October 7, 2015
Coleman C-Suite Wednesday – SBA Loans: To Sell, or Not to Sell?
By Walter McGlaughlin
Coleman Report Contributor
With SBA 7(a) loan volume at an all-time high and secondary market demand strong, the question of whether to sell or hold the guaranteed portions of closed loans is a front-and-center issue for many SBA departments.
To sell, or not to sell? We’ve all heard the arguments before. The secondary market is large, active and generally hungry for loans. Selling the guaranteed portions earns the lending institution substantial premium income, along with ongoing servicing fees. Many of us have seen analyses promising large rates of returns, although the math varies from one presentation to another.
There is no one correct answer for every lender, but the following are a few of the key benefits of each approach.
Selling the guaranteed portion
If priced correctly, selling the guaranteed portion of a 7(a) loan will earn the lender considerable premium income. Note the codicil “priced correctly”, which usually means variable rates with the potential for quarterly or monthly adjustments (although there is demand for certain fixed rate and ‘odd-adjust’ loans). Due to the high volume of loans mentioned above, premiums have narrowed in recent months, but 25-year loans can fetch premiums in excess of 16% and 10-year loans can still earn in excess of 10%.
As Andy Saslawsky, Director of Sun Trust Robinson Humphrey says:
It seems like every couple of years we get a hiccup in the SBA market that lasts a few months and then it comes roaring right back. This market continues to prove its elasticity over time and I don’t believe this recent price adjustment should be any different. The product and the performance have been very sound. I believe this is the right investment product at exactly the right time.
A few other considerations:
- Interest income: Given that only the guaranteed portion is sold, the remainder stays on the books, generating interest income.
- Servicing income: If sold for maximum premium, the lender retains 1% of the interest paid by the borrower to service the loan.
- Reinvestment income: This benefit is frequently omitted from discussions about the benefits of selling loans. Along with the premium, the lender receives the guaranteed portion back in cash from the investor. Returns from the reinvested principal should be factored into the analysis.
- Ongoing fee avoidance: The SBA’s ongoing fee (currently 473 basis points netted out of the interest income) is eliminated by the sale.
- Selling the guarantee: This frees up risk-weighted capital, which per Basel III is 20%.
Holding the guaranteed portion
Needless to say, there are potential advantages to holding loans in lieu of selling on the secondary market. These advantages include the following:
- Asset growth: Retaining loans maximizes asset growth.
- Long-term income: Although immediate income is greater when selling, the net present value of holding the loan may eventually be higher, depending on how long the asset remains on the books.
- Servicing flexibility: Certain servicing actions on sold loans may require investor approval, or in some cases, prohibited altogether.
- Pricing flexibility: Pricing without the concern for future sale increases the lender’s chances of winning deals.
Ultimately, each organization must decide which strategy works best for them. Many lenders have a mixture of loans in which some are sold while others are retained, so it’s not necessary to follow an all-or-nothing approach.
As W. Clement Stone once wrote, “Sales are contingent upon the attitude of the salesman — not the attitude of the prospect.”