Optimism is building among Small Business Administration lenders and secondary market participants that two government programs can get the SBA loan market moving again, though they say there are important details left to be fixed.
A new lending facility for the SBA secondary market has made it through rounds of trimming in the Senate stimulus bill, and the terms of a Federal Reserve Board liquidity program have gotten sweeter. But market participants say the Fed program still needs some adjustments before it can be truly effective.
"There are still some things that need to be addressed, but I'm very comfortable that they're going to be addressed," said Scott Taylor, a vice president based in Memphis for Shay Financial Services Inc.
The Federal Reserve Bank of New York released details last week about the terms of its Term Asset-Backed Securities Loan Facility, a program designed to lend investors money to buy the securities. The program includes SBA loan-backed securities, and the industry holds high hopes that it can help get SBA lending going again by reviving the secondary market.
Participants had previously said that the collateral accepted under the program did not include the SBA securities that poolers had found hardest to sell: those created between Jan. 1, 2008, and Jan. 1 of this year. Last week's term sheet reflected the change — SBA securities created since Jan. 1, 2008, will be accepted as collateral.
The industry, along with the SBA itself, cheered the change. But secondary market participants said other new details of the program must be fixed.
"I think the consensus that's emerging is that, although we've made some progress in terms of the timing of what loans can be sold into Talf, there are still some issues with the interest rate being too high and the haircut being too high," said Chris Reilly, the president of CIT Group Inc.'s small-business lending unit. "If the desired effect is to motivate the intermediary community to sell their balance sheets off and buy new loans, I think they're going to have to sell at a loss."
Holders of SBA pools would have to take a 5% haircut when using them as Talf collateral for a new loan. This means that financing a $100 million portfolio would cost $5 million of poolers' own money.
"I think the poolers were all expecting a 2% haircut," said Jim Reber, the president and chief executive of the Independent Community Bankers of America's ICBA Securities. "We would say that 5% is overkill, because this is full faith and credit with zero risk weighting. Yet they have the same haircut that credit card loans have. Subprime bank cards are on here at a 6% haircut."
Poolers were also unhappy with the interest rates the Fed planned to charge for a Talf loan, Mr. Reber said. The floating rate, which SBA poolers would most likely use, was set at 100 basis points above the one-month London interbank offered rate.
"That isn't as nice a rate as everyone was expecting," he said. "I understood this was going to be more like fed funds plus 25 basis points. … The poolers would even have bought off on something like fed funds plus 75 basis points. But an additional half a percentage point over what they were realistically expecting — that could be the difference between using the program and not using it."
Participants are banking on a conference call scheduled for Thursday with officials from the New York Fed. Mr. Taylor said he is hopeful that the call will help close the last gaps between the program's realities and poolers' expectations.
"Previously they addressed what many people considered to be a problem and they fixed it," he said. "They've been impressively responsive."