A Word from Arne
On January 7th, Jovita Carranza was confirmed by the Senate as the Administrator of the U.S. Small Business Administration, succeeding Linda McMahon. Ms. Carranza has previously held the offices of Treasurer of the United States and Deputy Administrator of the SBA. She has long been a strong advocate for small businesses, and we look forward to experiencing her leadership as she takes the helm of the SBA.
Growth Area – USDA Rural Development Guaranty Programs
One of the fastest growing segments of our practice is one featuring Rural Development loan guaranty programs from the U.S. Department of Agriculture (USDA), and the Department’s Business and Industry (B&I) program in particular. Lenders and borrowers gravitate to B&I loans, because they are backed by the full faith and credit of a U.S. government guaranty, and also because the program provides needed funding to credit-worthy rural businesses for most any legal business purpose.
Structured to Serve Rural America
Operating much like the SBA 7(a) program, the USDA B&I program is specifically designed to save and create jobs in rural America. Borrowers must be located in eligible rural areas, which include cities or towns with populations up to 50,000 people. Maximum gross loan size is $25 million and borrowers may include partnerships, individuals, cooperatives, for-profit and nonprofit corporations.
Funding may be used to purchase or improve commercial real estate, business acquisitions, fixed-asset acquisition, debt refinancing, and inventory and working capital. Most types of businesses are eligible, including those engaged in the manufacturing, wholesale, retail and service industries. One point for lenders to note: USDA B&I eligibility is in addition to SBA eligibility. If a potential borrower has used up SBA eligibility – and is located in a qualifying area – they would be eligible for a USDA guaranteed loan. Also, the Federally guaranteed portion of a B&I loan does not count toward a bank’s legal lending limit. Internally, our application process is virtually the same as the SBA programs.
Reap the Benefits
Please keep this valuable guaranteed loan program in mind as a part of your business development efforts. And lean on your Holtmeyer & Monson representative to learn more or clarify how USDA guaranteed loans can work for you.
See You at 2020 ICBA LIVE?
If you’ll be at the Independent Community Bankers of America (ICBA) national convention – 2020 ICBA LIVE - March 8th through the 12th in Orlando, stop by and see us. We will be exhibiting in the Expo and invite you to stop by Booth #340 for a visit. We’ll be giving away a $250 cash prize, so you’ll definitely want to enter the drawing.
Questions? Give Us a Call.
If you have any questions about USDA and SBA lending, or you need assistance in a particular area, we’re always available to help. We partner with our clients to cover every stage in the loan process—from loan packaging and closing, to securitization and sale, through portfolio servicing. These capabilities have earned us recognition as a Preferred Service Provider of the Independent Community Bankers of America (ICBA), and we’d be happy to help your bank.
Mortgage Bonds Keep Gaining Fans
Community banks add weighting to loan surrogates
by Jim Reber, President and CEO, ICBA Securities
If your community bank’s bond portfolio looks like the rest of the industry’s, you own more mortgage-backed securities (MBS) than ever. There are a bunch of reasons for this, most of which you’re aware of, but some you may not be. The MBS that community banks tend to own are a small piece of the overall mortgage pie. Around 88% of all mortgage securities are backed by 30-year fixed rate loans, which have scant appeal to bank portfolio managers.
Thirty-year fixed rate pools long durations, back-loaded cash flows and price volatility profiles are outside of policy limits for most community banks. Nevertheless, there are enough mortgage bonds that do fit these risk/reward profiles to go around. We will discuss some of the more popular items, and where the current opportunities reside. Perhaps it’s time for a ride on the MBS Express.
The average community bank has around 60% of its bonds in some type of amortizing securities. These include the garden variety straight pass-thrus, adjustable rate MBS, collateralized mortgage obligations (CMOs) and Small Business Administration (SBA) pools. They are almost all issued by the federal government or its agencies, have good liquidity and low risk weights.
And, since they act like loans, bankers can get their minds around the cash flows. That’s not to say they can totally control them. One of the drawbacks of MBS is that the repayment of principal is almost entirely in the hands of the property owners. Nevertheless, it’s easy to understand why a community bank would own a lot of pools.
Over the past decade, there has been a supply shift in the mortgage bond market. The overall MBS market has barely grown since 2008, when total outstanding balances were about $9.5 trillion. Today, they are right at $10 trillion outstanding, which is only a 4% increase in more than 10 years.
Also different is the noticeable growth in the multifamily MBS sector. Fannie Mae and Freddie Mac have issued around $140 billion in multifamily bonds annually in recent years, more than twice that of a decade ago. While they are still a minority of all outstanding MBS, they represent most of the overall mortgage market’s growth. They also have different cash flow characteristics, as there are principal lockouts and prepayment penalties attached to many of these pools that can help stabilize the overall portfolio’s duration swings.
Yet another reason to consider adding MBS is the Fed’s still-active management of its still-large balance sheet. Since 2017, it has shed more than $350 billion of MBS and will continue to do so, even as it attempts to get down to an equilibrium level. All its recent additions to its balance sheet for the purpose of stabilizing the overnight repo market were in Treasury securities and were expressly not quantitative easing (QE), according to Chairman Jay Powell. The Fed is not adding any MBS to its holdings and has no plans to do so.
In the second half of 2019, the combination of the Fed being a net seller of MBS and the cash flow volatility produced by three rate cuts caused yield spreads to widen, if not dramatically, then at least noticeably. Recently, 15-year fixed rate pools, which are the product of choice for many community banks, were available at spreads of around 60 basis points (.60%) over Treasuries. That may not sound like much, but that is around 15 basis point better than the beginning of the year; further, spreads on many of the other products that community banks own actually narrowed on the year.
The skeptics of this sector (you know who you are) would possibly assume that the spread widening has caused the market value of their currently held MBS to crater. They, on balance, would be wrong. The Fed’s rate cuts produced enough of a tailwind to all investment sectors so that prices actually rose in 2019; it’s just that mortgage bonds’ prices didn’t rise as much as others. That would seem to indicate relative value.
In sum, there are several back stories to the mortgage security market going on that have created “opportunities.” One need not step out of his or her comfort zone within the MBS market to take advantage. Maybe 2020 will be a year of relative stability with interest rates, which could cause yield spreads to return to historical levels. All these are reasons for your community bank to be a fan of mortgage-backed securities.
Jim Reber (email@example.com) is president and CEO of ICBA Securities, ICBA’s institutional, fixed-income broker-dealer for community banks.
Vining Sparks, ICBA Securities’ exclusive broker, will be prominently featured at ICBA Live 2020. The dates are March 8-12 at the Gaylord Palms Resort in Orlando, Fla. ICBA Securities will be presenting five learning labs and will be located within ICBA Central in the Expo hall. For more information, visit www.icba.org/events/icba-live.
SBA CAPLine – Guaranty Fee Reminder
We frequently handle transactions for CAPLine financing, a program that the SBA designed to meet the short-term working capital needs of small businesses. The guaranty fee for CAPLine credit is due upon receipt of the SBA’s authorization, and may be paid from loan proceeds. Note that this requirement differs from SBA 7(a) loans—those guaranty fees are due within 90 days of the SBA’s loan approval. Your Holtmeyer & Monson account executive will remind all parties about the guaranty fee requirements as the CAPLine application is approved.
When mergers involve SBA lenders, they must follow a strict protocol to assign SBA guaranties to the new institution. Generally, this involves transmitting a copy of the Merger Plan to the SBA by emailing it to this address. We’ll help with correctly registering SBA portfolios.