Is small business lending about' to be turned upside down by securitization? Not anytime soon, according to the Office of the Comptroller of the Currency.
In a study not yet widely circulated, staff economists Christopher Beshouri and Peter Nigro argue that the lack of information on small borrowers and the need for continuous monitoring of the diverse credits will stunt development of a national secondary market similar to the one for mortgages.
"If you look at the securitization of the mortgage market, you see what clearly is disintermediation securitization," said Mr. Beshouri.
"In the mortgage market you have a lot of nonbank lenders because when they originate a loan, they don't have to hold the loan on their books. The impact on the small business market will be much less dramatic."
In particular, the study points to the inability of investors to obtain information about a pool of small firm loans.
Mr. Beshouri said investors' ability to measure the risks and returns on loans within the pool will force lenders to retain a larger portion of loans than they do with loans guaranteed by the federal Small Business Administration.
The guaranteed portion of SBA-backed loans amounts to as much as 90% of the face value of the loan. Lenders may now sell the guaranteed portion, with coupons as high as 1.75% over prime, at premiums of as much 10% over face value.
By forcing lenders to retain a portion of the loan, the OCC study concludes that investors will ensure adequate monitoring of the loans.
"They recognize that the small business market is precarious and that management may take risks that are not in the lender's best interest," Mr. Beshouri said.
However, he said the combination of these factors will reduce the returns to lenders selling into the market. As a result, only the best credits are likely to be securitized.
Chris LaPorte, president and chairman of Government Securities Corp. of Texas, one of the largest dealers in SBA-backed loans, agreed that the prospects for a secondary market for non-guaranteed loans are bleak.
"I don't believe an unguaranteed market will ever be able to do anything remotely resembling the SBA's 7(a) market," he said. "The key to that market is the guarantee," Still, many expect the push for securitization of more small business loans to continue. Congress continues to study the possible creation of a Freddie Mac-style agency for business loans.
Some banks have discussed regional consortia. Earlier this year, Norwest Corp. had to abandon plans for its Norwest Partners program to allow Midwestern banks to sell surplus concentrations of loans into a mutual fundlike pool. Their conclusion: right idea, wrong time.
"Banks see no need to get loans off their balance sheets right now," said Cynthia Glassman, a consultant with Washington-based Furash & Co. "But that will change and they will want to shed some of these assets. When they get to that point, a market will develop."
She said the question is who will push for the development of a national secondary market. Ms. Glassman says it will be either the government, securities dealers, or banks.
More importantly, some suggest that if banks do not play a role, they risk being left behind.
Robin Wantland, senior vice president and manager of the small-business unit a,t Bank One Texas, says that securitization of nonguaranteed loans will be driven by nonbanks that have the most to gain.
"I think the whole securitization piece is critical for the competition," said Mr. Wantland, who is also president of the American Bankers Association's small business committee.
"It will open the business to a wider number of players. ITT and AT&T Capital [Corp.] are already pursuing it."
Indeed, one of the most aggressive player in the nascent market is the Money Store.
A major player in securitizing its own SBA-backed loans, the company has sold three issues of nonguaranteed small business loans worth $257 million.
But selling the issues required some enticements for investors spoiled by guaranteed loan pools. For instance, a September offering amounted to $130 million with a net yield of about prime minus 50 basis. points, or about 150 basis points below the price of guaranteed securities.
The last deal also featured some unique credit enhancements. First, the Money Store applied some of the excess spread earned from servicing the guaranteed portion of sold loans to boost the nonguaranteed securities.
The company also offered a subordinated class of securities and a reserve account.
