Archive for the ‘Uncategorized’ Category
Denver Reports – Apartment, Office, Retail – and Credit Union Commercial Rates for January
Colorado and Wyoming credit unions are helping provide much-needed liquidity to Colorado’s commercial real estate market, offering permanent loans with fixed rates, low closing costs and NO prepay penalties. Click here for the program summary Rate and Program Summary Centennial Lending Commercial Mortgages January 2012
REIS just released the vacancy, cap rate and pricing reports on Denver retail, office and multifamily for 3rd quarter. Click here to download the PDF, data provided courtesy REIS Inc.
Retail:
Office:
Multifamily:
Commercial Real Estate and 504 Rates for 2012 – Colorado
Intersted in financing? Click on the links below for 2012 rates and programs
Rate and Program Summary Centennial Lending Commercial Mortgages January 2012 - Rates for 504 and commercial real estate loans
Success Stories by Centennial Lending - Click for somne examoples of recent closings
Denver versus the World: Commercial Real Estate
Malls in the top 80 U.S. markets posted an average vacancy rate of 9.2% in the quarter, down from the 11-year high of 9.4% in the third quarter, according to Reis, which began tracking mall data in 2000. Mall vacancies had been climbing steadily for most of the downturn since 2007, when the vacancy rate fell as low as 5.5%.
DENVER RETAIL, like the Nation’s malls, is showing a gradual recovery. Vacancy has descended slowly to about 8% overall with higher numbers in Aurora and the northwest corridor. Asking rents are $18.64 in Boulder, showing 6.4% vacancy and $26.31 along the Colorado Blvd retail corridor which has only 1.6% vacancy.
REIS reports that nationally, the office vacancy rate fell in the fourth quarter of 2011 and rents rose for the fifth straight period, signaling that a recovery is well under way.
DENVER OFFICE rents are up slightly, to $19.74/SF asking rents versus $19.64 in third quarter. Vacancy is 15.7% area wide. The highest rents are (can you say oil and support industries?) downtown at $25.47/SF, then Northwest to Boulder at $21.39/SF, then in Cherry Creek at $21.18/SF. We had net absorption last quarter of 235,000 SF on an inventory of 107 million SF in metro Denver
REIS said as well that the national apartment vacancy rate fell to 5.2 percent, the lowest since the end of 2001. It was 5.6 percent in the previous three months and 6.6 percent a year earlier. As we have already reported, the Denver multifamily market remains strong with rising rents and vacancy under 5.5%.
Building or buying industrial space? Asking rents are $5.94/square foot overall, down a bit from $5.97 in 2010. The highest industrial rents are in Boulder, at $8.86, followed by Southeast Denver, at $8.27, followed by the northwest US 36 corridor at $8.27. Really encouraging are the vacancy rates – 4.2% metro wide, 4.5% in Commerce City, and still tighter in Brighton and in the northeastern suburbs, with space virtually nonexistent due to the oil and natural gas boom. The exception (but perhaps not for long) is Longmont metro, with a 16.9% vacancy due to new inventory coming online
New Year, New Job, New Liquidity for Metro Denver Commercial RE
Starting tomorrow, January 3, 2012, I am going to be making “small balance” commercial real estate loans in the Denver-Boulder area as a commercial loan officer and business developer for Centennial Lending. Centennial originates and services commercial and residential loan investments for its owner and partner credit unions here in Colorado and in nearby states. Why is the credit union connection important? Because credit union loans tend to be fixed rate, or hybrids, competitively priced with Bank debt, AND, unusual as it seems, they offer fixed rates without the customary but still horrible prepay penalty you find with life company debt. So a credit union loan is well worth checking out.
We lend on gas stations (sparingly) , self storage, office, multifamily, retail and industrial properties. We also do the senior part of SBA 504 loans, which offer up to 90% combined LTV on owner-user buildings and office, retail and industrial condos.
Today let’s talk about the six county metro Office Market. Then will look at industrial, Multifamily and retail.
The Metro Denver office market vacancy rate fell a bit from 13.8 percent in the second quarter of 2011 to 13.5 percent in the third quarter. Third quarter net absorption was positive and totaled 400,180 square feet, compared to positive net absorption of roughly 253,430 square feet in the second quarter. One building with a total of 30,070 square feet was delivered in the third quarter, and 907,060 square feet in nine buildings remained under construction.
Lones Llang Lasalle’s TJ Scnippits forecast and actual numbers:
2009 Negative 900,000 SF
2010 Positive 800,000 SF
2011 YTD Positive 1,000,000 SF ESt
2012 Positive 600,000 SF Forecast
2013 Positive 1,50,000 SF Forecast
Are we energized yet? 2012 is going to be another year of positive absorption here driven by job growth. And lenders like credit unions are very much back in the market!
Protecting Your Balance Sheet with Adjustables – Two New White Papers
One useful way of thinking about our national debt, and I like simpler numbers, don’t you – is they way our friends across the pond do – debt as a percentage of gross domestic product, the sum total of what we as a nation produce in a year. As my colleague Lou Barnes writes, “in today’s dollars, 1970 Gross Domestic Product was about $4 trillion, debt about $1 trillion. Today GDP is about $15 trillion, debt $9.4 trillion. Debt is 63% of GDP now versus 25% in 1970, but rather worse, debt is growing another 8% of GDP each year.”
I sell bonds and pass-through securities guaranteed by the Small Business Administration for a living. With debt rising so quickly and approaching European levels, no wonder we hear rumblings about Moody’s and S&P threatening to downgrade US debt to less than triple “A.”
At some point, the Fed is going to have to stop artificially holding up Treasury prices (and holding down yields). Once QE2 rides into the sunset, long term rates will have to go up, and that’s bad for long bond holders because the dollars they get back are worth less than the ones they lent out when they bought the bonds. Of course, as I have pointed out many times, if you own an individual bond rather than part of a bond fund, you don’t get hurt as much because you can just relax and hold your bonds to maturity, and still get 100 cents on the dollar even if that 100 cents is worth only 90 cents after inflation. You, the bond holder, at least still get back 100 cents in real dollars. But the bond fund investor’s ETFS or mutual fund shares drop in real dollar value and the bond funds have to sell bonds (at the wrong time) to generate the cash to fund redemption as investors buy gold and stocks. So bond funds have to take the hit. And so do you. So all I am saying, if you are going to own bonds – even the shorter taxable variety with a 3-5 year call or maturity that appeals to credit unions, for example, own the individual bond, rather than a fund.
So the institutional investors I serve are looking for bonds and agencies that adjust and protect them agaist inflation, that will hold value as rates rise and don’t have credit risk to the balance sheet. Which is why so many credit unions and banks are looking at SBA and USDA guarantees and passthrough securities – they typically adjust and often have high caps or no caps. Hence they will hold value and match liabilities.
SBA and USDA guaranteed notes and pass-throughs not only adjustable monthly or quarterly, or in 3 or 5 year increments (check out the new 504 first lien pools, more on that later) they have floors and prepay protection. Banks and credit unions are snapping these “full faith and credit” guarantees up to build a fortress-like balance sheet. The premiums are scary – unless you know how to underwrite around them. I have updated my White Paper on this subject and it’s available just click here. Also, on Thursday 27 January we have a webinar for credit unions on How to Start Your Own SBA Department. For an invitation, email me at timothyethomas@gmail.com. And for the new White Paper on setting up for SBA, click here.
Cheers!
White Paper Helps Build Non Interest Income and Better Banks
Hi! I have updated this post with new tags. The WHITE PAPER on Building Fee Income is generating huge interest — hope you like it!
Need specifics and a fresh perspective on building non interest income? I think you’ll enjoy my long awaited WHITE PAPER, which gives five great ideas — and the specifics, and the implementation contacts, and the questions you need to ask – to help your financial institution expand services AND grow fee income AND do so without credit risk to the portfolio AND start building a more fortress like balance sheet. Click here to download:
We’ll be announcing a WEBINAR featuring ALL FIVE contributors (and yours truly) shortly so STAY TUNED!
How to Ramp Up Fee Income Part One of a Series
While traditionally this blog covers SBA and USDA loans (just the guaranteed part) as an investment vehicle for credit unions and, yes, banks, I will be sharing with you portions of my next White Paper which is about ramping up your NON INTEREST INCOME and expanding your product lines. We are going to start with a very traditional idea at first then branch out into ten less traditional and more interesting ideas, and I’ll guarantee that you’ll find one or more you can use at your institution to increase the bottom line. Just email tim@silverlineadvisors and I’ll send you the contact information you need to meet an individual who can help you implement this idea. And be sure you opt in Read on!
These are difficult times to be in the mortgage business – but nonetheless, mortgages are an essential member/customer service and there are basically three delivery tracks:
Track 1: Traditional Mortgage Banking
Become a mortgage banker delivering directly to a government loan pooler and to FNMA/FHLMC or their successors. We won’t be discussing mortgage banking here due to the expense, human resources load, credit risk and interest rate risk inherent to the business. The risk/reward ratio in the current slow, tight credit market favors a less ambitious approach.
Track 2: Collect Rent, Let Someone Else Mind the Store
Rent space to a reputable, well established, experienced mortgage banker, creating a fixed income stream from underutilized office space. This rent needs to be at market due to current RESPA laws. Let’s assume a 200 square foot office and the price of $25 a square foot and three separate locations income would be $15,000 a year. Liability to the institution would be extremely low in this scenario and the mortgage banker would do all of the originating, processing and closing of the loan. This option also allows for us to originate all the different types of loans mentioned above.
Megastar Financial is a good example of a company you might consider renting retail space to. Founded in 1999, Megastar has a reputation for quality and integrity and is one of the fastest growing and privately held mortgage companies in Colorado. To date, the Company has funded over 10 billion dollars in loans. Megastar is considered a full service Mortgage Banker. They underwrite and close loans in their own name then sell to the secondary market to lenders such as Bank of America, GMAC, and JP Morgan Chase. The Megastar service proposition includes loan approval within 24 hours of application, in-house closing and document draw; a pricing engine that enables them to choose the best pricing for the customer from multiple investors, and careful tracking for all contract dates and with a commitment to having figures to closing three days before closing. Megastar also has an automated notification system that sends updates to parties involved in the loan transaction.
Track 3: Retailer, Meet Wholesaler
Choice three is to become a retailer and originate for a wholesaler like Megastar. Under RESPA and related legislation, for any institution or individual to earn a fee for a referral there are certain duties and services you need to provide, known in the trade as the Duties of the Originator. Your institution would need to gather information from the borrower and fill out the loan application and perform at least five of the tasks listed below.
- Analyze the prospective borrowers’ income and debt and pre-qualify the client to determine the maximum mortgage that the prospective borrower can afford.
- Provide education to the borrower about the home buying and financing process. Inform the borrower about the different types of loans and products available and explain how closing costs and payments vary with each product.
- Collect all financial information (tax returns, bank statements) and other related documents that are part of the application process.
- Initiate verification of employments and deposits.
- Initiate requests for mortgage and other loan verifications
- Order appraisals
- Order inspections or engineering reports
- Provide disclosures (truth in lending, Good Faith Estimates, and the required Colorado specific disclosures to the borrower)
- Assist the borrower in understanding and clearing credit problems
10. Maintain regular contact with the borrower, realtor, and lender during the application and closing process and inform them of the status of the loan.
11. Gather additional documentation as needed
12. Order legal documents
13. Order a flood certification
14. Participate in the loan closing
15. Share other activities as appropriate to ensure a smooth transaction for the customer and satisfy RESPA requirements.
Megastar has had success with other institutions by selecting the appropriate employees and providing adequate and ongoing training. A referral fee can be paid in this situation.
Megastar and we would require representations and warranties against fraud and misrepresentation. This option requires a wholesale agreement and applies only to conventional loans. FHA and VA transactions are excluded.
Want more on this subject? Just email tim@silverlineadvisors and I’ll send you the contact information you need to meet an individual who can help you implement this idea.
SBA and USDA Guarantees Appeal to Credit Unions; Webinar 19 August
Dear colleagues and credit union executives: We will have a WEBINAR on this topic on THURSDAY AUGUST 19 at 10 AM Mountain Standard time. 11 AM Central. For more information email tim@isaakbond.comand I’ll send you the dial-in and webinar information.
As I write this, in August, 2010, the shape of the solution to the corporate credit union crisis has yet to emerge. Clearly the very foundation of the system has been shaken in the aftermath of the collapse in performance of private label mortgage backed securities. The significance of the impairment, and the likelihood of loss, has prompted write-downs of OTTI for the corporate as required by Generally Accepted Accounting Principles (GAAP). These write-downs have obliterated retained earnings, as the retained earnings accounts have been emptied; paid-in capital has been depleted as well with write-downs on the magnitude of $3 billion at US Central and $8 billion at Wescor, to cite just two examples. Wescor now has negative capital and US Central, once the nation’s clearing house for the corporate credit unions would be in the same position were it not be for a liquidity injection from NCUA.
This scenario, repeated system wide, has forced most member consumer credit unions to write down their investments in the affected corporate credit unions. Here is the WEB link to two very informative presentations on the crisis:
http://www.ncua.gov/GenInfo/Members/Matz/MatzAnnouncement.aspx
A third video presentation, about possible solutions, should be released shortly.
While the Industry as a whole has to decide upon a long term “let’s not let this happen again” solution, and a structure that makes sense, we seem to be in an interim period where confidence in ratings services is nonexistent. Certainly confidence in the ability of corporate credit unions to prudently invest has been eroded. And to a great extent, the selection of investments, for the time being, is back in the hands of executives at in each consumer credit union. Chaos after the meltdown of 2008, and the aftershocks, means that as the ship seems to be sinking, each lifeboat has to set its own course until we can rebuild again.
In this paper I will talk about investments, one type for the loan portfolio (yes, the loan portfolio) and another for the securities portfolio. These investments serve the “short bucket,” that is to say they have characteristics which match pretty well to share dividends. In future installments we’ll talk about the longer end (5 year maturities and longer) and also offer some ideas on raising NON interest income and expanding member services by offering some products that do not impact the loan or securities portfolio but just generate fees.
The purpose of this White paper is to provide some suggestions to member credit unions about investments they can make that are safe, sound, comply with part 704 of the Credit Union Act where it applies, and have liquidity and enough yield to provide the basis for a good dividend rate on share deposits, an operating margin for overhead, and excess to rebuild retained earnings. Moreover, the investments we are going to talk about in this white paper do not require additional staff and overhead and do not impose an administrative or servicing burden on the credit union, except for entering the balances and income streams from the statement each month.
Types of Government Guaranteed Loan Investments
The most popular and widely traded government guaranteed loans are SBA 7A guaranteed loans (individual loans and pools) and USDA guaranteed loans. And we will focus on these in this paper.
Small Business Administration (SBA 7A) Loans
The SBA 7(a) loan guarantee program provides long term financing for small businesses not normally available through conventional commercial lending channels. This program provides the nation’s small business community with manageable long term debt service. These guarantees are issued to qualified credit worthy borrowers whose loan applications meet the criteria of both the lending institution and the Small Business Administration. Loans can be guaranteed to a maximum amount of $750,000. The originating credit union, credit company or bank keeps the non guaranteed portion and services the loan. The guaranteed portion is frequently sold on the secondary market. This is true of the SBA 7A and each of the loan types discussed below.
United States Department of Agriculture (USDA) Loans
Loans guaranteed by the United States Department of Agriculture (USDA) are traded nationally in an active secondary market and offer credit unions and other investors a unique combination of safety, attractive yields and, if adjustable, rate sensitivity. The USDA guarantees loans through many programs. Typically, the loan is fully amortized over a term of up to 25 years. The rate may be fixed for 1 to 5 years, then adjust quarterly over Prime or LIBOR. Or, the loan may adjust monthly or quarterly from the very start of the term.
Small Business Administration (SBA) Pools
The collateral for SBA pools is loans to small businesses that are guaranteed by the full faith and credit of the U. S. Government as timely payment of principal and interest. Most of the pools are adjusted to the prime rate and have no periodic cap and only a few of the pools have a lifetime cap. The adjustability feature along with the superior credit quality of the SBA pool makes this investment an attractive product.
Small Business Administration (SBA) 504 Debentures
These are 10 to 20 year fully amortizing, fixed rate promissory notes secured by equipment and typically a second deed of trust on commercial real estate occupied 51% or more by the borrowing business. These debentures are created under the SBA’s 504 program to finance the acquisition of real estate and equipment for businesses or the expansion of an existing facility, thereby creating jobs. The duration and fixed rate characteristics of these bonds may not fit most credit union balance sheets.
United States Agency for International Development (AID) Loans
AID loans are 100% guaranteed by the full faith and credit of the U. S. Government. Loans carry fixed or variable rate coupons and normally have maturities ranging from 9 to 30 years. Ownership is evidenced by individual document packages. Loans are made to assist the development of friendly third world countries with participation from those countries’ governments. The full faith and credit guarantee is only for investors that are U. S. Entities.
National Oceanic and Atmospheric Administration (NOAA) Loans
NOAA loans are 100% guaranteed by the full faith and credit of the U. S. Government. Loans carry fixed or variable rate coupons with no minimum or maximum denomination or maturity. Ownership is evidenced by individual document packages. NOAA guarantees funding for the purchase of commercial fishing vessels and related industries.
Overseas Private Investment Corporation (OPIC) Loans
100% guaranteed by the full faith and credit of the U. S. Government. Loans carry fixed or variable rate coupons with normal maturities ranging from 5 to 10 years. OPIC’s purpose is to promote economic growth in developing countries through insuring investments against certain political risks and the financing of enterprises through direct loans and/or loan guarantees. Typical loan guarantees range from $2 million to $25 million, but can be as large as $50 million.
Purchasing Government Guaranteed Loans
Credit unions and other depository institutions purchase government guaranteed loans to leverage their equity and staffs diversify their holdings and realize greater yields than comparable securities. They can also use them to match assets to liability re-pricing schedules. The advantages of this program are zero principal and accrued interest risk, secondary market liquidity and almost zero administrative overhead. Loans can be resold as well in an active secondary.
Safety
All loans purchased in the SBA and USDA secondary market are guaranteed by the full
faith and credit of the U.S Government. This guarantee applies to both principal and
accrued interest. The guarantee is irrevocable to the investor.
Government guaranteed loans are rated as a low risk asset. “This is an unconditional guarantee to the investor or registered holder regardless of the actions of the originating lender,” writes the SBA’s counsel in commenting on 51 Comp.Gen 474, interpreting Section 5 of the Small Business Act, known as 15 USC 634.
Starting in 1972, the irrevocable nature of the SBA’s secondary market guarantee has been clearly set forth in the opinions of the Comptroller General of the United States. The Comptroller specifically approved the SBA’s purchase from an innocent secondary holder of an SBA guaranteed loan upon the borrowers’ default, even though the SBA had knowledge of the possibility of negligence, fraud or misrepresentation on the part of the bank which made the loan. This clear and proven idea of the unconditional guarantee for secondary market purchasers, which applies to USDA guarantees as well, has been responsible for the liquidity of these instruments and their suitability as low risk, highly rated investments.
Yield
Yields depend on premiums paid and vary from a spread of 100 BPs to well over 250 BPs over Treasuries. Fixed rate loans trade at yields which offer spreads to a comparable treasury yield. Floating rate loans trade at yields which offer spreads to appropriate short term indices such as 90 Day Treasuries, LIBOR or Prime.
Example 1
Consider a typical $500,000 USDA loan guarantee, floating at 2.75 over Prime, adjusting quarterly, priced at 106, with a 5 year amortization of premium:
Prime Rate 3.250%
Margin +2.750%
Current Gross Rate 6.000%
Servicing Usually -0.500%
Net Coupon to the Credit union: 5.500%
Cost of Funds Internal: -0.600% For 3 Month Assets
Net Spread: 4.900%
Amortize the Premium: -1.358%
(6% Premium amortized over 5 years at a 5 percent discount)
Net Spread after Premium: 3.542%
Net Spread $ $17,710.00 (3.542% x $500,000)
Capital Allocated $35,000.00 (7% of %500,000)
Return on Capital: 50.60%
(In this example, the guaranteed loan, with the full faith and credit of the US Government, delivers a yield of about 30 basis points over Prime, which is 339 basis points over today’s 3 month Treasuries, and about 294 basis points over the Credit union’s cost of funds, with no real administrative load, no principal and accrued interest risk and no rate cap).
Example 2
Now let’s look at a smaller SBA guarantee with the same analysis:
Example $100,000 SBA loan guarantee, Prime plus 2.750%, 10 year amortization, priced at 108.
Prime Rate 3.250%
Margin +2.750%
Current Gross Rate 6.000%
Servicing Usually -1.000%
SBA Fee Always -0.675%
Net Coupon to the Credit union: 4.435%
Cost of Funds Internal: -0.600% For 3 Month Assets
Net Spread after COF 3.725%
Amortize the Premium: -1.600%
(8% Premium amortized over 5 years at a 5% discount)
Net Spread after Premium: 2.125%
(Note that If prime stays flat the spread returns to 3.725 after premium burns off in 5 years)
Net Spread $ $2,125.00
Capital Allocated $7,000.00 (7% x $100,000)
Return on Capital: 30.36%
(In this example, the guaranteed loan, with the full faith and credit of the US government, , delivers a yield until the premium burns off of about 104 basis points under Prime, but that yield is 197.5 basis points over today’s 3 month Treasuries, and about 152.5 basis points over the Credit union’s cost of funds for 3 month or shorter liabilities, with no real administrative load, secondary market liquidity, full faith and credit and no rate cap. These smaller SBA loans can diversify your portfolio across the country or can be purchased within your trade area.
Pools
In this paper we are concentrating on building a portfolio one loan at a time rather than buying an undivided interest in a pool. The yield on SBA loan pools is low compared to the yield on an individual loan guarantee. Pools may yield 60 to 150 basis points over comparable US Treasuries. Individual loan guarantees can be 2 to 4 times as high. Pools offer “instant” diversification and, because they are securities, they can easily be pledged. Individual loans are harder to pledge but offer a much more attractive yield and they give your credit union an opportunity to select investments geographically, even in your own field of membership, or with a National focus – and by industry type (NAIC code), and by collateral type (real estate secured, equipment secured, or unsecured). Finally, as we’ve said, pools are securities and belong alongside your bond portfolio. Individual guarantees build the loan portfolio and loan to deposit ratio.
Acquisition Costs
The ease of acquisition of this product and its low maintenance costs are noteworthy
advantages. There are no hidden costs, attorney fees, appraisals, liquidation costs or site
inspections to be considered. The only staff time consumed in implementing a Guaranteed Loan
Program is file review at purchase, namely:
- Review the Loan Guarantee Certificate for completeness
- Review the Certificate Number and Loan Number
- Review the Assignments of Guarantee and collateral file
- Review the Trade Confirmation
These activities can be done in ½ to 1 man-hours per loan.
Monthly, the loan statement, which includes all loans purchased with SBA guarantees on one form and USDA guarantees on another, needs to be entered into your accounting system as a “loan serviced by others,” and reconciled with the principal and interest payments which
are forwarded directly from the Fiscal and Transfer Agent in the case of SBA loans or from
the originating institution in the case of USDA loans. The processing time is the same as any other loan related accounting input and is a data entry and quality control function.
Availability of Product
SBA and USDA loans are popular investments and are actively traded nationally through a network of broker/dealer firms. Purchases are made on a forward commitment basis with settlement to follow, usually within 30 to 90 days. Guaranteed portions come in all sizes with maturities ranging from two to forty years. There are fixed, floating and hybrid loans. Floating loans reset to various indices, including Wall Street Prime, U.S. Treasuries, LIBOR and others. Loans trade from par (100) to premium prices over 110 % of par.
Common Questions and Answers:
- How reliable is the guarantee if there’s a problem in the loan file? What’s the credit grade of this asset?
- The loan portion you would own is guaranteed by the full faith and credit of the US Government. There is no credit or collateral risk. You are guaranteed not to lose any principal or accrued interest. Secondary market guarantees of USDA and SBA loans are UNCONDITIONAL and IRREVOCABLE. The investor ONLY purchases the guaranteed portion of the loan. The unguaranteed portion remains with the servicing lender along with the servicing of the loan. Your principal dollars invested are not at risk even if there is a collateral shortfall
- Is this a loan or security and can I pledge it?
- These loans are booked as purchased in your loan portfolio and increase your loan to deposit ratio. GGL loans are not subject to mark to market accounting under current rules. If you buy a portion of a pool, called an undivided interest, that is a security and goes in the investment portfolio. Pools are pledge able to entities like the Federal Home Loan Bank as collateral for borrowings if you need liquidity. Individual guaranteed loans generally are not pledge able to the FHLB, but may be pledged as collateral for a line of credit on a case by case basis.
- What documentation should I retain with my negotiable instruments?
- The Loan Guarantee Certificate is your proof of ownership for a purchased SBA loan.
- On a USDA loan the Guarantee Cert includes a Transfer Agreement.
- What loss reserves should I set aside for these loans?
- GGL loans require ZERO loss reserve and do not count against lending limits or the 12.5% commercial loan cap in place as of the date of this Paper.
- Can I resell the guaranteed loan if I need to for liquidity?
- Yes. There is an active secondary market and loans can be resold as needed for cash liquidity. However, prices vary daily. Get to know your SBA-USDA guaranteed loan broker-dealer. It is their job to get bids for you and execute trades when you need to. However, be mindful that sales are subject to gain or loss calculations which may affect your profitability.
The Risks:
As you have no doubt heard, these loans trade at a premium. If a loan defaults or prepays early any unamortized premium will have to be immediately amortized. Hence, you “lose” the unamortized part of the loan defaults early because default results in a repurchase by the USDA or SBA and that’s the same as selling a bond at par for which you paid, say, 106.
To help you evaluate the risk, calculate a breakeven for each loan. Your broker dealer can assist with this. The breakeven point is the point at which your cash flow after cost of funds exceeds the premium you paid for the loan. For example, if you pay a 6% premium for the guarantee and the net coupon is 4.6%, and your cost of funds for 3 months is about 60 basis points (3 month treasuries yield about 15 basis points as I write this), your breakeven point is:
4.60% Net Coupon after Servicing (adjusts every 3 month with no caps)
-.60% Cost of Funds
=4.00% Effective
Premium/Effective = Breakeven, so
BEP = 6.00% / 4.00% = 1.5 years
So, if the loan stays 1.5 or more years, you are ahead of the game and there’s not a cash loss for an early prepayment. Moreover, on USDA credits, you (the investor) get to keep the prepayment penalty which is often quite substantial – in event of a voluntary payoff. On SBA deals, the SBA keeps the penalty.
So here in a nutshell is the mindset most successful guaranteed loan investors have: buy government loans that are good quality (proven cash flow, or strong compensating factors, or that are in NAIC codes that have low default rates.) These are more likely to “stick.”
Once you are past the breakeven point, which is easy to estimate, you are in the profit zone. And once the loan stays beyond the time you amortized the premium, your yield increases from the reduced yield (called the Bond Equivalent Yield) that reflects the premium, to the full net coupon on the loan (the rate the borrower is paying, less the SBA fee and servicing, as we discussed earlier). The asset typically adjusts each quarter as Prime or as LIBOR moves. In other words, the premium is a “drag” on your yield. But once the premium has amortized or burned off, the drag is no longer there and your earnings on the asset in question increase very dramatically.
The fixed rate SBA or USDA loans have interest rate versus cost of funds risk. Variables do not have this risk.
To amortize the premium:
Consult your accountants, but we recommend 5 years on loans that have greater than 10 year final maturity and we recommend 3 years on maturities under 10 years
If the loan has a prepayment penalty (USDA commonly 5% for 5 or 10%, 9%, 8% etc) amortize to end of penalty period. At the end of the amortization period you own the coupon at par
Servicing is Done For you
You get ONE check each month with loan by loan detail. This saves man-hours, there’s little or no administrative cost. This is a self managing asset.
Delivery:
Unlike corporate bonds or stocks or municipals these trade DVP (Delivery Versus Payment)
Investor receives all documentation prior to delivery, then you:
- Agree to terms of Settlement
- Become the beneficial owner at exchange of funds
The Offering
Offerings are subject to prior sale and because the market is so active, the group of available credits will most probably be different from the inventory attached until the trade is made. However, new inventory is continually being originated, particularly in the geographical areas preferred by the Credit union.
The Regulations
The National Credit Union Association Examiner Guide, Chapter 12, covers SBA loans as investments. The Guide is wrong in one respect: there is a very active secondary market in these loans and in the SBA pools which many go into.
Here verbatim is what the Guide says:
“Fixed-rate Small Business Association (SBA) guaranteed loans have
appealed to some credit unions because of their relatively high yields.
SBA also has a variable-rate participation loan, in which the loan rate
generally adjusts quarterly and moves with the prime rate, thus
reducing the IRR of the security.
However, the lack of an active secondary market for these loans limits
their marketability, making them more suitable as a long-term
investment than as a liquid asset. Generally, SBA single loans contain
more risk than SBA loan pools. Likewise, SBA loan pools that have a
small number of loans carry more risk than do pools with larger
numbers of SBA loans. In other words, the larger the number of loans
in the pool, the more predictable is the pool’s performance and the
better its marketability.
SBA loans, whether fixed or variable rate, do not have a consistent
average life and SBA can call them for immediate repayment, which
could result in a loss if the credit union purchased the SBA at a
premium. In addition, the “thin market” (i.e., not an actively traded
secondary market and a limited number of brokers making a primary
market in SBAs) restricts marketability of these instruments.
Example: A credit union purchased a $100,000, 10 percent, 5-year SBA loan at
105. After one year, the balance of the loan was $80,000 and the unamortized
premium was $4,000. The borrower repaid the loan in full at this point. Since
SBA guarantees repayment only at par, SBA would not reimburse the credit
union for the remaining $4,000 unamortized premium and the credit union must
absorb the loss during the current accounting period.
Credit unions should be aware of the dangers of purchasing SBA loans
and other secondary participations at high premiums. However, the
decision of whether or not to purchase SBAs remains with the
officials.”
About Isaak Bond Investments Inc.
Isaak Bond Investments is a 33 year old institutional municipal broker dealer based in Denver. Isaak Bond Investments is a member SIPC and licensee under FINRA. They provide bonds for a number of nationally known, very large municipal bond funds, credit unions, trust departments and institutional investors. Isaak Bond Investments makes a market in taxable (Build America) municipals, SBA and USDA guarantees, agencies, and rated general obligation and revenue bonds. Isaak trades in the secondary bond and government guaranteed loan market, where they believe additional yields are available, and, as principal, buys and sells odd lots.
About the Author
Tim Thomas joined Isaak Bond Investments, Inc., in May, 2010 after two years in the SBA and the nationwide commercial secondary markets division with Bank of the West (a subsidiary of BNP Paribas) and 25 years in corporate and real estate finance.
Prior to Bank of the West, Tim served as a senior loan officer, analyst and correspondent channel manager with IMPAC, a real estate investment trust based in Southern California, where he headed multifamily mortgage origination in nine States.
Tim holds a Series 7 securities license. He is a graduate of Santa Clara University with a degree in economics and political science, with an emphasis in public finance. Tim is a member of the Colorado-Wyoming Chapter of CCIM. He is a frequent guest speaker and honorary instructor in at the University of Denver’s Burns School of Real Estate. Tim is active in Rotary, teaches high school debate, Junior Great Books, and is a volunteer with the Channel 9 Health Fair. . A native of Denver, Tim resides with his family in Centennial, Colorado.
Acknowledgements:
Editors and Contributing Authors:
Justin Dodson, Coastal Securities, Houston
Steven Douglas, Coastal Securities, Houston
SBA Production and Pricing:
Keldon R. Moldre, Horizon West Partners, Salt Lake City
Close to Expanded SBA Limits – But No Cigar
Want the real story on the hoped-for increase in the 7 A limit to $3MM, the expansion of the 504 program to include refinances, and a reliable extension on the fee waiver? Go to www.govtrack.us and put in SB 2869 (that’s my favorite) and House resolution hr 3854.
2869 passed the House in OCTOBER 2009. Huge margin. 322 Ayes, 11 not present, only a handful of Nays . Now a companion bill is in the Senate. We are still waiting.
2869 is the one for me.
- Increasing 7(a) loan limit from $2 million to $5 million;
- Increasing 504 loan limits from $1.5 or $2.0 million to $5.0 or $5.5 million;
- Allowing the 504 loan program to refinance commercial real estate loans (“incurred not less than two years before the date of application”), up to 80% LTV;
- Extending the 90 percent guarantees on 7(a) loans and fee elimination for borrowers on 7(a) and 504 loans through December 31, 2010;
- Increasing the loan limit on microloans from $35,000 to $50,000.
BUT without a final version, and the Presidents’ signature, it is business as usual.
Business as usual is not all that bad.
The SBA 7(a) lending program, per www.sba.gov, processed 16,558 loans from January through March of this year, which is more than double the 8,205 loans done in the same period a year ago. Wow. , Volume was $3.7 billion, more than double the $1.6 billion processed in the year-earlier quarter.
So — is there much pressure for change? Change, remember that?
And the stimulus is getting dangerous.
The White House’ 2011 budget proposal forecasts a record deficit of $1.6 trillion, or 10.6% of gross domestic product, highest since World War II as a percenatgee of what we produce as a Nation.
The Administration is creating a blue ribbon panel to study cutting the debt– but even with measures in place the White House still expects the national debt to rise above 71% of GDP over the next two years from 53% of GDP in 2009.
So: the scuttlebut is that one of two things will happen: VICTORY for an SBA expansion by May 15, which is what NAGGL (the National Association of Government Guaranteed Lenders) hopes for – or , if you read the Washington Post story of April 5, a quiet period of inaction, with these much needed bills languishing in recognition of the deficit and the political realities that spending and tea party politics are going to clash in November, resoundingly, and if you read the polls, the tilt may well be back to the right.
SBA Volume Up Finally
The General Accounting Office reported last week — in a piece excusing the SBA for delays in the 504 pooling program, among other things, some encouragng stats.
Origination of 7(a) loans in the primary market doubled from an average of about $650 million per month in the fourth quarter of 2008 to an average of about $1.4 billion per month in the third quarter of 2009, which is higher than second and third quarter 2008 average monthly originations of $1.1 billion and $1 billion, respectively. In addition, SBA 7(a) secondary market sales more than tripled between the fourth quarter of 2008 and the third quarter of 2009, from a monthly average of about $108.8 million to a monthly average of about $336.9 million. Furthermore, data indicate that the secondary market for the SBA-guaranteed, or debenture, portion of 504 loans has also improved.
Some day soon, thefirst 504 pools will roll out — I predict buy mid April. And the liquidity in the SENIOR 504 market will return.
Visit www.coloradolendingsource.org to sign up for the FREE 7A production webinar scheduled February 11 2010, or email me at tim@horizon-west.com for information