The collapse of the housing market and the rising default rates by many mortgage holders has created many problems for banks around the country. Many banks had invested heavily in both subprime residential mortgages and were eager to fund many commercial real estate projects.
With the slumping economy, many banks have been forced to sell off distressed assets for a fraction of their investment. Some of the projects have been started, only to fail, leaving a bank unable to reclaim its full investment. Others have been completed, but low rental or leasing levels have left some property owners unable to pay their commercial mortgages.
A new company founded in Milwaukee is showing banks a different solution. Bellwether Capital Group Inc. was founded in October for the express purpose of helping banks rid themselves of distressed assets.
“Our client buys all or any identified non-performing (assets) at the full note plus any accrued interest,” said Michael Blumenfeld, president of Bellwether Capital Group. “That’s full, 100-percent value, which will bring the banks current on that loan.”
Bellwether’s founding partners are Blumenfeld, Bill Frey and Dan Breitzman. State Rep. Scott Newcomer (R-Hartland) also is involved in the firm.
The fledgling company has an exclusive contract for the Midwest with Portfolio Equities Inc., a private equity fund that specializes in purchasing distressed real estate assets. Portfolio Equities is most interested in acquiring construction projects, land, existing developments and other investment properties that have fallen behind on their payments for 30 to 90 days, before the foreclosure process begins.
“Most of this is commercial real estate,” Newcomer said. “This can be raw land, started construction, really anything other than hazardous waste. It could be strip malls, golf courses or any other commercial property. That’s what they (Portfolio Equities) really like.”
Portfolio Equities’ purchase of distressed assets from a bank is contingent on the bank purchasing four to five times the same amount in one to four family residential loans from a pool of adjustable-rate mortgages that the private equity firm holds, Blumenfeld said. The pool of mortgages contains properties across the United States, Blumenfeld said, and all of the properties contained are at least 20 months current.
“This is a way for us to help banks get a better position and help them get the bad debt off their books,” Newcomer said. “And they can get better debt while they do it.”
Portfolio Equities’ distressed asset purchase also gives banks the option of having the private equity firm purchase a 10 percent stake in the bank or give it a deposit of up to 2.5 percent of the amount of assets purchased. The equity stake or 2.5 percent deposit amounts to an insurance policy for the bank, Blumenfeld said.
“That way, if any loan goes bad, the bank can pay for it,” he said.
Bellwether is pursuing transactions with several Milwaukee-area banks, Blumenfeld said. Several have signed letter-of-intent documents with the firm, indicating their level of interest.
Kenosha’s Southport Bank is one of the Milwaukee-area financial institutions that has signed a letter of intent with Bellwether. The bank is now in the early due diligence stages of the transaction, said Karl Ostby, president and chief executive officer of Southport Bank.
“It would be basically taking some of our non-performing or problem assets and swapping them for performing mortgages,” Ostby said. “We’re trying to make sure it makes sense (now).”
Southport Bank is one to two weeks from making a decision, Ostby said. He said Southport Bank, like almost every bank in the country, has some troubled real estate loans, but declined to discuss them further.
While acknowledging that it can sound too good to be true, Blumenfeld said the Bellwether and Portfolio Equities capital restructuring model can become the best fit for all parties involved.
“For the bank, we’ve eliminated their distressed assets,” Blumenfeld said. “For the equity fund, we’ve given them additional equity in what they specialize in. For the developer in a property that is being foreclosed, they can still finish their project.”
Bellwether recently moved into a 4,000-square-foot office in the Empire Building at 710 N. Plankinton Ave. in downtown Milwaukee. Bellwether currently has five employees, but will likely add more employees and services in the coming months.
It also has sales representatives in Minneapolis, Chicago, Michigan, Indiana and Florida, Blumenfeld said.
The company is also developing a niche in helping companies that are having difficulty finding traditional bank financing in today’s market access capital, Blumenfeld said.
“When a client gets kicked out of a bank, we help them find financing today,” he said. “We work with a number of hedge funds, private equity groups, mezzanine funds and debt-based lenders.”