Why Lowering Loan Rates Won't Boost SBA Loans
Today’s article on Heraldnet.com says: "Congress is puzzling over how to improve lending rates to small businesses in light of a lackluster performance from loan programs through the Small Business Administration."
The crux of the small business credit crunch is not about interest rates or lack of investors willing to purchase loans….although both play a part….its about credit quality.
There is a key piece of the pie that no one is talking about. That is: investors want to buy perfoming or “seasoned” loans that have been in good standing for a significant period.
A “seasoned loan” is one where the borrower has made payments on time since the loan was originated, the collateral value hasn’t deteriorated and there are generally no issues or problems. That means that any SBA loan made today would generally require 12 months of good performance before an investor would be willing to purchase it at the current premium.
However, if during that “seasoning period” the borrower goes into default (i.e. stops making payments) the loan can’t be sold at the premium the bank hoped to get. So the bank is stuck with a bad loan. This is why many lenders have slowed down their SBA lending.
With poor credit quality comes liquidity issues for the bank. This is VERY simplified but here’s the process: if the bank can’t sell the loan, then there is no influx of cash to make the next loan. And if the loan goes “bad”, the bank doesn’t get the cash flow from the payments to continue operations. It can be a vicious cycle.
With the stress already being experienced by bank balance sheets, and scrutiny from regulators requiring write downs, many lenders simply choose not to play right now. It’s not worth the risk. For stats on banks click this link: SBA Loan Slide
The Treasury’s $15 billion plan to buy up SBA loans may work providing that lenders can get comfortable with giving up some ownership to participate in the program.
Originally, many SBA lenders said “no” to the Treasury’s plan because they either had no stock to offer the government or were a division of a large corporation.
Now the government has dropped the $500,000 salary cap requirement. And the Treasury is considering whether to offer SBA loan originators a deal in which the SBA lender could issue stock to the government and then immediately repurchase it. This would be required because of the stimulus package “rules” in the legislation.
It’s not a done deal. And for now because of market uncertainty banks aren’t going to open the spigot full-blast for SBA loans (or commercial real estate loans). It will be more of a trickle effect. Hopefully, it will be enough to keep small businesses afloat.
I think history will show that the lack of capital to small business owners prolonged this recession/depression. There’s always a lesson to be learned. Unfortunately it generally comes after the fact.
The crux of the small business credit crunch is not about interest rates or lack of investors willing to purchase loans….although both play a part….its about credit quality.
There is a key piece of the pie that no one is talking about. That is: investors want to buy perfoming or “seasoned” loans that have been in good standing for a significant period.
A “seasoned loan” is one where the borrower has made payments on time since the loan was originated, the collateral value hasn’t deteriorated and there are generally no issues or problems. That means that any SBA loan made today would generally require 12 months of good performance before an investor would be willing to purchase it at the current premium.
However, if during that “seasoning period” the borrower goes into default (i.e. stops making payments) the loan can’t be sold at the premium the bank hoped to get. So the bank is stuck with a bad loan. This is why many lenders have slowed down their SBA lending.
With poor credit quality comes liquidity issues for the bank. This is VERY simplified but here’s the process: if the bank can’t sell the loan, then there is no influx of cash to make the next loan. And if the loan goes “bad”, the bank doesn’t get the cash flow from the payments to continue operations. It can be a vicious cycle.
With the stress already being experienced by bank balance sheets, and scrutiny from regulators requiring write downs, many lenders simply choose not to play right now. It’s not worth the risk. For stats on banks click this link: SBA Loan Slide
The Treasury’s $15 billion plan to buy up SBA loans may work providing that lenders can get comfortable with giving up some ownership to participate in the program.
Originally, many SBA lenders said “no” to the Treasury’s plan because they either had no stock to offer the government or were a division of a large corporation.
Now the government has dropped the $500,000 salary cap requirement. And the Treasury is considering whether to offer SBA loan originators a deal in which the SBA lender could issue stock to the government and then immediately repurchase it. This would be required because of the stimulus package “rules” in the legislation.
It’s not a done deal. And for now because of market uncertainty banks aren’t going to open the spigot full-blast for SBA loans (or commercial real estate loans). It will be more of a trickle effect. Hopefully, it will be enough to keep small businesses afloat.
I think history will show that the lack of capital to small business owners prolonged this recession/depression. There’s always a lesson to be learned. Unfortunately it generally comes after the fact.
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