For the first time in more than a decade, the burgeoning secondary market for U.S. Small Business Administration-guaranteed loans is facing a modest decline as asset-hungry banks hold the loans on their books.
Just less than $1.2 billion in SBA loans changed hands through the first eight months of 1994. That compares with $1.25 billion in the same period last year.
If the trend continues, experts say, total loans transferred between brokers who buy loans, assemble them into pools, and securitize them for sale, on the one hand, and investors, on the other, will fall as much as 5% from the record $2.03 billion handled in 1993.
But such a decline is not seen as having dire consequences for the market or the SBA. Started in 1972, the market allows lenders to sell the guaranteed portion of their loans directly or to repackagers who sell them to institutional investors.
Congress gave the market a boost in 1984 when it granted pooling authority to the SBA. Since then, the market has mushroomed, growing at a 48.9% average annual compounded rate, which has fueled the SBA's loan programs.
"It's the vehicle that allows us to relend that money," said Steve Mattern, SBA division manager at Truckee River Bank in California. "If there wasn't a secondary market, there wouldn't be an SBA loan program."
Indeed, while nonbanks such as the Money Store and AT&T Capital Corp. are major players, small institutions like Truckee River Bank are seen as giving the market national breadth.
The market and lenders have both benefited from strong demand for SBA-guaranteed securities. Before 1993, prices for SBA loans were commanding premiums as great as 20% more than face value. In late 1993, though, the SBA sought to counter those premiums by imposing new rules awarding itself half of any premium above 10%.
This move, together with a 40-basis-point SBA fee to offset program expenses and another 12.5-basis-point transaction fee, have pushed prices down to 110% of par or less.
Lenders have found other ways to make up the difference, though. According to Chris LaPort, whose Government Securities Corp. is a major player in the secondary market: "Most lenders sell their loans at 110 and keep the extra servicing."
For now, volume has cooled as banks focus on building assets. This is in stark contrast to the late 1980s, when banks used the market to obtain cash and reduce their loan exposure.
The market is widely used by smaller banks, though many have rigid guidelines for how much of the guaranteed paper they are willing to sell.
Bob Sewell, chairman of Equitable Bankshares, a $150 million-asset bank in Dallas, says he will not sell more than 33% of his SBA loan portfolio because of tough competition for new loans and because such sales would distort earnings.
"One thing banks like is consistent earnings," Mr. Sewell said. "If we sell all our loans into the secondary market, we're not going to be able to perform every year."
Another reason for the slowing market is investor uncertainty about rising interest rates. Morgan Keegan & Co.'s Alan Jankowski says investors are waiting to see how much the Federal Reserve Board will raise short-term rates.
"We call it an investor strike," he said.
Investors trading out of their SBA positions to offset losses in other securities have added to the oversupply. Interest rates charged to SBA borrowers are tied to the prime rate and are reset every 30 to 90 days. This, combined with regular prepayments, means the value of SBA securities has held steady.
Investors still like the securities because the return is as much as 200 basis points greater than that of three-month Treasury bills. With returns of that magnitude, some institutions are putting as much as $500 million of the securities into their portfolios and holding them until maturity.
While big institutions dominate the investor market, few big names are among either the lenders or the pool assemblers. According to the SBA, Bear, Steams & Co., Prudential Securities, and CS First Boston Corp. are the only Wall Street firms participating.
Five of the 17 pool assemblers hail from Memphis. Besides Morgan Keegan, others include: Union Planters National Bank, First Tennessee Bank, Commerce Investment Corp., and Calibre Financial Group.
The market is jointly regulated by the SBA, the Securities and Exchange Commission, and the National Association of Securities Dealers. The SBA's role is to license loan pool assemblers who are first registered with the SEC and NASD.