A Word from Arne
As we near the end of 2021, we’re highlighting notable changes in H&M personnel and customer support, needed regulatory amendments and an upcoming webinar on loan growth that you’ll want to attend.
Holtmeyer & Monson Staffing Changes
In order to continue to provide our clients with our industry’s highest level of service, Holtmeyer & Monson is pleased to announce the following staff additions and appointment:
- Dustin Powell has been named Executive Vice President. Powell will assume responsibility for the direction and management of the Account Executive team. Since joining H&M in 2014, Dustin has focused on development and delivery of SBA transaction services.
- Curtis Lee has recently joined H&M as our Quality Control Manager. Curt served 23 years with the Small Business Administration, underwriting SBA loan applications as well as being involved in policy and procedure issues at the Hazard, KY Loan Guaranty Processing Center. Lee also managed the 7(a) Questions Help Desk.
- Jennifer Scully has joined H&M as Senior Vice President, and will be involved in portfolio management as well as assisting with specific accounts as an Account Executive. Jennifer has over 20 years of SBA lending and loan administration experience with multiple banking institutions.
Please join me in welcoming and congratulating these members of our H&M family. We’re excited to be working together as our firm continues to broaden our leadership position in the Lender Service Provider industry, and our dedicated support of small business lending across the nation.
Proposed SBA Expansion to Direct Lending
While I believe the SBA is a very effective government agency, I strongly disagree with the current proposal for the SBA to make 7(a) loans of up to $150,000 directly to borrowers. The best and most effective method to deliver much-needed capital to small business owners is through community lenders. These local financial institutions make it a practice to develop close and valuable relationships with Main Street businesses, and they have a far better perspective on the best ways to serve the borrowers’ needs. H&M, along with ICBA, strongly opposes the proposal for the SBA to grant loans directly – a move that might well result in a severing of ties between many borrowers and the lenders they’ve grown to rely on. Effective small business lending involves the ability of borrowers to “sit across the table” from their lender. Small businesses should have the option to depend on a local partner to efficiently finance their operations. We will continue to keep you posted on this issue.
Upcoming Webinar on Loan Growth
I hope you’ll join me and David Ruffin of IntelliCredit for our upcoming webinar “2022 Loan Growth: Finding It and Managing the Risk” on December 7th at 2:00pm ET. In the webinar we’ll discuss current lending trends, hot opportunities, the sectors and niches to focus your lending efforts on, and how to manage loan growth in new areas without incurring inordinate risk. REGISTER HERE.
Remember, if you have any questions regarding SBA programs, or need clarity on an issue or situation you’ve encountered, don’t hesitate to contact us. We serve as the out-of-house SBA and USDA loan department for community financial institutions throughout the country, and we’re well equipped with answers – so much so, we’re the ICBA’s Preferred Service Provider in our category.
Fed Taper Tactics
A review of past QE wind-down strategies
by Jim Reber, President and CEO, ICBA Securities
Maybe the U.S. economy has improved to the point where further quantitative easing isn’t as critical to the Federal Reserve’s policy of “accommodation.” It certainly looks like the Fed has some further work to do on the portion of its mandate that relates to price stability, given the overshoot of its inflation goals. Fed Chairman Jay Powell said as much as early as this August, when he commented that “substantial further progress” has been achieved, and a month later stated that “moderation in the pace of asset purchases may soon be warranted.”
Such unvarnished comments are not just welcomed by bond investors, they also have a specific purpose: to give clear indications of “forward guidance” so as to not throw the financial markets in the kind of chaos they experienced the last time we entered this phase of monetary policy. Remember the Great Taper Tantrum of 2013?
Then-Fed Chairman Ben Bernanke surprised the market in a May 2013 speech whereby he mentioned the wind-down of bond purchases, in which he didn’t give any timelines. The longer end of the Treasury market was spooked to the point that 10-year yields rose by more than 100 basis points that year. To put this into perspective, the price of the 10-year note that was auctioned in May 2013 fell by more than ten full points by the end of the year.
What made the sell-off harder to explain is that the Fed actually continued to be a net buyer of bonds all the way until October 2014, when it began a policy of replacement investing. Its balance sheet basically ran in place at about $4.5 trillion until late 2017, at which point it began to let some maturities of both Treasuries and mortgage-backed securities (MBS) roll off.
The reason it’s worthwhile revisiting some of these events should be obvious: This time around, the Fed is sitting on double the amount of bonds it owned in 2017. The numbers can boggle the mind: even with the mountain of debt that Treasury has issued over the last five years, the Fed still owns more than 20% of it. The upshot of this is that various Federal Reserve members, from the chairman to the governors to the regional presidents, will likely choose their words very carefully, and exhibit transparency and consistency, when discussing the great unwind—whenever that begins.
Been there, done that
While the pay-down looks like a daunting task at the present, there are some positive historical data that likely are giving some support to bond prices currently. Lost in the big build-up of inventory in the last 20 months is that the Fed had been very successful in shrinking its balance sheet between 2017 and 2019.
There were really three separate, but related, stages to the removal of policy accommodation during this five-year period. First, the Fed gradually got out of the bond-buying business (the “taper”). Secondly, beginning in 2017 it stopped replacing some of its maturing investments, following a well-documented schedule of roll-offs. Thirdly, it raised Fed Funds nine times from 2015 through 2019.
When all was said and done, the interest rate curve from “2’s to 10’s” flattened by 125 basis points, and the Fed chased off $750 billion in assets, or about 17% of its balance sheet. Perhaps most impressively, long-term rates actually fell during this tightening-and-paydown phase. This speaks to the Fed’s success in its forward guidance campaign, and also that it let portions of its balance sheet disappear slowly enough so as to not disrupt the bond market.
Fasten your seat belts
The stakes may be higher this time, as this wind-down is going to start at a much higher baseline than in 2019. But there’s this: more than 30% of the Fed’s balance sheet will mature in the next four years, so there will be plenty available to let run off. And there isn’t any mandated timetable to get to a normalized balance sheet level, so assuming that inflation stays within tolerable bands, the Fed can be relatively patient in its pace of unwinding its positions.
Still, it will be critical to the stability of the bond market for the Fed to be clear in its words and actions in the coming months and quarters. This forward guidance may replace “transitory” as the Fedwatch buzzword for 2022. The market values of a lot of fixed-income securities residing on community bank balance sheets will depend on it.
New SBA Guidance on Refinancing Interim Loans
Effective October 1, 2020, SBA added a provision to its Standard Operating Procedure (SOP) that included language prohibiting lenders from refinancing a “short-term obligation that was created with the intent of refinancing it with a 7(a) loan,” unless the short-term loan qualified as “interim debt” according to the SOP. In practical application, the provision permitted a bridge loan issued to accommodate a borrower’s needs, such as a business acquisition loan closing to meet a purchase agreement timeline. However, many lenders interpreted the provision as prohibiting the use of an SBA loan to refinance any short-term or interim loans made with the intent to being refinanced with a 7(a) loan. Fortunately, the 2020 provision was amended as of September 8, 2021 by SBA Policy Notice 5000-814473, Interim Advances: Guidance for Processing Short-Term Interim Loans Prior to the SBA Loan Approval. This new Guidance clarifies and broadens the conditions that allow a lender to refinance a short-term, interim loan created with the intention of being refinanced with an SBA-guaranteed loan.
As you probably know, H&M is working with a new Fiscal Transfer Agent (FTA) for SBA loan servicing and reporting. Now, anyone who does not use the H&M Portfolio Management service should follow these steps when correcting an error in the FTA system: 1) Change the incorrect data; 2) Save your change; 3) Validate the change. Any deviation from this 3-step process will cancel your attempted correction.