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.
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