January 15, 2020
By Caity Witucki
Contributing Editor, C-Suite Wednesday
C-Suite Wednesday — Does the SBA Need a PSA Curve?
Historically, there has been a lack of loan level prepayment data available to SBA secondary market investors because small business loans have a complex set of circumstances that bring about defaults and prepayments.
However, the mortgage industry has had a standard for analyzing pools since 1985 known as the Public Securities Association (PSA) curve. The PSA curve tells Mortgage-backed securities (MBS) investors that standard mortgage prepays rise by 0.2% each month for the first 30 months and they then assume an annualized speed of 6% with an average lifetime CPR of 4.97%. Since business loan prepays vary by industry and have a higher default rate, an SBA industry standard for prepayment analysis – similar to the mortgage industry’s PSA curve – has not been introduced.
However, the change to how the principal is paid to pools, which occurred in October 2017, has resulted in 27 months of quality, loan-level prepayment data that allows data analysts to make some assumptions on how an overall SBA “PSA” curve might look.
At the Secondary Market Summit in Washington DC, Bob Judge, an SBA asset valuation expert and founder of Government Loan Solutions, presented the 27 months of SBA loan prepay data organized into 4 different SBA “PSA” curves: sub-15 year variable loans, sub-15 year fixed rate, 15-25 year variable, and 15-25 year fixed. According to his analysis, the current data suggests the 20-year average prepayment speed for all 7(a) pools is 14.77%. As more data becomes available that number may be adjusted for accuracy. Additionally, if the data continues to be available to the public, “PSA” curves for specific business types could also be available in the future.
An SBA industry standard, similar to the PSA curve, could help lending institutions streamline the data analysis that they already conduct on SBA loan prepays and help investors make more educated decisions about SBA pools from a lifetime speed perspective.