At JRB, our clients often call us with “should we, or shouldn’t we?” questions. We got a call the other day from Jean, a loan officer I know pretty well. Her institution has been looking at making SBA loans for a while and it has  received unsolicited requests from secondary market brokers suggesting that the premiums from the sales would reduce potential portfolio risk.

Jean knew she was late to the party and had her doubts. Premiums were averaging close to 120 about 18 months ago. Those days are past. But Jean’s management wants to increase liquidity and the guaranty sale was an avenue they were exploring. Our conversation went like this:

JEAN. All the brokers who called promised big premiums from selling the guarantees. But I’m skeptical, so I called you. As a neutral party, you would give me the straight skinny. And I heard you all helped another bank start selling its guarantees.

ME. You’re right Jean. JRB is a neutral party. We don’t buy or sell loans on the secondary market. However we maintain contact with several secondary market folks. And yes, we have helped our clients put together the information needed to find the best buyer for their loans. You’re a great client and I’d be glad to help you as well. Here’s how it works:

The secondary market puts together pools of loans from various lenders. The loans in the pool have a similar maturity and rate. As a general rule, the longer the term, the higher the spread, the more the premium. A  pool of loans with 25-year terms at prime plus 3% (the maximum spread the SBA allows) will command a higher premium than a pool with loans of shorter term or lower rate.

By the way, when I say a 25-year term, I don’t mean a loan that originally had a 25-year term, but now has 23 years left. Although there is a market for a loan like that, it cannot be part of a pool of  loans with 25 years left. It’s “non-poolable.” Since it cannot be sold as part of a group, it must. be sold individually and its premium will be less than the loans in the pool. The best time for selling a loan is at origination, when the loan is funded.

JEAN. What about interest rate adjustments? Is the premium for a variable rate better than for a fixed rate?”

ME. Of course that depends on the rate, but yes, generally, a variable rate loan commands a higher premium than a fixed rate. But be careful of the adjustment period. A loan with a rate of Prime +3% that adjusts quarterly with prime will have a higher premium than one that’s fixed for, say five years.

And remember that the secondary market sells pools of loans with similar rates and terms. So if some of your loans adjust every year and some adjust every three or five years, they will have different premiums. There are investors who will buy those annual or three-year adjusters. Just don’t expect the same premium as for a loan with a rate that adjusts with prime.

JEAN. Does loan size matter? We’ve funded a whole bunch of 7(a) loans under $300,000.00.

ME. Yes, loan size matters. While there’s a market for smaller loans, the premium on the sale of a small loan is less than on a larger one.

JEAN:  Thanks Richard. I feel like I can put together a presentation to management about the secondary market for 7(a) loans. If they have questions I can’t answer, I know where to turn for help!

Richard Jeffrey
Senior Associate
Head Underwriter