SBA and Commercial Finance and Investment News

Under the new law,  SBA 7(a) loans are  increased from $2 million to $5 million, and SBA 504 loans can now go up to a total loan amount of $12 million between the first lien and the debenture (second).  This means a great influx of midsized businesses to the government guaranteed loan market.

And the 504 program can facilitate REFINANCES.  It’s a great program — with a 20 year fixed rate second from your local CDC and a first that adjusts typically every 5 years on a 25 year schedule.  Wow.  Get on the phone and call your customers.

The SBA fee waiver for borrowers and 90 percent guarantees under 7A have been extended through 31 December.  Yeah!  .”

Get in the GAME.  Learn about origfnating SBA and find out about the fee and growth opportunities — fees if you sell the whole loan — growth if you intelligently keep a portion of the risk.

First, the bad news:  the economy is still, to be generous, sluggish.  My compadre Lou Barnes writes,

” One of these monthly payroll reports will signal a turn in the economy to self-sustaining growth, and splatter the bond and mortgage markets all over the windshield.”

Not today.  Economic reports weaker than expected included the New York Fed Empire State Manufacturing Index, August Industrial Production, August Capacity Utilization, the September Philadelphia Fed Business Index, and the University of Michigan Consumer Sentiment Index.  The August Consumer Price Index (CPI), a measure of inflation, was up 0.3% on expectations that it would be up 0.2%.  Year over year, though, CPI is up just 1.1%.  Excluding food and energy, core CPI is up just 0.9%.

The Dow Jones Industrial Average is currently at 10,589, up slightly over 100 points on the week.  Crude oil futures are currently trading at $73.35 per barrel, down over $3 per barrel on the week.  The Dollar weakened versus the Euro and strengthened versus the Yen on the week.

Depressed?  Don’t be.  We are all waiting for SB 5297 to add volume for the SBA world, and JOBS JOBS JOBS.  And FINALLY it looks like the House will listen and the Senate version may pass.  Here’s the latest per my colleague Jordan Blanchard at CDC Small Business Finance in Pasadena:

the following bill (HR 5297) is expected to be on the President’s desk.  It will dramatically increase 7A production and double 504 production across the country.

SBA 7A Provisions

• Increase to maximum SBA 7a loan amount to $5,000,000
• 90% guarantee through December 31, 2010
• Fee waiver for the rest of 2010 (subject to available funding)

SBA 504 Provisions

• 504 Debenture increase to $5,000,000 for most applications and $5,500,000 for

`manufacturers

•  Two year window for refinancing debt (details provided below)
• 504 Debenture increase to $5,000,000 for most applications and $5,500,000 for program from the date of the first pool issuance – first pool issuance expected to be September, 2010
• Fee waiver for the rest of 2010 (subject to available funding)

First Mortgage Pool Program Update

• The extension to the FMP program was critical as FMP program which allows us to sell the FIRST lien portion of the 504 at prices around 105.
• That program was set to end in February, 2011. The new sunset date is slated to

be September, 2012, or $3B in allocation – whichever comes first.

• Increased 504 activity by community banks due to capital, liquidity and regulatory relief.
• Community banks can now compete against larger banks by offering lower rates and longer fixed periods while achieving an above market yield.
• ncreased 504 volume by non-bank lenders who can sell 85% of each loan.
• A significant increase in wholesale liquidity for special purpose properties such as hotels, gas stations, car washes, and restaurants.
• A new industry of Pool Originators who are the first participantsin the new era of ‘skin-in-the-game’ securitizations.
•  Interest in the SBA 504 wholesale first mortgage market (post FMP) by the nation’s largest banks including Bank of America Merrill Lynch.
• Significant increase in volume for CDC’s from both bank and non-bank lenders.
• A new era for those CDC’s that choose to become a secondary market resource for their first mortgage partners.

Once more, the return of dreaded guarantee fees (up to 3.75% of the guarantee on 7A loans and 50 BP on the senior 504) has been delayed — so the rush is on yet again to get your guarantee, this time  by 31 May. The Senate  voted to extend the Recovery Act Program through May 31, 2010 and provided $80 million for 7(a) and 504 fee reductions/waivers. It has also extended the 90% guarantee on the 7A  through May 31st. It is expected that President Obama will quickly sign this legislation into law.

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!

The following  is courtesy Mike O’Donnell, head of Colorado Lending Source (www.coloradolendingsource.org) , Colorado’s leading CDC and #12 in the USA. (quite an accomplishment considering Colorado’s rather diminutive population base, wouldn’t you agree?)   If ever you want the best 504 training for your teams, or 7A training, or a 504/7A processing facility, I recommend CLS,  I use them (yes and I have office space next door).  So, commercial over, here is the news:

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.

SBA 7A and 504 applications  are up 87 percent in this past month versus February a year ago, and closed loan volume is up by 58 percent for the first two months of this year, compared with the first two months of 2009.  PLP lenders, like Wells Fargo and US Bank, are seeing a surge in applications and CLP lenders (those who submit directly to SBA for underwriting) are seeing similar boosts in the number of loans they are processing for an SBA guarantee.  

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.

Per my colleague Mike O’Donnell, head of Colorado’s tremendous CDC, Colorado Lending Source (Check out their Website www.coloradolendingsource.org) this is the sad and lukewarm news.

Loans submitted to the SBA that have not yet been approved or loans that are in the process of being submitted to SBA for approval, are now being placed in a “recovery act” queue anticipating the return of subsidization in the near future.  Translation:  Be prepared to pay the GUARANTEE FEES see the archives on SBA Finance News if you need a refresher course.  Fees are up to 3.5% OF THE GUARANTEE AMOUNT  on 7A loans (and higher on loans over $1MM)  and 0.5% on the SENIOR part of 504 debt (the Bank loan not the Debenture).   You never know, the stimulus may be BACK but it’s ALL DRIED UP now.

And if you are waiting patiently for SB 2869, Mike says, be patient.

S. 2869:
This Senate Bill would increase loan limits on both the SBA 7(a) and 504 loan programs and also provide other enhancements including, most importantly, allowing the 504 program to refinance eligible conventional loans up to 80% LTV.

The Bill would have a zero impact on tax payer funds and currently has 21 co-sponsors.

We need it.  The President wants it.  Smart Republicans want it.  Let’s go.  Write Udall and Bennett.

When they waived the guarantee fees on the 7A and 504, and raised the guarantee percentages, we all knew it had to end.  We took it “cum grano solis,” with a grain of salt.  Well, the ARRA runs out February 28.  And the fees are back yet again.  Here is what to prepare your borrowers for.

7A Loans between $150,001 and $700,000 3.00% of the guaranteed amount so 2.25 points on the TOTAL loan (See, if you want the math, $700,000 times 75% guarantee times 3 percent is $15,750 which is 2.25 points on the $700,000.)

7A Loans greater than $700,000 3.50% of the guaranteed amount which is 2.626 points on the total loan

(OK class so here:  $1 million loan, times 75% is $750,000, times 3.5% is $26,250.  Got it? And magically $26,250 is 2.625 points on the $1 million loan.)

AHA!  But here’s a wrinkle.  There’s an EXTRA charge if your GUARANTEE amount is over $1 million.  Let me work an example for you.  $1.9 million is the loan amount.  $1.9 million times 75% guarantee is $1,425,000, correct?  Now, $1,425,000 is $425,000 MORE than the $1 million the SBA is really wanting.  SO, on the EXTRA $425,000, charge 25 basis points.  So the EXTRA is $425,000 x .0025 = $1,062.50.  Bottom line:  Borrower pays 3.5 points x $1, 425,000 which is $49,875, plus the Override, or of $1,062.50, so the TOTAL fee to the SBA is $50,937.50.  . 

Guarantee fees can typically be added to the loan and financed.   As long as LTV is under 90 including said fees. Or 80 for special purpose properties. 

The Guarantee Fee on a 504 loan is ½ of 1% on the SENIOR (bank funded) loan. So:  $4 million deal, of which $2 million is the BANK loan, $400,000, is the Equity Injection and $1.6 Million is the DEBENTURE.  What is the fee to guarantee?  Half a point NOT on the guaranteed loan, oh no, that would be too logical.  It’s on the BANK loan, so $2 million x .005 = $10,000

So I promised three GOOD news items this week — and here they are!

Good News #1

 From the MBA’s Commercial Real Estate Finance Conference this past week in Las Vegas, here’s the word:

Life companies are back in the market

Many if not most have LARGER budgets for commercial RE mortgages than last year

LTVs are creeping up (from 50 to 60, maybe 65% LTV)

And Guess WHAT, there IS a conduit or two –  “like the conduits of the late 90’s,” and for deals of 10MM up there’s NONRECOUSE available at up to 70% LTV for seasoned stabilized properties in good markets with good staggered leases in place

Good News #2

WSJ reports the U.S. Federal Reserve is leaving the door open for restarting its program to support the mortgage market, if the economy weakens or interest rates increase sharply, Federal Reserve Bank of New York President William Dudley said. As things stand, the central bank’s purchases of mortgage-backed securities are scheduled to end March 31. “Obviously, if mortgage rates were to back up a lot and if that had a big consequence for the economy, then we very well could rethink the issue about whether we wanted to buy more mortgages,”

Good News #3

The SBA 7A remains a GREAT deal for banks if the 90% guarantee funding continues, which seems Congressionally likely.   A bank can make a 7(a) loan with a 90% guarantee and sell its guaranteed portion at a premium as high at 110%.  And the guaranteed portion is a zero risk weighted asset. It does NOT get any better.  Ever.  There’s no excuse NOT to get involved in SBA lending.  As 28 Senators wrote to Secretary of the Treasury Timothy Geithner this week, “Small businesses ARE the real engine behind job growth in the U.S. Over the past 15 years, over 64 percent of all new jobs were created by small businesses.”  Yet credit remains tight,  as defaults plague the economy – even so, there’s no reason a good and prudent loan risk cannot be shared with the SBA.  Let’s  do it.

To get you started we are cooperating with COLORADO LENDING SOURCE, Denver’s great CDC, to TRAIN you on the 504.  Email me at tim@horizon-west for information, its FREE and it is FEBRUARY 11th and it is a DIAL IN WEBINAR

Are you ready for the return of Wall Street as we once knew and loved it?  Investment bankers, at least a handfull, are stepping forward this month to pool senior 504 loans (companion loans) the senior part of which is guaranteed, ie, translation, AAA. 

Under the new program, portions of eligible 504 first mortgages pooled by originators or broker dealers could be sold with an SBA guarantee to third-party investors in the secondary market. Lenders will retain at least 15 percent of each individual loan, pool originators will assume 5 percent of the risk, and the SBA will guarantee the remaining 80 percent. To be eligible to be included in a pool, the first mortgage must be associated with a 504 loan disbursed on or after Feb. 17, 2009. The program will be in place until Feb. 16, 2011, or until $3 billion in new pools are created, whichever occurs first.

OK if you are like me you are GLAD 2009 is OVER, right?  A horrible year of uncertainty in the SBA world, huge delinquencies in portfolios, commercial RE troubles dragging down community banks, credit almost impossible for CRE and for business loans, enormous capital infusions at Fanie and Freddie, and, worst of all, I got laid off.  So al tghis hit home.  But here are six GOOD things we can say about the year end numbers, courtesy BAML (Bank of America Merrill Lynch):

Good:  The US trade deficit narrowed in October with exports rising for the sixth consecutive month.

Good:  retail sales and consumer sentiment both surprising to the upside.

Good:   business inventories rose this month  for the first time in over a year, suggesting that the inventory cycle will add  to overall growth in the fourthquarter.

Good:  Senior 504 loans are eligible for pool level guarantees now.

Good:  CMBS is coming back by way of large single borrower or single asset deals

Good:  SBA 7A and 504 guarantees are “free” through 28^th February