The macro scenario of our market is finding a new balance thanks to the improving (or at least in view of it) of the two major pending operations.

Brussels has approved the restructuring plan of MPS, which includes the sale of impaired loans equal to 26 billion to Atlante.

The two banks of Veneto have sold the “performing” one to Intesa San Paolo at a symbolic price, and the State pays a required advance to avoid the default based on the expected collection of the credits by SGA.

Basically, the conclusion of these two arguments is the same; to tell the truth, the credits were never sold. For example, when you go to the market to buy fruit, you just have to pay the fruit seller to take the fruit home. In this case, the fruit seller keeps the whole amount of money, even if he has issued the sales receipt.

The recent history of transactions is particularly indicative; however, in many cases, sales can be regarded as such only from a technical point of view…

A general trend towards a quick sale/securitisation to the greatest possible extent has been observed, due to both the ECB provisions and the belief (very widespread) that NPLs may undermine banks and the whole economy.

But is it really so?

We believe that it is the exact opposite, i.e. that NPLs are the result and not the cause underlying this situation. At least for 3 reasons:

1. Albeit non-performing, they are some of the few assets still available to the banks.

If we consider “assets” any income-generating item, then the banks have three kinds of assets: persons, network and territorial presence. Within this (unstoppable?) drop of core-business, banks should not get rid of all their assets, especially in a period of transition where most of the staff is employed in less profitable activities, sometimes replaced by technology.

2. The correlation between numerous NPLs/few mortgages is not confirmed by the facts observed.

Our data, in fact, show that banks are willing to grant loans to “meritorious” subjects, while nobody provides financial support to “non-meritorious” subjects (to avoid past mistakes), who represent the majority; therefore banks compete for the other customers, by reducing the rates with an unsustainable margin.

3. The absence of NPLs does not imply a proven economic growth.

Conversely, the cancellation of NPLs may lead to the opposite effect: for example, with reference to the real estate market, the massive sale of NPLs would result in a sudden increase in the supply in the medium term as well as to an adjustment of the sales prices.

In conclusion, we do not view NPLs as a burden, and we don’t believe that their cancellation may solve all the problems. The role of the servicers/loans investing in NPLs and their impact on real economy is overestimated. This conclusion does not grist to our mill, but we cannot deny the truth.

We believe that targeted and on demand sales may improve the situation of the banks, since the servicers would actually meet the real requirements of the customers – defined both in size and time – as happens with the traditional delivery of services.

Positive effects on real economy would be observed if the politics and the major liquidity providers focused elsewhere.

Emanuele Grassi

The title of the article recalls and refers to an intervention made during the recent NPL Meeting held in Venice, which compared the NPL market with the economic theory of the lemon market.

This reference will be familiar to those who have studied these issues at the university: to help the other readers (including the author of this paper, who was curious about this quotation) understand, this theory can be attributed to George Akerlof and appeared for the first time in 1970 in one of his article. In short, it explains how, in case of information asymmetry between the seller and the purchaser in a market, there are essentially two stages:

– in the first stage, the seller will offer products with a poor quality, taking advantage of the inadequate information provided to the customers;
– at the same time, the seller will be deferred from removing high quality lemons from the market, knowing that the market will not pay a premium price for the same reasons described in point 1;
– in the second step, the buyer realises that quality in that market is an uncertain data and high quality lemons do not remain on the market booth, therefore the buyer stops purchasing lemons, thus putting an end to this market.

Obviously, this theory is more complex and I have opted for a simplification. The author makes other examples (used cars, refined food) but does not mention the NPLs.

This comparison was undoubtedly smart and noteworthy; however, in our opinion, there are no grounds for this to happen in the NPL market, at least for three reasons:

1) The NPL market is currently characterised by an excess liquidity; some asset classes are growing into a bubble. Nowadays, buyers are too busy investing money to understand the intrinsic (asset quality) , this problem will be faced at a later time;

2) information asymmetry is basically due to the data bases originally kept by banks. The substantial difference over the lemon theory precisely lies in the fact that, considering the shortage or lack of data, NPL buyers offer prices below the average threshold to protect themselves. Generally, NPL buyers are as patient as the housewives at the market booths;

3) the market data quality is clearly improving thanks to a strong change of direction involving the banks, as well as to the work of the servicers engaged in the purchase and assessment processes.

In many cases, sellers and buyers are already able to distinguish between good and bad lemons; with reference to mortgage loans, the discussions have revolved exclusively around good lemons so far.

Emanuele Grassi

How are pledged real estate properties and mortgage credits assessed?

It is quite complex, since in our Country it is difficult to price a real estate on a free market , and this controversial issue is often debated by accountants, technicians, owners and asset valuers. The assessment are rather uneven. Moreover, we must also consider pledged or potentially attachable properties, which are subjected to countless possible complications, such as: unknown occupancy, uncertain timing of the release, poor knowledge of the property conditions, lack of well-defined timing and costs of all the required procedures, uncertainty about the receipt of the payment.

Therefore, considering the above, all the parties involved generally express divergent views; this leads to the ill-famed “bid-ask gap”, at least with regard to mortgage credit.

Then, what are the most appropriate assessment criteria? The answer is very simple: the appropriate price is always determined by the market.

In order to assess any investment, we must take into account the resulting income. When it comes to real estate properties, we must consider the rent, while mortgage credits require a more complex analysis which includes all the above-mentioned factors; however, the decisive element is always the ability of the asset to generate long-term profits.

Therefore, the actors in this market must combine all the variables on the reference property market (including also the common downwards bidding, for example) with the peculiar aspects and uncertainties of debt collection and legal procedures, at the same time assessing each of these variables with the purpose of understand which of them exert an actual impact on the asset in question.

Considering equal properties, the burden arising from enforcement proceedings or agreements radically changes the recovery scenarios. The same argument applies to, for example, the occupancy of a property: in fact, the occupancy status may alter the commercial appeal and value of the asset. Eventually, the intended use of the property as well as any possible change greatly affect the decision of the target customers. This list could be much longer.

The asset valuers appointed by the court and (unfortunately) many operators in this sector distinguish the open market value (OMV) from the judicial market value (JMV) of the property (to be) pledged through simple flat-rate deduction percentages. This approach could be applied in case of oversupply depreciation, but it does not provide accurate assessments. Conversely, the GMA assessment, which is currently undergoing certification and is managed by dedicated software, takes into account all the “judicial” variables affecting likely to individually affect the price; this allows the customers and the operators to control the operations and develop a customised recovery strategy for each asset.

 Emanuele Grassi

Our business often asks us to study and understand the economic trends from a privileged point of view.

It is like a preview of reality, where we can see how many people and companies are facing economic difficulties, including their areas and sectors.

Everyday there are moments of confrontation with the players of this sector, and especially with those who manage non-performing loans on behalf of banks and loan management companies. The former can quickly assessthe changing dynamics of economy, since they operateat Instituteswhich consist of branches and legal offices; the latter are generally more oriented towards the profitability of NPLs and keep the market trends, the recent sales, the liquidity in the market and the trading prices in check.

Therefore, it is often possible to ask directly the persons involved for non-performing loans, while having a cup of tea.

Recently we have observed at least 6 major common difficulties which are slowing down or affecting the management of the loans to be collected, thus further loweringtheir prices:

1) drive-by abnormalities and no qualitative control of the outstandingloans: the main anomaly is the lack of a proper loan management system, before theloss of performance of the same loans. Prevention is better than cure, but in this case no prevention plan has been developed andno qualitative control of the preservation of a real estate property has been enforced; the only protection applies to serious damages, but, in most cases, the poor use and preservation of the propertyrepresent the main damage to the same property. Moreover,no prior assessment of the private individual’s income is carried out, therefore problems are evidenced only at a later time, after the first failure to pay aninstalment or in the rare cases whenforward-looking debtorsnegotiate the payment with the bank agents.

2) Lack of extra-judicial solutions offering a suitable protections to their promoters; in fact, according to the leading players in the market, all the measures currently available – especially those relating to collective proceedings (composition with creditors on a going concern basis, debt restructuring processes, composition with underwriters) – are too expensive and time-consuming. Among the major criticalities, there are the dispersal of resources, the “blind” acceptance of compositions or the ease with which the curators can initiate proceedings at the expense of the procedures;

3) Necessity to perform conversions especially of industrial buildings: the legal and bank offices contest the poor resources to be used to actively managethe most troublesome assets,for example the old industrial buildings and workshops located in urban areas, whose land suitability could be granted by the municipalities free of charge, with the purpose ofgetting rid of them, also becausethe budget is too low fortheir demolition/refurbishment or the submission of new projects;

…to be continued…

Emanuele Grassi