Where We Are
The pandemic has changed everything. E-V-E-R-Y-T-H-I-N-G. Not only has the pandemic changed where so many people are doing business, but also the way. It’s likely you’re doing business differently today than you even did three months ago, and then the three months before that, and before that.
We’ve been here before, albeit, with a few differences. The financial havoc the Great Recession wreaked was due to an internal cause – the housing market – while the Pandemic is due to an external cause, which can be described as a natural disaster. Both were disasters, natural or otherwise. Regardless of how they occurred they’re both playing out the same in our industry in one BIG way: Commercial real estate property ownership is headed back to the banks in record numbers and adequately managing impaired, or distressed assets should be a top priority for anyone in the loss mitigation or specialty assets line of work.
And the takeaway? You need to be able to manage these properties quickly and efficiently, while ensuring these properties are in good condition, and market-ready.
In looking at the Great Recession we can gain incredible insight, along with an action plan blueprint.
Then and Now
Along about 2008 banks were dealing with significant loan defaults from borrowers. One of the many consequences of the loan defaults was an increase in environmental liability. This was due to borrowers’ tenants utilizing hazardous materials and not following environmental compliance guidelines. They cut those proverbial corners trying to save money by dumping hazardous materials out the back door instead of ensuring prudent risk mitigation practices entered through the front door. Bad move. What happened next?
In the short term, regulators looked the other way on strict environmental compliance, but then right along about 90-180 days later, municipalities needed revenue, and so they levied fines on those not adhering to strict environmental compliance.
This meant then, and what’s likely to happen again in the not-too-distant future, a deluge number of properties had to be assessed with costly remediation efforts involved to restore these assets back to marketability.
The takeaway from this was to never, ever take due diligence shortcuts. You’ll be lost in an alley in no time, if you do.
Lessons from the Past Will Help Us Recover Quickly in the Future
Having said that, the multiple quarantines and shelter-in-place orders have shut businesses down numerous times, making it so they’re unable to generate revenue. In turn, tenants are unable to pay rent, and borrowers are unable to pay bank loans creating a domino effect that’s a real game-changer.
This will likely result in an increase in environmental risk similar to what we saw during the Great Recession. Once again, agencies responsible for oversight may have let things slide, but now as we move forward into recovery mode, they’ll likely levy fines on properties that haven’t adhered to environmental compliance requirements.
This is where the due diligence lesson from the past kicks in. It’s the exact right time to get ahead of the curve. As you look at the vast landscape of distressed assets and less deals in the pipeline the answer to how we’ll all recover is the answer to how you’ll help your customers during this recovery, managing your property portfolio efficiently and quickly: technology. Specifically? Portfolio management.
The Rebound That Has Us Bounding Forward
While many of the grimmest financial predictions haven’t come to pass, the reality is there are still a high number of distressed assets coming through, and they’ll keep arriving in seismic sea waves. That’s okay when you have a plan of action.
The Not-So-Great Recession taught us that we had to be nimble, agile, resourceful, and innovative. Then, just as now. We’ve learned to work together coming up with solutions that fit the needs of banks and customers alike. We align around the mutual desire for a positive customer experience.
As we speak, banks are working with borrowers to rework loans, provide forbearance, or refinance to meet the post-pandemic financial challenges. It’s crucial to factor in environmental risk, which can have a significant impact on collateral value.
A powerful and proactive plan includes performing environmental stress tests on outstanding loan portfolios and adopting a permanent monitoring program to evaluate environmental risk for the life of the loan.
By implementing a monitoring program to evaluate environmental risk for the life of the loan, this will help you identify environmental risks in the aftermath of the pandemic. You’ll also help ensure compliance with The Office of the Comptroller of Currency (OCC) as well as meeting Federal Deposit Insurance Corporation (FDIC) guidelines.
Learning from environmental risk mistakes made during and post the Great Recession means you know how important it is to complete your due diligence. Getting a technology solution in place that will manage your current – and potential – loan portfolio will allow you to ride those seismic sea waves I mentioned earlier.