Re: Subprime Loans Debacle - Posted by ray@lcorn
Posted by ray@lcorn on May 10, 2007 at 10:18:29:
In my view the subprime problems are much ado about not much. Yes there were loans that shouldn’t have been made, and yes there will be an increase in foreclosures, but in the big picture it is a small sliver of the total mortgage universe and will not cause a systemic meltdown. The market will take care of the problems as long as the politicians stay out of it.
As to the effect on commercial lending?nada. If anything, the elimination of the subprime investment vehicles increases capital availability in other sectors.
As Patrick said below, there is a little more scrutiny of deals at the securities investment level, but no appreciable changes in loan underwriting. Spreads (securitized loans are priced as a “spread” over T-bill rates) are holding steady and competition is stiff among lenders for loans.
Anecdotal example: I got a quote yesterday on a small (~$2mm) unanchored retail deal at 120bps over the 10-yr T-bill “on-the-run rate” (a little higher than the spot rate on Bloomberg), which places the rate just below 6%, and the broker stressed that it could be negotiated downward for a clean deal. This time last year I got a similar deal done at 5.55%, so not much has changed.
p.s. My comments above are not to say the subprime mess won’t have any effect. It will, and in ways not many realize. In addition to the obvious increased housing supply from foreclosures, demand will be suppressed going forward. Here’s why: the first-time buyers that created the record home sale numbers of 2004-2006 would not have qualified under normal conditions until their incomes (and credit) supported the purchase. So the market essentially borrowed those first-time buyers from the future years, and it will take some time for the pipeline to refill.