Commercial Loans and Fun Blog

Where Does Subprime Commercial Loan Money Come From?

Posted by George Blackburne on Tue, Jun 16, 2015

Subprime_RacoonFor over thirty years, the only commercial real estate lenders making subprime commercial loans were hard money commercial lenders.  Either a bank funded your commercial real estate loan or a hard money lender funded it.  No one else was making subprime commercial loans.

Then some smart Wall Street investment bankers started to covet the outrageous returns being enjoyed by those private investors who invested in hard money commercial loans.  There is an old saying in capitalism, "Outrageous profits breeds competition."  Many private investors who invested in subprime commercial loans - even after loan lossess - were indeed earning outrageous yields, typically 6% to 8% more than what C.D.'s were yielding.

The first major Wall Street player into the subprime commercial loan business was Bayview Financial L.P., along with their small commercial loan subsidiary, InterBay Funding, LLC.  Bayview and InterBay entered the subprime commercial loan market in 1999.  By the end of 2006, they were the dominant players in the business of securitizing subprime commercial real estate loans.  Another large player in the subprime commercial loan business at the time, although considerably smaller, was Lehman Brothers.

At the time, the securitization business was going wild.  Investment bankers were already securitizing jumbo home loans, car loans, and credit card debt.  It was Bayview Financial that first convinced the investment world to also accept subprime commercial loans into their loan pools.

Bayview Financial accomplished this important feat by gradually sprinkling a few subprime commercial loans into their asset-backed securization pools.  You have no doubt heard of the term mortgage-backed securities; but asset-backed securities are slightly different than mortgage-backed securities.


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Asset-backed securities ("ABS's") are defined as bonds backed by pools of various kinds of loans, not just mortgages.  In the early 2000's, the typical asset-backed securitization pool consisted of credit card paper, car loans, aircraft leases, royalty payments, and scratch-and-dent residential loans, which are home loans that have been kicked out of mortgage pools.

Bayview Financial convinced some Wall Street investment bankers to allow them to sprinkle into these asset-backed securitization pools a few subprime commercial loans.  This had several advantages for the pool.  First of all, the typical scratch-and-dent residential loan was 80% loan-to-value.  The typical subprime commercial loan was just 65% loan-to-value.  By sprinkling in a few subprime commercial loans, the pool's average loan-to-value ratio declined from 80% to 72% LTV or so.

The average yield on a subprime commercial loan was also around 2.5% higher than the average scratch-and-dent residential loan.   Sprinkling in a few subprime commercial loans raised the average mortgage yield in the pool.

The concept proved to be a sound one.  These subprime commercial loans also ended up having a better payment record than the residential loans in the ABS pools. Soon Wall Street had a steady appetite for subprime commercial loans, and Bayview had created a new industry.  For several years the ABS industry was cookin' with gas.

Then the Great Recession hit.  Subprime residential loans defaulted in enormous numbers, and soon the word "subprime" became a dirty word.  The ABS market dried up entirely, Lehman Brothers went bankrupt, and Bayview Financial was forced out of the market.  The entire Wall Street subprime commercial loan industry disappeared overnight.




For eight years a handful of surviving hard money commercial lenders feasted on a niche where we had very little competition.  It was a particularly good time because the banks had largely stopped making commercial loans.  Therefore not only was the Wall Street subprime commercial loan business gone, but the banks were not making many commercial real estate loans either.  Those were the days, my friend.

In my last blog article, I mentioned that while commercial real estate fell by 45% during the Great Recession, it did NOT fall because so many subprime commercial loans went bad.  In fact, the overwhelming majority of these Wall Street subprime commercial loans paid a fine rate of interest through the Great Recession.




By the way, I call them "Wall Street" subprime commercial loans because it is the investment banking industry that sells the bonds backed by these subprime commercial loans.  Bayview, InterBay, Lehman Brothers, and other mortgage companies may have originated these loans, but it is the Wall Street investment bankers who ultimately sell these asset-backed bonds.

Okay, so the economy eventually recovered.  The surprisingly positive performance of these subprime commercial loans through the slump was noticed by the investment world.  Capitalism functions, and now the Wall Street subprime commercial lenders are back.

But there is a twist.  No longer do bond investors just want a few subprime commercial loans sprinkled on top.  Now they want the entire ice cream cone filled with subprime commercial loans.  In other words, the entire pool of loans will be subprime commercial loans.  These pools will be securitized as if they were they were small, higher-yielding CMBS pools.

These new commercial loans are called nonprime commercial loans.  I hope to blog later this week about the difference between a subprime commercial loan and a nonprime commercial loan.

For more on subprime and nonprime commercial loans, please click here.

At least six nonprime commercial loan companies have sprung up or returned to the market in the past 18 months.  Blessedly they have all joined as lenders.  You can apply to all six nonprime commercial lenders by submitting your deal through C-Loans.


Apply To Six Nonprime  Commercial Lenders


One of the nice things about taking my famous 9-hour video course, How To Broker Commercial Loans, is that you learn the entire profession.  You'll even earn how to underwrite commercial construction loans.  You will finally understand what in 'tarnation lenders mean when they throw around terms like mezzanine loans, preferred equity, and structured finance.  Your confidence will soar.  No longer will you be just winging it.


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Remember, if you run across a banker who makes commercial real estate loans, be sure to grab one of his business cards.  You can parlay the contents of just one business card into a free directory of over 2,000 commercial real estate lenders.


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How would you like to get that wonderful 9-hour video course for free?  Just convince one of your banker buddies to join as a lender.  You'll also receive $250 every time he closes a commercial loan for C-Loans.  Is it hard to convince a banker to join?  Naw.  Just click on the red button below and forward the page to your banker.  The page sells itself.


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C-Loans now offers business loans, rather than just commercial real estate loans.  This includes accounts receivable financing, equipment financing, inventory financing, and secured lines of credit.


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My own hard money shop is ravenous for subprime commercial loans.


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Topics: Source of Subprime