Are Art-Backed Loans Part of the Current Credit Crisis?

Step away from the beach and take a look at the front page of the “Money & Investing” section of today’s Wall Street Journal, where Lauren A.E. Schuker provides a detailed report on current fears about possible defaults in “the big-money world of art-backed loans,” linked to the broader credit crisis.
Schuker writes:
As these newer kinds of [art-backed] loans proliferate, concerns are rising in the art world that some borrowers could default or find themselves in over their heads. Art is notoriously tough to value, so if prices fall sharply, lenders could find that they’re holding collateral worth less than the loan it is backing.
She names such art-backed lenders as Fine Art Capital, First Republic Bank and Art Capital Group.
What she doesn’t mention is the art-backed loans provided by auction houses. Sotheby’s Finance Segment is described in its most recent annual report as follows:
The Company’s Finance segment provides certain collectors and dealers with financing, generally secured by works of art that the Company either has in its possession or permits the borrower to possess. Clients who borrow from the Finance segment are often unable to borrow on conventional terms from traditional lenders and are typically not highly interest rate sensitive….
The majority of the Company’s secured loans are made at loan to value ratios (principal loan amount divided by the low auction estimate of the collateral) of 50% or lower. However, the Company will also lend at loan to value ratios higher than 50%.
Some of these loans are advances to consignors. Others are “general purpose term loans to collectors or dealers secured by property not presently intended for sale.”
The report acknowledges:
To the extent that the Company is looking wholly or partially to the collateral for repayment of its loans, repayment can be adversely impacted by a decline in the art market in general or in the value of the particular collateral….In certain instances…secured loans are made with recourse limited to the works of art pledged as security for the loan.
In those “certain instances,” if the the borrower defaults and the value of the collateralized art falls below the amount of the loan, Sotheby’s is out of luck (or has to await a turn in the market).
According Sotheby’s most recent quarterly report, the average loan portfolio of its finance segment was $181.53 million for the three months ended June 30, compared to $146.28 million for the same period last year—a 24% increase.