SBA Offers Guarantee for 504 First Mortgage Pools

The Small Business Administration is creating a secondary market guarantee program for loans originated in its 504 Certified Development Co. program. A 504 CDC loan can be used to purchase real estate or other fixed assets related to a small business' expansion. It involves a 50% loan-to-value first mortgage provided by a private commercial lender without a government guarantee; a 40% second mortgage loan made by a CDC having the government guarantee; and a 10% borrower equity investment. The new program would encourage sales into the secondary market of the first mortgage portion and is funded through the American Recovery and Reinvestment Act. SBA said the recession has caused a significant decline in secondary market activity for the 504 first mortgage loans. Under the 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% of each individual loan, pool originators will assume 5% of the risk, and the SBA will guarantee the remaining 80%. 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.