SBA and Commercial Finance and Investment News

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:

 

1.  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

 

1. 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. 

 

1.  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.

 

1. 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.

 

1.  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

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.

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

The Journal reports this morning what we sort of have known all along:  “The perilous state of many CMBS issues has Federal Reserve and Treasury officials searching for ways to prevent widespread foreclosures on commercial real estate mortgages. In some cases, lenders can keep a lid on distressed commercial property loans made directly to borrowers and held directly by the lender by extending the debt so long as the underlying properties generate sufficient cash flow to cover the debt service. But because of the way they are structured, it is extraordinarily difficult to do this with loans tied to CMBS issues. “ 

 

Translation:  it’s tough to do any sort of a workout once you have pooled that loan you ar servicing.  Developers  are just handing over the keys.

As the FDIC fund runs on toward empty, Banc Investment Group reports that a major component of loan origination for community banks is commercial real estate lending, and these banks could remain under pressure for the remainder of the year. BIG’s Commercial Real Estate Index showed an 11.5 percent decline in second-quarter lending with industrial and retail sectors falling 20 percent and 15.8 percent, respectively.
“That underscores the problem that banking is having in general,” Chris Nichols of Banc Investment Group said yesterday.  “There is a need for more capital, and the [commercial] real estate index underscores that point as well. As we look forward, as an industry, we worry about the amount of commercial real estate on bank books.”

Sheila Bair, head of the FDIC, says now is the time to clean the balance sheet, take your lumps.

One possibility:  RE ORIGINATE  your commercial permanent and bridge loans.  Carve out that 60% LTV piece and let your local commercial mortgage banker give the client a life company loan.  And take the rest of the debt and reassign it to other collateral.  Deceptively simple.  No loss on sale.  Cash comes in the door.  Worth thinking about!  Contact timothyethomas@gmail.com  to discuss!

Welcome to your foxhole. Ignore the Howitzer rounds and thew machine guns. There’s not much you can do but hunker down in the trench known as community banking if you have a high concentration of CRE or construction loans and if you are in a high risk market. The Federal Deposit Insurance Corp. reported it has 416 banks on its watch list, but industry experts said that number is certain to get bigger as more commercial real estate loans mature but can’t be refinanced. “These are smaller institutions, but they hold a lot of commercial real estate loans and that market will continue to deteriorate,” said Bill Fitzpatrick, an analyst at Optique Capital Management. Increasingly, the principal sources of the banking industry’s problems are commercial and retail loans, not residential mortgages and mortgage-linked securities, FDIC Chairwoman Sheila Bair said.

OK, let’s start with the Bad and Ugly: Remember savings banks? According to the OTS today, “thrifts reported a slight quarterly profit in the second quarter, the first positive results since mid-2007, but the number of companies and assets in trouble continued to rise. The OTS said the troubled-asset ratio is similar to those seen in the middle of the savings-and-loan crisis in the early 1990s. Residential-mortgage loans account for roughly 68% of the current troubled assets, while commercial-real-estate loans represent an additional 22%.”

Bring back those Lo Doc loans, what’s wrong with you?

But builders are even smiilng — well, let’s say it’s between a frown and a half smile with a nervous twitch. Per the MBA: “New home sales rose 9.6 percent in July to a seasonally-adjusted annualized rate of 433,000 units, following a 9.1 percent increase in June.”

So lets make those builders and subs some 7A loans. Pretty soon theyll want to buy back their HQ buildings with a 504.

THe reality. A rising tide raises all ships. Ours may take some time, but the tide is rising.

Roll Tide!

Yes, it looks that way! Here’s what the MBA reports: “New National Association of Realtors data shows that home resales grew in July at the fastest monthly clip in a decade. Sales of previously owned single-family houses, townhomes and condominiums climbed 7.2 percent during the month, with foreclosed and distressed properties accounting for almost 33 percent of the activity. NAR chief economist Lawrence Yun comments, “We have seen four straight months [of gains]. It is not isolated . . . this is a very broad-based recovery.”

Mid 2010 for commercial real estate, that’s the “turn,” so they say. Here is Reuters this morning:
“The National Association of Realtors said the commercial real estate market slowed to its lowest level in 15 years during the second quarter. “The reduction in commercial real estate activity is expected to last at least through the first quarter of 2010. Any meaningful recovery is not likely to occur before the second half of next year.” And our friends at Moody’s say: The value of commercial property in the U.S. has plummeted 27% this year, and the decline is likely to continue, Moody’s Investors Service said a report. In June, the Moody’s/REAL Commercial Property Price indices dropped 1%, the rating agency said. “It’s too soon to call the bottom,” said Connie Petruzziello, a Moody’s analyst and co-author of the commercial real estate report. ”

The action is in SBA, folks 7A right now, 504 right around the corner as the poolers start to line up once the administrative regs are complete — something we expect within the next 90 days, or sooner.

Those in the know know that SBA + BDO + BANKING = NOT NOW. At least that’s the sentiment out there. But community banks are waking up and smelling the profits. Their priorities: Control risk, add revenue, grow the client base, avoid compliance problems. Government guaranteed lending does all of those things. Shifts rsk, generates NII, generates a great ROI, doesn’t grow the portfolio and — done well — it poses little compliance risk.

On the job front: Expect growth in our sector as TALF rolls out and the Fed buys SBA backed bonds to move the senior 504 pieces. The cavalry is here! Viva Geitner.
Overall, Reuters reports today that:
“Seventy percent of bank executive respondents expect the job market to remain the same or worsen next year, and improvements in the real estate market and consumer confidence topped the list of triggers for a full recovery.

Though a turnaround in financial services is expected to be slow, 78 percent of the financial heads forecast improvement in 2010 as revenues and profitability improve.

And the worst seems to be over with job cuts, as two-thirds of respondents said they had completed their head count reductions and only 15 percent contemplated further action.”

So it ain;t that bad. There IS a light at the end of the tunnel.