An air of optimism permeated the Midwest Lodging Investors Summit earlier this month in Chicago, but the conference ended with a harsh dose of reality during the final panel, “Hotels in Default: What’s Next?”

Despite already improving operating numbers and even better projections for the coming years, the recovery won’t be fast enough to save some of the hotels already in default and the many more headed that way on a collision course with looming CMBS loan maturities in 2012, a panel of experts said.

“There is no way for the economy to recover by 2012 to avoid those maturities,” said Steve Van, president & CEO of Prism Hotels. “RevPAR just doesn’t get back fast enough.”

The panelists—Scott Steilen, a principal of Warnick + Co.; Rick Takach, president and CEO of Vesta Hospitality; Biff Hawkey, senior vice president of development for Hostmark Hospitality Group; and Van—each projected RevPAR growth ranging from four percent this year to nearly double-digit improvements and better in 2011 and ’12.

Those lofty improvements still won’t be enough of an uphill climb out of the deepest downturn this industry has seen. Overleveraged and now with undervalued properties, many owners and banks are left with an impossible challenge. “Why would we quit extending and pretending when no one wants to say ‘Remember that loan we made for $100 million?’” said Van. “’It’s worth $40 million now.’”

Hawkey said the lack of any resolution to all these distressed assets has been slower than anyone expected because there’s such a large volume that even the ones worth buying and saving get lost in the shuffle. Takach, whose Vesta Hospitality owns and operates more than 10 hotels in the Western U.S., said he’s found the only way to get lenders’ attention is by missing a payment—and even then, it took 90 days. Special servicers, the panel agreed, were even harder to read as their levels of hotel expertise varied as much as their approach to dealing with defaults did.

To get any type of workout solution, Takach said, borrowers have to put additional money in. Steilen agreed: “It doesn’t have to be your capital, but there has to be new capital coming into the project” to get any restructuring done.

He also cautioned another “freight train called PIP (property improvement plan)” was coming and hotel brand companies had been doing their own versions of extend and pretend. Compounding that, as occupancy continues to return, Steilen said, operations have already been cut to the bone and many of those changes can’t become permanent.

Moderator David Neff, co-chair of law firm Perkins Coie’s hotels and leisure practice, cut to the chase by asking whether owners are better off trying to deal with the problem now or trying to wait it out. Van said now could be a good time to sell with the limited amount of quality assets available fetching good prices from all the equity in play. Wait and see was the panel’s best, and only, other advice.

Steilen said there needed to be a clearinghouse or mechanism to get things moving. The two veterans on the panel—Hawkey and Van—discussed whether a modern-day version of the Resolution Trust Corporation (RTC) was needed.

“I kept thinking we need an RTC,” Van said. “That unclogged the market (in the 1990s), but the difference is: The last time this was a $200 billion problem and now it’s a $2 to $3 trillion problem. It’s so big it can’t be dealt with the same way. The losses are too big because the bubble was so big.”

Hawkey pointed out the economy took about six years to stabilize and for the RTC to clean out the system during that recession, so maybe the modern-day solution is still a few years away.

“Maybe that five- to seven-year time frame is good,” Van said. “We’re going to be in the ditch a while, we might as well learn how to make a living in it.”