Tell your auto mechanic, the owner of your favourite restaurant, and the person who cleans your pool that it's the end of the line for subprime business loans. I think that in six months, the market for subprime commercial mortgage loans will shrink by 75%. If these small business owners want to use their commercial buildings' equity to help them get through the coming recession, they may not be able to do so if they don't apply in the next few weeks.
Wall Street lenders like Bayview Financial, which is a great company and one of our best friends, get money to lend by securitizing their subprime commercial loans. They put all the loans into one big group. They give a trust the group of loans. The loans in the trust are used to back the bonds that the trust sells.
The bonds are then sold on the Asset-Backed Securities (ABS) market by investment bankers. ABS bonds are often sold as credit card debt and car loans, as well as subprime business loans.
The problem is that the people who buy these ABS bonds now want yields that are much, much higher. Yesterday, I read in Bloomberg that buyers of AAA-rated ABS bonds are now asking for yields that are 2% (200 basis points!) higher than they were just eight months ago. ABS bonds are no longer as popular as they once were.
The loan-to-value ratios of subprime commercial lenders on Wall Street are also being forced to go down. For example, Silverhill Financial recently cut the loan-to-value ratio on its high-LTV programme from 97 percent to 85 percent.
Changes like these are a sign that the market for ABS bonds might be shrinking. If Bayview, Lehman Brothers, and the other subprime commercial lenders on Wall Street suddenly cut back on their programmes, the small hard money commercial lending companies won't be able to handle the extra business. Lending for subprime commercial mortgages could stop, and it could happen very quickly.
So, you should tell the owner of your favourite coffee shop and the guy who fixes your car's body that if they ever want to borrow money against their buildings, they should do it now.
