The success of the first-ever Small Business Administration 504 first-mortgage pools sold on the secondary market for securitization means it is likely there will be more of these transactions in the future, an executive with one of the participating lenders said.
Bank of America and United Midwest Savings Bank were the institutions that assembled the first pools to be sold in a new program authorized under the American Recovery and Reinvestment Act of 2009.
Dick Witherow, the president of Midwest Business Capital, the SBA and Department of Agriculture lending unit of United Midwest Savings, said prior to the passage of ARRA, the secondary market for 504 loans had dried up.
That lack of a secondary market had forced his company to pull back originating the product, which can be used by small businesses to finance owner-occupied real estate.
But because of this outlet, and the liquidity it creates, he points out, Midwest Business Capital now has a couple of deals in the pipeline. Thus, the company was able to stay in the market because of the ability to securitize.
The sale gives Midwest Business Capital money to lend, much in the same way residential mortgage securitization works for mortgage bankers.
United Midwest assembled a pool of nearly $8 million, with SBA guaranteeing $6.4 million of it. B of A’s pool was over $32 million, with $25.7 million guaranteed by SBA.
Christopher Hurn, chief executive of Mercantile Capital Corp., the Altamonte Springs, Fla.-based firm that specializes in the 504 product, agreed with Witherow in noting the program will give lenders the liquidity they lack and that hopefully, once the loan is sold in the secondary market, they will take those funds and make new loans.
Mercantile “definitely wants to take part” in this program. It hasn’t decided if it wants to be a pool originator or a pool assembler in the program, Hurn said. It also will look to originate loans to be pooled under the program.
Mercantile will also provide interim funding to program participants. It already has a 504 interim second program, so it is very familiar with that aspect.
It will take that expertise and fund seconds for REITs, which have a 50% loan-to-value ratio limitation on what they can do.
The firm will also do what Hurn called “interim firsts.” The lender is required to keep a 15% stake in the loan. Mercantile will fund the remaining 85% until the loan is sold in the secondary market.
He notes this program is the first time there is a government guaranty on the first-lien position in the 504 program. Until now the government only guaranteed the second lien.
Meanwhile, the Small Business Jobs and Credit Act of 2010 has given more of boost to the 504 program, reports the National Association of Development Companies.
The net worth for companies to be eligible for a 504 loan was increased, the maximum loan size was raised and a two-year program to allow for the refinancing of existing small business commercial debt was put into place.
Hurn said creating the ability to refinance is likely to have a bigger impact on the 504 business than this program. While the government has yet to create the rules for this refinance program, it will make “a huge difference” in 504 production, he predicted.
B of A did not return a request for comment by press time.
