While the coronavirus continues to plague the United States, the Trump administration in concert with the Small Business Administration and Treasury has provided much needed relief to individuals and small businesses. The three primary relief programs – Economic Injury Disaster Loans (EIDL), Paycheck Protection Program (PPP), and the Debt Relief Program –have been very successful while suffering from some lack of clear guidance. The PPP has become the most widely used program, with Phase One funding of $349 billion used up in about 2 weeks. Phase Two, with funding of an additional $310 billion, has approximately $130 billion yet unused. The application deadline has been extended to August 8, and I encourage all eligible readers to take advantage of this program.
PPP Loan Forgiveness Update
We are now entering the covered period when recipients of the PPP can apply for loan forgiveness. In preparation, Holtmeyer & Monson has made a significant investment in an electronic portal to handle PPP loan forgiveness applications. The portal — which is both interactive and user friendly — is available to all new and existing H&M clients. Please contact your account executive if you need further details.
Holtmeyer & Monson, in concert with the Independent Community Bankers of America, has pushed for a broad and simplified process for receiving PPP loan forgiveness. Current sentiment is that PPP borrowers with loans of $150,000 or less (about 86% of all loans) would make a blanket certification that all program rules were followed, and receive full PPP loan forgiveness. We are awaiting final legislative action on this matter.
Debt Relief Program
The SBA Debt Relief Program provides financial relief to SBA loan borrowers by making six months of P&I payments on SBA loans. This relief will be available on new SBA loans approved, and fully disbursed, prior to September 27, 2020.
Main Street Lending Program
Another relief program recently introduced is the Main Street Lending Program. This program is administered by the Boston Federal Reserve Bank and provides working capital funding to qualifying borrowers with loan size between $250,000 and $399 million. Approximately 95% of these Main Street loans will be purchased by the Federal Reserve. Lenders must register to take part in the program. Holtmeyer & Monson will be actively supporting our clients throughout the Main Street Lending Program. If your institution is interested in more details, please contact your account executive or me.
We expect some additional relief program(s) to be rolled out, and we will keep all of our readers advised of developments.
As always, we’re standing behind small business lenders, and your deserving customers, as we all work together to navigate these times. We’re pulling for you and your well-being.
Featured Article
Ready to Run
After a lag, prepayments are primed to take off
by Jim Reber, President and CEO, ICBA Securities
If you are inclined to read bond analysts’ research reports, eventually you’ll chance upon some commentary that addresses the performance of mortgage securities. To many of the uninitiated, which I pointedly state do not include community bankers, mortgage-backed securities (MBS) are an abstract collection of investments that have long maturities and a volatile series of principal paydowns. They seem to require a lot of effort and are only marginally tethered to the housing finance market in general.
But not so fast: Further analysis reveals that community banks have a higher weighting of their investments in the mortgage sector than at any time in the past. So, MBS must have some kind of appeal, and tellingly, it’s with financial professionals. The qualitative features that are attractive to community banks include:
- cash flows that complement the loan portfolio
- ability to modify price risk profile efficiently
- high degree of liquidity
- outstanding credit quality
What’s not to like? Well, in the 2020 interest rate environment, the total lack of control over prepayments. In fact, this year may set new standards for refinance activity. Let’s see what the near future for MBS may look like and try to develop a game plan to insulate against unwanted cash flow.
Where we’ve been
A good place to start is to look back a decade or so ago, to see if we’ve been to these current secondary market levels yield levels before. The answer is close, but no. The required rate for a new conforming mortgage to be worth par to Fannie Mae or Freddie Mac, also known as the Commitment Rate, is closely tracked by mortgage lenders. For example, if the Commitment Rate is 2.5%, a lender can make a 3.25% loan to a borrower, keep 25 basis points (0.25%) for servicing income, pay the agency about 50 basis points (0.5%) for its guarantee fee, and deliver the net coupon at par.
Back in late 2012, the lowest the 15-year Commitment Rate hit was 2.07%. Not coincidentally, prepayments on all coupons of MBS spiked and peaked about 60 days later. The elevated refinancing activity continued throughout the first half of 2013. The second half of the decade saw some general stability in the mortgage market and reasonably steady cash flows from mortgage securities. Not so today.
Where we may be going
As of this writing, we are at truly historic required rates. The Fannie Mae 30-year Commitment Rate has been well south of 2.5% for several months, and its 15-year cohort has hovered in the 1.7% range. This means that 30- and 15-year loan rates around 3% and 2.375% respectively could be sold into the secondary market at or near par.
And here’s the kicker: Mortgage lenders have not yet rushed to be the cheapest on the block. Lender surveys indicate that conforming loan rates have stayed at least 50 basis points (0.5%) more than the Commitment Rates after accounting for servicing and guarantee fees. A combination of factors, including resource limitations and the—understandable—quest for fee income, have kept the loan rates relatively high compared to Fannie’s secondary rates.
First in its class
In mid-June, there was a unicorn sighting in the MBS market: A 15-year Fannie Mae MBS with a 1.5% coupon. It was the first in history with a coupon that low. If Commitment Rates remain anchored where they are now, there will be more to follow. Given the rush by many community banks to remain more or less invested, since overnight rates appear to be destined to remain near zero for some time, the prices on these low coupon MBS are in the 102 range. While that may be a challenge for some investors, at least these pools should have relatively muted refinance profiles.
If the mortgage lending community eventually throws in the towel regarding pricing discipline, there will be a bunch of recently originated loans that will be in the “drop zone.” At the end of the day, there are really only three strategies that provide much hope in the way of prepayment protection:
- MBS with very low borrowers’ rates
- pools comprised of loans with low outstanding balances
- securities such as Delegated Underwriting and Servicing (DUS) bonds or Freddie K’s that have defined prepayment penalties
Some combination of these can help stabilize the cash flows in your community bank’s bond portfolio. Prepayments that walk, not run, will likely be a desirable trait for investors in 2020.
Jim Reber (jreber@icbasecurities.com) is president and CEO of ICBA Securities, ICBA’s institutional, fixed-income broker-dealer for community banks.
Vining Sparks,ICBA Securities’ exclusive broker-dealer, publishes a monthly analysis on mortgage security refinance activity on a wide selection of MBS. To subscribe to the Mortgage Prepayment Summary, visit viningsparks.com or contact your Vining Sparks sales rep.
Regulatory Corner
SBA Guidance Received on Change of Ownership
For many of the SBA 7(a) applications that we regularly prepare, the funding is intended for business acquisition and change of ownership purposes. Dustin Powell, one of our account executives, recently worked on a change of ownership transaction that the lender wanted to process under their PLP delegated authority. We sought guidance from the SBA legal staff and were advised as follows: “If a change of ownership is to be funded with an SBA loan, the loan must be processed non-delegated. In addition, nothing turns on the characterization of the transaction as an asset versus stock purchase.” Please be mindful of these stipulations regarding change-of-ownership transactions, as the use of PLP delegated authority could impair your SBA guaranty.
Penny’s
Hot Topic
SBA guidance on filing monthly 1502 Reports for existing PPP loans requires lenders to submit reports on or before the 15th of each month (or if the 15th is not a business day, the next business day after). Note that first-time reports for newly closed loans must be submitted to Colson Services within 10 days of disbursement. H&M handles this for all PPP Agreement clients.