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.

1. Analyze the prospective borrowers’ income and debt and pre-qualify the client to determine the maximum mortgage that the prospective borrower can afford.

1. 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.

1. Collect all financial information (tax returns, bank statements) and other related documents that are part of the application process.

1. Initiate verification of employments and deposits.

1. Initiate requests for mortgage and other loan verifications

1. Order appraisals

1. Order inspections or engineering reports

1. Provide disclosures (truth in lending, Good Faith Estimates, and the required Colorado specific disclosures to the borrower)

1. 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.

But, you say,  we saw an uptick in Treasury yields and a downdraft in prices on Friday because of statements by the Fed chairman.  I think it’s temporary, and here’s why:  housing whicxh drives so many things inour economy is in the tank and is headed down. Again.  My friend and colleague Lou Barnes writes this week:

“Rates are now rising sharply from their lows after the Professor’s (Ben Bernanke’s)  murky address accurately reflected a divided and uncertain Fed, in a reactive state several miles from anticipation and pre-emption. There will be no new QE (quantitative easing, the Fed’s direct injection of invented cash) or any other substantive action until the economy declares itself, double-dip or modest recovery. The job market will be definitive, but this Fed will need to see two or more months of dipping data before moving.

        Analysts have struggled to quantify the housing “shadow inventory” and its effects ever since the market began to roll over in late 2005. The focus on delinquencies and future rate and amortization re-sets has missed the depth of shadows.

      This inventory, in one stage of distress or disquiet or another, looks like Napoleonic infantry advancing slowly through fog, each rank harder to make out, the back invisible, one rank after another gradually coming into view.

 In the second quarter 4.5% of all mortgages (roughly 2.5 million of the fifty-million total) are in foreclosure.   Right behind,  the 14.4% in delinquency.

 Also, 11 million households are underwater versus mortgage balances, and another 2.4 million have negligible equity (CoreLogic). Many, perhaps most of these households are not even delinquent, but can go to distressed sale or walk away at any time.”

No equity, no job, no hope.  And the foreclosure moratoria are expiring.  So is the popularity of the Obama administration.

My advice:  Grab good quality bonds and guiaranteed loans and strong credit where you can and hang on.

The Credit Union SBA Investing webinar has been moved to August 26 because of the Mid America SBA secondary market convention this week.

Wondering how smart it is to invest in government guaranteed loans?  Want to get some questions answered?  Unsure about how to deal with prepayment risk?  Get the answers from the experts on Thursday, August 26 at 8 AM Pacific, 9 AM Mountain, 10 AM Central and 11 AM Eastern time.  Here’s the dial in data:

For participants:

Join: https://bankerstuff.ilinc.com/join/yspjfkr

Primary Dial-In: 1-888-394-8197
Passcode: 114628

You presenters will include Tim Thomas, author of the recent White Paper on government guaranteed loan investing for credit unions; Karen Bean, Senior institutional sales representative for Signature Securities, and Executive Vice President Mary Mims.  The presentation and Q&A should be about half an hour.  For more information, contact Tim Thomas at Isaak Bond, 303-623-7500, tim@isaakbond.com

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

The first 504 pool should be ready to roll by the end of May — SBA is in last minute talks with Colson, the master servicer.  Stay tuned!

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.

Yesterday, March 25th, some new SBA-specific legislation was introduced and passed by the House of Representatives using their unanimous consent provisions and then, that same evening, the exact same bill was introduced and passed by the Senate the same way.

The very simple, two-paragraph bill, HR 4938, provides another extension to the Recovery Act SBA loan provisions, extending them now from March 28th through to April 30th.
This extension will allocate up to $40 million in pre-budgeted funds for 7(a) and 504 fee reductions / waivers along with (more importantly) the 90% 7(a) guarantees. 
It is expected that the President will quickly sign the legislation into law.

Want to know what a bank failure and receivership is really like? Well, they say Friday night is the time the FDIC closing team will show up at your main branch.  Once the senior site agent meets with the Bank president, and the first platoon from the FDIC has secured the cash and begun a count, the remainder of the FDIC takeover team  and subcontractors will show up.  Oh, yes,  and the  CURRENT bank employees are deputized as temporary FDIC employees.   But the influx from the FDIC is huge.  Figure one agent per $5 MM in assets.  $400 million bank, 80 polite, briefcased, laptop flipping, well dressed people show up, all at once.  And along with them, the president of the receiving bank.   Three days later the failed bank is open – with a new name.  FDIC examiners and agents head personnel, operations, lending, investigations, accounting, file review, and other functions  until the receiving bank has its personnel in place and  the dance is  done with the precision of a fine watch.  Visit http://www.npr.org,  click on This American Life and download Ira Glass’ recent podcast entitled “Scenes from the recession.”  It’s  first hand takeover account of a small community bank in Washington State and the drama behind the numbers is poignant, to say the least.   So if you’re not a numbers guru you may be interested in the human side of the bank closure business.

We are seeing some glimmers of light, if not portions of the Glory Train of Recovery, in the tunnel. 

lationHousing starts and building permits last month are holding steady in the 550,000 to 650,000 range, rather than deteriorating further, that’s a good thing.  Industrial production rose 0.1 percent in February, while capacity utilization rose to 72.7 percent. That was the eighth month in a row of improvement in the utilization rate. It’s now at a 14-month high.  So maybe we might have to increase capacity.  We might have to, uh, GROW. Why, by golly, the FED might have to raise the discount rate again.  Not In-flation, really, or STAG f, but re-flation.  The air is coming back into the balloon.

NO thanks to the SBA, of course, because ONCE AGAIN the Agency is OUT of money to subsidize guarantee fees and once again 7A borrowers will have to pay big time — up to 3.75% of the guarantee amount,  for a 7A loan — and HLFA A POINT on the SENIOR 504 loan.  We are bouncing back to the dark side yet again because of inaction in Congress.  And you can forget about higher 504 and 7A limits, at least for a while. 

YES, dear readers,  our community banks — those long-suffering bankers conventioning last week in Orlando, and their minions — are getting told to lend, not to lend, told the SBA is there to help, but not really.  They are all struggling and all wondering how to show some solid earnings — which is why my white paper is coming out this week — “Four ways to ramp up fee income without growing assets (or adding to credit risk). ” Stay tuned for that!

Yours truly is leaving Horizon West  Partners, LLC on April 1 to run his own firm, called Silverline Advisors, to provide loan placement and secondary marketing services to those same community bankers  — services they in turn can deliver for a fee to their customers on a concierge desk model.  It’s pretty cool if I do say so myself.   I believe that commercial and SBA loan placement is OVERPRICED and you really CAN deliver what used to cost 100 basis points in broker fees for a fraction of that — anyway, that’s my new model.  Email me at tim@silverlineadvisors if you’d like a copy of the white paper.

Retail sales rose 0.3 percent, while “core” sales excluding autos climbed 0.8 percent. Both figures topped estimates.

Without the SBA we’d be in trouble.  Regular working capital lines, CRE secured term loans and other credit facilities outstanding at banks are DOWN, way down.  The total volume of small-business loans in bank portfolios  fell 1% in January,, says the US Treasury.  New loan originations for small businesses dropped 28%.  So banks are trimming portfolios while SBA originations carry the load. Meanwhile, total. January new loan originations were down 35% versus a year ago.   Happy times, these, for our bretheren in commercial banking.

Which is why I’m writing a White Paper entitled “Four ways to ramp up fees  without growing assets:  a profit primer for community banks.”  We’re going to talk about originating A/R, factoring, working cap lines, SBA cap lines, and 7As, and selling (or co-originating) them without hitting portfolio.  Provide the service, pocket the fees, use the new investors’ products to restructure your portfolio, have some happier small business customers for a change, what a concept.  Fees great, credit risk zero.  Interested?  Email me at tim@silverlineadvisors and I’ll send you a copy.