I sat down with Rich Decatur, a career lender and Special Assets banking professional located in the Mid-Atlantic with ties to the South, to discuss this moment in time and how banks and financial institutions can plan for, and respond quickly, to increasingly vital staffing concerns.
How are banks and financial institutions viewing the current reality and the potentially significant issues facing their balance sheets?
I think most experienced bankers and financial professionals are aware of the risks but keeping their fingers crossed and still hoping for the best (FED support and direction) with a number planning for a mid to worst case scenario. Those of less tenure and experience (20 years or less) do not really have that on their radar right now – as always time will tell.
This financial crisis has a much broader reach than the real estate centric crisis in 2008-2009. Could you touch on that?
Yes. Subprime mortgages in 2008, effectively junk mortgage loans rolled into Collateralized Mortgage Obligation (CMO) issues and sold to investors, were the cause. These turned out to be mostly junk paper even as the credit agencies signed off saying they were quality investment instruments.
Today, the potential problem is corporate and commercial debt where companies have loaded up on cheap debt because of the low interest rate environment that the Central banks have maintained over the last ten years, in effect keeping rates too low for too long. This economic downturn is, and will, continue to stress the system and expose the vulnerabilities on our over reliance on debt, both public and private, as it touches every industry not only real estate.
What implications does this have on the banks and financial institutions, and what will they need to add or strengthen in order to thrive and compete?
Well, while bank balance sheets are much stronger today than in 2008, I am not convinced the quality of the loan portfolios are as good as some say and many assume. We also have two times more global debt, which is a big problem and growing. History teaches us that excessive debt (be it owed by individuals, corporations or national sovereign debt) never ends well. This has only been exacerbated during the COVID-19 pandemic with the huge stimulus bill passed by Congress. You do not solve a debt problem with more debt (even though it may buy some time) and that is what we have been doing over the last ten years and continue to so.
The implication is the scope of the workouts on the horizon will make them more complex and harder to resolve than in 2008-2009. Of even greater concern is that most financial institutions have not had a strong Special Assets group, which is focused on working out problem loans, in ten years, if ever.
What makes a Special Assets professional different from a traditional loan officer?
One of my mentors told me “Few bank CEOs understand special assets because they have never done it, and as such do not recognize the tremendous value that good (experienced) Special Assets professionals can bring to the bank in terms of working out non-performing loans via restructuring and/or liquidating the credit to maximize recovery of bank capital.”
The personality type of a loan officer that engages and nurtures lending relationships is normally not the same type that should be tasked with determining the best course of action for handling a non-performing loan and executing that plan to recover and preserve bank capital.
I can tell you not everyone is cut out for nor has the skillset for Special Assets work. Technically it takes knowledge and experience in all three disciplines – commercial banking, real estate and finance. The key personality traits needed are firm communication, creative negotiation and, of most importance, an excellent intuitive risk instinct. You also sometimes have to be downright mercenary and hard-nosed depending on the situation and the attitude the borrower exhibits (good or bad)
What is the time frame for a financial institution to understand if they have the right people?
If it becomes a dam breaking event with a high volume of loans going past due and rapid defaults increasing across the portfolio, then they will quickly become overwhelmed and will realize they probably do not have the right people or the right number of people. If loan deterioration is slow and low volume, they will not realize it for a while.
I suspect banks will try and first tap people from inside – their loan officers and if available some having prior or a light Special Assets background from 2008 or prior. Some will learn fast under pressure and some will not.
This specialized role is one that could also lend itself to remote work to augment an existing team with firepower and provide an institution the opportunity to fill the role with the highest caliber person in the marketplace. Do you agree?
Historically, I would say no, but that has changed in recent years with good software and communication systems and support. Since COVID-19 companies are more open to a virtual work situation.
Given supply and demand, everything points to this role of a Special Assets professional requiring a rarified skillset and very valuable to an institution, much like compliance officers became on Wall Street after the hedge fund crisis. Am I right?
Most definitely yes. Given the specialized skill set and personality type coupled with the fact that each problem loan is unique and the process can be lengthy and complicated, every prudent bank and financial institution should have a plan to fill these roles seamlessly with the most qualified professionals available.
Lynette Horton is a Senior Financial Services Professional working with banking and investment groups for over 25 years. She leads the Better Hire division that supports Financial group’s efforts to obtain the Human capital they need to compete successfully. She can be reached at [email protected].