Growth in SBA 7(a) loan sales has closely followed the growth in SBA 7(a) loan fundings every year since 2012. The chart below illustrates that in fiscal 2017 a record 16,700+ SBA 7(a) loan guarantees were sold for roughly $9.3 billion in principal.
(Source: Colson Services Corp.)
Lenders participate in the 7(a) secondary market for numerous reasons. Whether a lender is seeking to increase liquidity in order to offer more small business loans within their community or simply looking to improve their institution’s non-interest income, sale of guaranteed portions of 7(a) loans to the secondary market has enabled community lenders to achieve their goals and extend credit to the businesses which need it most for over 30 years.
When the guaranteed portion of an SBA loan is presented for sale, investors will typically offer a premium paid over Par for the right to purchase that loan. The secondary market for 7(a) loans is highly liquid and premiums paid for SBA 7(a) loans are close to all-time highs. For lenders interested in accessing this market, there are 5 key factors which impact 7(a) secondary market premiums.
1. Term
10-year and 25-year SBA term loans are the most commonly sold loans. A 25-year term typically will result in a higher premium than 10-year terms due to their historic longer durations and slower pre-payment speeds.
2. Spread
Maximum spread over Wall Street Journal Prime is 2.75% on loans greater than $50,000 and will typically result in the highest premium. A general rule of thumb is that for every quarter point (0.25%) reduction in spread, a lender can anticipate around a point (1.00%) reduction in premium offered by an investor.
3. Size
The size of the guaranteed portion of a loan sold impacts premium as well. Typically, guaranteed portions over $1 million in size generate a slight discount when compared to guaranteed portions under $1 million. Lenders should expect that every $500,000 of a guaranteed portion above $1,000,000, premium will drop by roughly a quarter point (0.25%).
4. Adjust
Calendar quarterly interest rate adjustments receive the highest premiums. Monthly, annual and fixed rate loans tend to trade at a significant discount compared to quarterly adjust loans.
5. Seasoning
Generally, the closer a loan is sold to its note date, the stronger secondary market premium it will generate.
While demand for the guaranteed portion of SBA 7(a) loans continues to remain consistent, a number of factors outside of a lender’s control cause premiums paid for SBA 7(a) loans to fluctuate. This can make it hard for a lender to predict what the premium on a loan will be prior to approval. However, understanding the 5 most common factors that impact premiums for 7(a) loans can be helpful for any lender interested (or already participating) in the secondary market.
About Windsor Advantage, LLC
Windsor Advantage provides banks and credit unions with a comprehensive outsourced SBA 7(a) and USDA lending platform.
Since 2010, Windsor has processed more than $1.6 billion in government guaranteed loans and currently services a portfolio in excess of $1.2 billion (as of October 31, 2017) for more than 75 lenders nationwide. With over 150 years of collective government guaranteed lending experience, cutting-edge technology and rigid controls, Windsor Advantage is uniquely qualified to assist clients with implementing a thoughtful and profitable lending initiative.
Windsor Advantage has a team of 30 professionals with offices in Chicago, Illinois; Indianapolis, Indiana and Charleston, South Carolina. For more information, please contact (312) 248-8530.
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About the Author: Rob Forslund has been with Windsor Advantage on the secondary market sales desk for two years assisting in the sale of over 600 7(a) loans in 2017 alone. Prior to Windsor, Rob worked for Oppenheimer & Co. as a financial brokerage assistant. Rob graduated from the University of Iowa with a degree in finance. He can be reached at 312-248-8531.