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The Window Is Closing for Subprime Commercial Borrowers

Tell your auto repair mechanic, your favorite restaurant owner, and the owner of your pool cleaning service that it's last call for subprime commercial loans. I predict that the subprime commercial mortgage loan market will shrink by 75% within six months. If these small business owners are ever going to pull some equity out of their commercial buildings to tide them through the coming recession, it may be too late if they don't apply in the next few weeks. The way that Wall Street lenders, like Bayview Financial (a fine firm and good friends of ours), raise their lending capital is to securitize their subprime commercial loans. They put the loans in a big pool. They assign the pool of loans to a trust.

The trust issues bonds backed by the loans in the trust. Then investment bankers sell these bonds into the Asset-Backed Securities (ABS) market. In addition to subprime commercial loans, credit card debt and car loans are also often sold as ABS bonds. The problem is that the buyers of these ABS bonds are now requiring massively higher yields.

I read in Bloomberg yesterday that the buyers of AAA-rated ABS bonds are currently demanding yields that are a full 2% (200 basis points!) higher than they were just eight months ago. The appetite for ABS bonds is clearly waning. In addition, Wall Street subprime commercial lenders are also being forced to lower their loan-to-value ratios. For example, Silverhill Financial recently lowered its high-LTV program from 97% to just 85% loan-to-value.

These changes are a warning that the market for ABS bonds may be drying up. If Bayview, Lehman Brothers and the rest of the Wall Street subprime commercial lenders suddenly dial back their programs, the relatively tiny hard money commercial lending companies will be unable to handle the overflow. Subprime commercial mortgage lending could largely dry up, and it could happen very quickly. Therefore you need to tell the owner of your favorite coffee shop and your auto body repair guy that if they are ever going to try to borrow against their buildings, they better do it now!.

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