of the loans were made when the real estate market was “riding high on tax advantages,” Nudelman said.
“The benefits are not there anymore, and unfortunately it’s the taxpayer that’s picking it all up,” he said.
Altschuler Melvoin is responsible for managing 430 overdue “non-performing” loans on Arizona properties, including apartments, office buildings, raw land, residential developments and hotels.
The apartment developments are not fully leased, but Nudelman says that at some price the numbers will make sense for a prospective buyer. “We understand the disposition of 430 assets is a difficult task and will take a long time,” he said.
His firm has a group of 50 apartment buildings that it has agreed to sell as a package. The development had a stated value of $170 million on S&L; books, but analysts say it probably will not command more than $120 million.
Nudelman works with the borrowers now, trying to arrange payment of the loans, renegotiating terms and conditions. If that fails, the government will wind up taking control of the properties, and then his firm will be looking for apartment managers and leasing agents.
Nudelman is fearful of future markets if the loans fail and he has to try to sell the property. “I believe the market is still very weak,” he said. “There are a lot more S&Ls; and banks still in trouble.”
FDIC Chairman Seidman cautions that the sales value of assets “depends on the condition of national, regional and local economies and real estate markets.”
“No one can predict with any certainty the future course of the economy in general or real estate markets in particular,” he told Congress recently. “Thus, until the last asset has been sold, any estimates of cost . . . are fraught with error, and will continue to change as market conditions change.”
Times researcher Murielle Gamache contributed to this story.
An S&L; Rescue Glossary
Book value--The value of the loans and properties as listed on the books of the S&Ls; seized by the government and handled by the Resolution Trust Corp.
Recovery value--The estimated sales price of seized assets, in the judgment of local RTC officials.
Estimated fees--Calculations by the RTC of the amount likely to be paid to contractors.
Asset management--Taking control of the loans and real estate on behalf of the government. Negotiating with borrowers whose loans are overdue, finding new tenants and collecting rents at real estate properties. Arranging sales of loans and real estate.
How the Study Was Done
The Times’ computer-assisted study is based on an analysis of more than 20,000 contracts awarded by the Resolution Trust Corp. over the last two years.
In response to a Freedom of Information request filed with the RTC, the agency supplied The Times with paper records showing contract numbers, names of contractors, the type of service to be provided, and the estimated fees to be paid to contractors.
For contracts involving management of loans and real estate, the RTC also supplied the book value of the assets and the amount that the RTC expects to recover through the sale of the assets in question.
Because the RTC declined to supply the information in computer-readable form, the information was key-punched and entered into a Times database.
In compiling the list of top contractors, firms that have joint ventures with other companies or have affiliates with contracts have been combined. The total fees are grouped together under the parent firm as a single number.
TC’s Largest Asset Managers
CONTRACTOR CITY BOOK VALUE 1. NCNB Texas National Bank Dallas $3,544,462,592 2. J.E. Robert Co. Alexandria, Va. 2,419,708,000 3. BEI-Ritz Joint Venture Dallas 2,244,508,183 4. CLPRS/CLSAM Tulsa, Okla. 1,393,264,324 5. Northcorp Realty Advisers Dallas 1,143,430,003 6. Altschuler, Melvoin & Glasser Chicago 1,087,977,518 7. Ralph Edgar Group Lake Geneva, Wis. 802,271,498 8. Onyx Asset Management/ Houston 668,574,550 PMSI-RAM 9. The Beverly Group Sacramento 597,807,073 10. Resolution Management Assoc. Atlanta 581,028,737 11. BJF/Grant Thornton Northbrook, Ill. 539,790,000 Asset Mgmt. 12. Prentiss Properties Ltd. Dallas 496,859,000 13. FAMCO Services Dallas 447,074,982 14. Ree Inc. Columbus, Ohio 432,754,598 15. First Gibraltar Bank Irving, Tex. 357,093,000 Realty Advisers 16. Hewitt, Olson, Smoker & Assoc. Ft. Lauderdale, Fla. 321,112,479 17. Midland Data Systems Shawnee Mission, Kan. 312,786,001 18. Emerson International Salt Lake City 307,857,463 19. Wallace Associates Salt Lake City 265,108,141 20. Leisuretime Management Lakewood, Colo. 264,483,095 Resources 21. Lowe Associates Denver 247,694,326 22. Hatfield Philips Atlanta 237,955,279 23. The Palmieri Co. Los Angeles 233,203,515 24. RPC/Mitchell Titus Wayne, Pa. 213,565,924 Joint Venture 25. Ontra Analysis Group Austin, Tex. 213,220,128 Joint Venture
ESTIMATED CONTRACTOR SALES PRICE RECOVERY 1. NCNB Texas National Bank 2,057,077,996 58% 2. J.E. Robert Co. 1,525,640,000 63 3. BEI-Ritz Joint Venture 1,439,590,950 64 4. CLPRS/CLSAM 893,493,005 64 5. Northcorp Realty Advisers 718,685,144 63 6. Altschuler, Melvoin & Glasser 610,412,000 56 7. Ralph Edgar Group 634,201,318 79 8. Onyx Asset Management/ 518,147,351 78 PMSI-RAM 9. The Beverly Group 372,848,989 62 10. Resolution Management Assoc. 355,277,231 61 11. BJF/Grant Thornton 373,731,000 69 Asset Mgmt. 12. Prentiss Properties Ltd. 363,198,000 73 13. FAMCO Services 279,125,849 62 14. Ree Inc. 277,760,878 64 15. First Gibraltar Bank 357,093,000 100 Realty Advisers 16. Hewitt, Olson, Smoker & Assoc. 159,051,686 50 17. Midland Data Systems 239,598,001 77 18. Emerson International 193,834,961 63 19. Wallace Associates 107,700,855 41 20. Leisuretime Management 144,814,914 55 Resources 21. Lowe Associates 26,775,000 11 22. Hatfield Philips 168,066,541 71 23. The Palmieri Co. 193,349,284 83 24. RPC/Mitchell Titus 130,210,430 61 Joint Venture 25. Ontra Analysis Group 134,993,484 63 Joint Venture
FOOTNOTES:
1. Totals for NCNB Texas National Bank include contracts awarded to Financial Resources Management Trust Co. and to Financial Resource Management Inc., both Dallas-based, wholly owned subsidiaries of NCNB.
2. Totals for BEI-Ritz Joint Venture include contracts awarded to BEI Management Inc. BEI-Ritz is a joint venture between Ester Ritz of Dallas and BEI Holdings Ltd., an Atlanta-based bank consulting and asset management firm. BEI management is a subsidiary of BEI Holdings Ltd.
3. Totals for CLPRS/CLSAM represent contracts awarded to two Coopers & Lybrand joint ventures--CLPRS, a joint venture formed with Preferred Relocation Services Inc. and CLSAM, a joint venture formed with Sigma Asset Management.
4. Onyx Asset Management and PMSI-RAM are joint ventures which share the same office in Houston and work together on
RTC projects. Ram Management Assoc. Inc. is a partner in both joint ventures.
5. BJF/Grant Thornton Asset Management Co. is a joint venture formed by Grant Thornton and The BJF Group, Ltd. for the specific purpose of conducting work for the RTC. Totals listed also include contracts awarded separately to the two firms.
6. Totals for Midland Data Systems include contracts awarded to Midland Asset Management Inc.
7. RPC/Mitchell Titus Inc. is a joint venture between Real Property Consultants and Mitchell Titus Inc.
8. Totals for Ontra Analysis Group Joint Venture also include contracts awarded to The Ontra Cos. and The Ontra Cos./T.A. Myers & Co. Joint Venture.
9. Ralph Edgar Group’s contracts have been canceled by the RTC. The firm was found to have violated rules by failing to disclose its default on a loan from an S&L.;
Source: Los Angeles Times computer study of Resolution Trust Corp. contracts recorded through June 28.
