SBA 7(a) Activity Rebounds: But Will It Hold?

February 24, 2010

Strategically leveraged stimulus dollars boosted government-backed real estate loan originations, as small business borrowers, lenders and secondary-market investors witnessed last year while enhancements to the Small Business Administration's signature loan guarantee program took hold.

But significant uncertainties surround the extension of the SBA 7(a) program's temporary enhancements - and whether a potentially far-reaching proposed expansion will garner Congressional approval.

Temporary stimulus-driven enhancements to SBA's 7(a) adjustable-rate loan guarantee program most notably include an increase in the guarantee level from 75 percent up to 90 percent of a loan's principal, and a guarantee-fee waiver saving most borrowers 3 to 3.5 points. And eligibility of 7(a) loan pool securities for subsidized purchase financing under the Term Asset-Backed Securities Loan Facility (TALF) has likewise helped improve secondary-market liquidity. (See the 7(a) program overview below.)

With the combined, ahem, stimulus of these stimulus-related enhancements, previously depressed 7(a) loan originations rebounded sharply last year.

Gross 7(a) loan approvals (typically 80 to 85 percent of approved loans actually close), which had dipped to a cyclical trough below $500 million in January, rebounded steadily to nearly $1.7 billion in November. And an SBA representative notes that more than 1,000 lenders that hadn't funded 7(a) loans since 2007 have returned to the fold over the past year.

On a more ominous note, funding dedicated to some of the enhancements is nearing exhaustion, and temporary measures are set to expire if a polarized Congress doesn't extended them.

The 90 percent guarantee level is scheduled to revert to 75 percent at the end of February. The 7(a) program's eligibility for TALF financing is slated to expire the following month. And dedicated funds backing the fee waiver are nearing exhaustion.

Meanwhile the Obama administration has proposed perhaps an even more significant enhancement: increasing the program's $2 million guarantee cap to $5 million. The proposal likewise requires Congressional action.

SBA lending and investment veterans Scott Evans and Kurt Chilcott point to that pretty dramatic recovery in 7(a) originations and secondary-market investment activity in supporting extensions of the fee waiver, TALF financing and, especially, the higher guarantee level. And they see great promise in the proposed higher dollar cap as well.

But they also worry Congressional inaction will put a damper on further gains in the program's vastly improved liquidity.

Evans, co-principal with Cleveland-based Government Loan Solutions, which helps lenders and investors value SBA-tied securities, is particularly concerned the TALF expiration could reverse the encouraging gains of late in secondary market activity, and in turn 7(a) originations. With the securities as collateral, investors have been able to acquire SBA-backed 7(a) pool assets borrowing at the Federal Funds Target plus 75 basis points.

Evans notes that under TALF-leveraged investments and other stimulus incentives, the pricing premium (above guaranteed principal amounts) paid for 7(a) loans in the secondary market has rebounded from the depressed level scarcely above par a year ago, back to the "full" 10 percent or so seen today. Accordingly, he'd hate to see TALF taken away from SBA securities investors.

For his part Chilcott, who heads San Diego non-profit CDC Small Business Finance, which arranges SBA financing for business property acquisitions, fears the expiration of TALF eligibility might send that premium back south. But he's also hopeful the proposed greater dollar cap might provide as much of a boost to 7(a) originations as the higher guarantee level and other enhancements already have.

Not only will the higher cap bring SBA-backed funding to larger deals, successful businesses with outstanding SBA loans can come back for additional financings, Chilcott stresses.

Their message to legislators: git-r-done.

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