How To Guarantee A Loan

Transcription

1 Government Guaranteed Loan Participations & Pooled Securities

2 Small Business Guaranteed Loans SBA 7(a) Owner occupied real estate, working capital & equipment Up to $5MM, 25 YR, 75% - 85% guarantee USDA Business & Industry Rural area real estate, working capital & equipment Up to $10MM, 30 YR, 60 80% guarantee FSA Farm Ownership & Operating Farm ownership, livestock, equipment & operating loans Up to $1.302MM, 40 YR, 90% guarantee 2

3 You may be thinking.. Aren t SBA loans for borrowers with questionable credit? They can t even qualify for a conventional loan! 3

4 Guaranteed vs. Conventional Longer term loan meets lender s DSCR requirement; borrower prefers lower payment Specialized collateral represents inadequate liquidation value Lender doesn t have available capital or liquidity without government guarantee 4

5 What is the Nature of the Government Guaranteed Portion of an SBA 7(a) or USDA Loan? Depends on who is asking 5

6 Originating Lender Guarantee is conditional : may be compromised or lost if underwriting or servicing is not SBA/USDA compliant Guaranteed portion is not counted as a MBL and therefore not counted toward aggregate business lending cap (Part 723.1(b)(4)) 6

7 Secondary Market Investor Investor purchasing guaranteed portion receives an unconditional guarantee from the government Per NCUA General Counsel Opinion, the unconditional government guarantee transforms this loan participation into a permissible investment 7

8 NCUA Opinion 8

9 Participations vs. Guaranteed Loans Unguaranteed Loan Participations Secondary Market Guaranteed Loans Primary Risk Credit Risk Premium Risk Counterparty Risk Yes No Loan Underwriting Regulatory Full underwriting required Lending regulatory restrictions apply No credit review; evaluated more like a security Permissible investment; can be characterized as loan, not subject to participation & MBL regs Liquidity Limited Established active secondary market 9

10 Guaranteed Pools & Loans SBA 7(a) Pool Security SBA/USDA/FSA Loan Risk Premium Risk Premium Risk Guarantee Full Faith & Credit ; timely pay Full Faith & Credit Characteristics Multiple underlying loans Single loan Coupon M or Q reset (very few Fixed) No periodic cap/floor Indexed to Prime, LIBOR M, Q, Odd reset & Fixed With/without cap/floor Indices vary Payment Freq Monthly Pro Rata Pass Thru Monthly, Annual, etc Prepay Penalty 5/3/1 for loans >15YR; does not pass through to investor Wide Range, passes through to investor Settlement DTC Eligible (CUSIP) Physical Delivery 10

11 Payment Flow Borrower $ Lender is servicer $ Investor Borrower $ Lender is servicer FTA $ Investor 11

12 What Happens if Loan Defaults? Demand can be made to originating lender when loan is 60 days in arrears If lender does not repurchase loan, demand is made to the Agency Interest will accrue up to 90 days from date of original demand letter to lender (USDA) or will not typically exceed 120 days from last interest paid-to date (SBA) 12

13 Evaluating a Guaranteed Loan USDA Brecht Loan Annual Pay 2.18% % Net Fixed 3.25% Gross Fixed 12/12 Note; 12/23 Premium 13

14 SBA Pool Security SBA Pool Annual Pay P+.825% (4.075%) 15/15 Loans 1/13 Issue Date Monthly Reset 4/ Premium 14

15 Loan & Pool Examples Description Coupon Prepay Penalty M Adj Pool (P+.825%) 5YR Fixed/Q Adj Loan 4.75% (P+1.50%) 5YR Adj Loan 4.325% (P+1.075%) 5YR Adj Loan 2.75% (FM5+0%) Fixed Rate Loan Fixed Rate Loan Rem Term Prem BEY@ 5YR 10CPR 10 YR % 10/..3/2/1 25 YR % 2.47% 5/3/1 30 YR % 2.52% 17 YR % 1.89% 6.00% 10/..3/2/1 30 YR % 3.51% 3.975% 5/3/1 15 YR % 2.49% 15

16 You may be thinking.. Those loans to small businesses.. they are going bankrupt tomorrow! You are going to pay WHAT in premium??...those are going to payoff tomorrow! 16

17 Voluntary vs. Defaults Default $ 37% Voluntary $ 63% Source: SBA, Coastal Securities Monthly Prepayment Research Report

18 SBA Pool Historical CPR Recent speeds are ~ 50% of the long term CPR averages Source: SBA, Coastal Securities 4-13 factors 18

19 MBS Prepayment Comparison Max Avg Min σ G2AR G2AR YR SBA YR SBA SBA Pools exhibit ~50% the average 3-Mo CPR with 50% or less volatility than GNMA ARMs 19

20 Rate Shock Impact on Price As of 3/

21 Now from the Experts! Greg Gibson CFO/COO Northwest Federal Credit Union Cory Schwab VP Commercial and Secondary Market Loans Patelco Credit Union 21

22 Greg s 10 Commandments of GGLs 1. Do your homework, know the asset class and your goals 2. Know your balance sheet and make sure SBAs fit 3. Understand the risks GGLs mitigate and those they add 4. If you only dip your toe, you may end up getting a bath 5. Premiums command respect not necessarily fear 6. Know the major poolers for best supply and price 7. Compare product characteristics, pools vs. whole loans, SBA vs USDA, 7a vs 504 and find the best fit 8. Don t view these assets as BAGBD (buy and go brain dead) 9. GGL markets are cyclical, know entry and exit points 10. Proverbs 15:22

23 Coastal Securities Contacts Gerry Bennett Margaret Gilbert

24 Disclaimer Nothing contained herein is an offer to sell or the solicitation of an offer to buy any financial instrument. The opinions and recommendations presented do not take into account individual client circumstances, objectives, or needs and are not intended as recommendations of particular securities, financial instruments or strategies to particular clients. Investors must make their own independent decisions regarding any securities or financial instruments mentioned herein and seek professional advice, including tax and accounting advice. Any indications of market valuation contained herein are based on current information that we consider reliable, but we do not guarantee it is accurate or complete and users should make whatever additional determinations of market value they deem appropriate. All assumptions, opinions and estimates constitute Coastal Securities Inc. s (CSI) judgment as of this date and, along with prices and yields, are subject to change without notice. Past performance is not indicative of future results. The yield and/or average life shown on loans, SBA pools, CMOs or mortgage backed securities consider prepayment assumptions that may or may not be met. Changes in prepayments may significantly affect yield and/or average life. CSI does not accept orders or instructions transmitted via or left on any phone voice or text mail system. Please be aware that communications received by or sent from our system are not confidential and subject to review by supervisory personnel. 23