http://www.banklawyersblog.com/3_bank_lawyers/commercial_lending/index.html
Check out this related commercial lending blog from the lawyers in banking.
Thursday, August 9, 2007
Tuesday, August 7, 2007
Commercial Real Estate loan pools and the Subprime market
So how is the subprime market related to commercial loans? And is there a correlation to the woes of Subprime residential market with the currently "safe" commercial market? On the surface, they seem similar but the collateral is very different. Residential pools are all like a McDonalds burger....the same everytime. Whereas commercial pools have your Tier 1: mixed use, apartments; Tier 2: retail, office, warehouses, automotive, self-storage, mobile home parks <25%>25% RVs, restaurants and bars, gas stations, and night clubs.
Commercial pools come in different sizes, locations, etc. But what make them totally different than residential is CASH FLOW. Ok, some residential properties do generate rent but their value is based on comparables not Net Operating Income (NOI). In addition, the feeding frenzy that took place over the last 5 years in residential loan origination is not directly transferable into commercial due to its more sane underwriting guidelines of low LTV's and 1.2 debt service coverage requirements. Albeit, there a few pools being created in the higher combined LTV and Stated Income loan product categories, but they are typically in the stronger equity position with straight 70% or lower minimum LTVs. Unlike the 100%, stated 2/28 subprime loans available in the residential markets between 2003-2006.
In summary, as long as the secondary market pools can carve out tranches that keep commercial deals seperated from the Residential deals...you will see less defaults. But the problems will exist where the big brokerage shops have created investment securities with blended securitizations. Thus making the investment harder to evaluate true value and risk and analysts that do not understand the underlying asset structure. In a nutshell, have Congress stop the investment shops from "blending" investments and keep a triple-A rating on a CDO a pure commercial or pure residential pool.
Commercial pools come in different sizes, locations, etc. But what make them totally different than residential is CASH FLOW. Ok, some residential properties do generate rent but their value is based on comparables not Net Operating Income (NOI). In addition, the feeding frenzy that took place over the last 5 years in residential loan origination is not directly transferable into commercial due to its more sane underwriting guidelines of low LTV's and 1.2 debt service coverage requirements. Albeit, there a few pools being created in the higher combined LTV and Stated Income loan product categories, but they are typically in the stronger equity position with straight 70% or lower minimum LTVs. Unlike the 100%, stated 2/28 subprime loans available in the residential markets between 2003-2006.
In summary, as long as the secondary market pools can carve out tranches that keep commercial deals seperated from the Residential deals...you will see less defaults. But the problems will exist where the big brokerage shops have created investment securities with blended securitizations. Thus making the investment harder to evaluate true value and risk and analysts that do not understand the underlying asset structure. In a nutshell, have Congress stop the investment shops from "blending" investments and keep a triple-A rating on a CDO a pure commercial or pure residential pool.
Monday, August 6, 2007
Will Commercial Loans be affected by SubPrime?
The latest news from Wall Street is ...Bear Stearns CEO has been fired. This issue is starting to affect the Wall Street bond traders in even larger numbers than anticipated. Last year, I would have never thought I would be saying that all the major bond trading houses would be affected by the sub-prime debacle. The problem is that the reaction to all of this will create exactly what the markets do not want...a panic. Having been a loan underwriter in my previous life, I am wondering why banks that originate home loans didn't start looking at their lending practices before the market hit the fan?
My thoughts are that this time will be worse than the early 1990's, because the underwriting guidelines were tougher to obtain a home loan. Last year, anyone that had a pulse could get a home loan, even with a bankruptcy less than 5 years old. What changed? ....underwriting.
by: Commercial lender
www.firstselectloans.com
My thoughts are that this time will be worse than the early 1990's, because the underwriting guidelines were tougher to obtain a home loan. Last year, anyone that had a pulse could get a home loan, even with a bankruptcy less than 5 years old. What changed? ....underwriting.
by: Commercial lender
www.firstselectloans.com
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