AS THE BANKING sector slowly returns to health, more distressed multifamily assets are expected to hit the streets next year.

In the second quarter of 2010, the banking sector saw an aggregate profit of $21.6 billion, its highest quarterly earnings since the third quarter of 2007.

This slow movement out of the red and into the black means that banks can now more readily absorb some losses through asset liquidation.

“The combination of more stable fundamentals, improving price discovery on the investment sales market, and a desire of regulators and banks to see a decline in the pool of REO will result in an increase in sales out of distress next year,” says Sam Chandan, chief economist for New York-based market research firm Real Capital Analytics.

That's good news for all of those multifamily opportunity funds positioned to capture a wave of distress that never materialized in 2009 or 2010. Their long wait on the sidelines was mostly attributable to the FDIC's policy of tiered bank failures—a slow bleed that critics say delayed price discovery, but that proponents say staved off a greater economic collapse.

“Regulators have been mindful that rapid movement of distressed assets into the marketplace may not be ideal for the broader health of the financial system,” Chandan says.

The pace of bank failures has overwhelmed the FDIC, resulting in further delays in closing “zombie” banks, some of which probably should've been shuttered a year ago. The number of banks failing this year will likely exceed last year's total of 140.

Yet things are getting better for the sector. The number of bank loans 90 or more days past due has declined for the first time since 2006. And the banks that are failing these days are smaller ones.

“The largest banks, where there were some potential systemic issues, are more stable and healthy now,” Chandan says. “But many of the smaller community and regional banks, where concentrations of commercial real estate loans are very high, are facing continued challenges.” The jury is still out on the availability of construction debt in 2011. Smaller banks account for an inordinate share of the overall market for construction debt, and their continued problems will likely help the FHA continue its reign of popularity.