According to a survey of its broker-dealers, ValueXpress reports SBA 7(a) guarantee prices holding steady at 109-110 for 25-year SBA 7(a) loans secured by real estate and priced at the Wall Street Prime Rate plus 2.75%, adjusted quarterly. The sale price provides a 1% servicing fee to the seller. “After SBA 7(a) premiums for a P+2.75% loan disappeared completely during the height of the credit crisis in 2008, premiums have recovered to historical levels,” said Michael Sneden, Executive Vice President of ValueXpress. “Premiums returned to the benchmark of 110 in October/November 2009 and have been trading around those levels since. We continue to educate our partner banks and new partners considering the SBA 7(a) program on the benefits of this program.”
As a simple example, a $1-million loan originated by a bank utilizing the SBA 7(a) program secured by an owner-occupied building can be eligible for a 90% government guarantee. That means $900,000 of the loan is fully guaranteed by the U.S. government. The guarantee can be sold in the capital markets, and with more than 10 active broker-dealers, the guarantee for an originating bank can be sold, one at a time, immediately upon loan closing. A P+2.75% loan with a 90% guarantee sold at 110 will generate a $90,000 profit to the originating bank, plus a 1% ongoing servicing fee during the life of the loan. Only the $100,000 balance of the loan is counted on the bank’s books as a charge to its capital. Assuming a 10% capital requirement, the loan utilizes only $10,000 of the bank’s capital, but adds $90,000 in profit that flows to capital. So the beauty of the SBA 7(a) program is that it quickly grows profits and capital for the originating bank. “With the Obama Administration extending a waiver of borrower guarantee fees for the SBA 7(a) program, this product will be very attractive for commercial banks in 2010,” Sneden said.