A former president of Fannie Mae has formed a company to expand the fledgling activity of securitizing bank loans to small businesses.

Initially, Small Business Funding Corp. plans to securitize credit- scored loans of between $50,000 and $250,000, and expand into the unguaranteed portion of Small Business Administration 7(a) loans and loans secured by commercial real estate.

"Big banks know all about securitization and are using it extensively, but we want to offer it to community banks and regional banks," said James Murray, chief executive officer of Small Business Funding.

Mr. Murray was president of Fannie Mae, formally the Federal National Mortgage Association, from 1981 to 1983.

Washington-based Small Business Funding, founded this month, is the second such venture. Earlier this year a bank software company joined with a California securitizing firm to form a company, nicknamed Lori Mae, to securitize loans made by community banks.

And a third is in the works. Jack Singer, senior vice president and chief investment officer of California's Imperial Bancorp, said his bank plans to buy small-business loans from other banks and securitize them in 1998. Then Imperial plans to securitize a new pool of loans every six months.

"We think there is a significant market out there that will develop over the next several years," Mr. Singer said.

Proponents praise securitization because it allows lenders to sell their loans to generate additional money to fund new loans and generate fee income from servicing the loans without risking additional capital.

But securitization of small-business loans has been hampered by a lack of standard loan terms and the scarcity of long-term performance data. Mr. Murray said credit scoring will help predict loan performance.

Small Business Funding plans several securitizations to total between $200 million and $300 million next year and plans to securitize as much as $600 million in several years.

Lori Mae plans to securitize $250 million in small-business loans in 1998. Initially, the company will securitize lines of credit secured by accounts receivable and term loans for equipment.

"We took a little longer because we wanted to make sure we put all the pieces together," Mr. Murray said. "Now we have the whole system ready to go."

Chase Securities Inc., a subsidiary of Chase Manhattan Corp., will act as Small Business Funding's adviser. Last year Chase was involved in the securitization of more than $14 billion in asset-backed loans.

Small Business Funding also signed a deal for Kansas City, Mo.- based Midland Loan Services to act as the master servicer. The company is negotiating with another firm to be the trustee for the securitizations, Mr. Murray said.

Another former Fannie Mae official, Stephen Frank, will serve as vice president and chief financial officer of the new company. Banking attorney Mark Sullivan will be the president.

The trio have their work cut out for them. The securitization of small- business loans is dominated by nonbank lenders, with no access to deposits, that sell the guaranteed or unguaranteed portions of their SBA loans.

SBA lenders securitized $8.9 billion of the guaranteed portion of their loans between 1992 and 1996, but only $5 million of the unguaranteed portions in the same period.

Last month California's SierraWest Bancorp became the first bank lender to securitize nonguaranteed portions of its SBA loans, which resulted in a $2 million gain for the bank.

But Mr. Murray said the small-business securitization market has huge potential. "Eventually it will have all the characteristics of the residential mortgage market," he said.

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