Many people are wondering what impact the bankruptcy filing by Lehman brothers has on commercial lending.  Lehman Brothers was a large player in commercial real estate lending.  Up to about 12 months ago their small balance commercial lending program was probably one of the largest in the country behind Interbay Funding.

Lehman got caught up not only in the residential sub-prime debacle but also in the stated commercial lending mess.  The root cause in the commercial arena is that loans were made to people with good credit who were unable to prove their income.  This model works when applied correctly.  Unfortunately Lehman brothers along with a number of other small balance lenders did not apply the model correctly.  Lehman relied on outside appraiser opinion of value and loaned sometimes 80-90% on the appraised value.  As hopefully everyone knows by now, relying on third party appraisal is not the way to best establish value. 

To prevent the problems in valuation, many firms (that are still around), underwrote the value of the real estate in house and also required an appraisal by a firm selected by the lender.  Sadly most lenders, like Lehman, did not do the same amount of due diligence.  To be fair, the small balance program is not what brought Lehman to its knees, but it does serve as a lesson to other lenders about what should or should not be done in the future.