Note Sales and Transparency

March 21, 2011

There have been a few recent land sales which included the foreclosed borrower reacquiring the property with new partners. These sales usually are note purchases that include the elimination of the guarantee for the borrower. The interesting comparison is with residential loans where this type note sale to the original borrower never occurs.

Lenders who sell commercial notes sign confidentiality agreements with the new buyers which prevent appraisers from confirming the price of the purchase. The buyer then begins foreclosure on the original borrower.

The result of these practices is to lessen the number and reliability of sales in the market. Today there are many more note sales than property sales. In addition the process of buying a note is not as open as a normal MLS marketing and sales of a property. Local banks begin the sale of assets by offering the notes to bank insiders prior to an open market trade.

The sale of residential loans thru the secondary market includes large discounts for loan pools with late payment history or non-payment periods. So far no real discount has been given to the property owner who has continued to make payments even though the loan amount in many cases is above the market value of the home.

The analysis of these note sales indicates in the commercial market lenders are much more likely to include the borrower in a restructure of a loan, while no such consideration exists for the residential loan borrower. The reason is probably size of the deal and the degree of expertise of the legal advice for the borrower. The larger commercial loans tend to have solid legal representation for both lender and borrower.