ValueXpress is assisting Country Bank, an affiliate, in its application to become an SBA 504 First Lien Pooler. The SBA created a secondary market for first lien positions of SBA 504 loans as part the Jobs Act. The program allows for the pooling and sale of a portion of first mortgage loans that were closed in conjunction with SBA 504 second mortgage loans. Of the first lien position that is sold, 80% will be backed by Pool Certificates that will be guaranteed by the U.S. government. The program has $3 billion of authorization and less than $200 million has been utilized.
Under the pooling program, a financial institution can make or acquire first lien position loans that were made or acquired in conjunction with an SBA 504 loan. An 85% interest in these loans can be sold to a 504 First Lien Pooler, or a 504 First Lien Pooler can originate first mortgage loans themselves, or a combination thereof can occur. The 504 First Lien Pooler then sells an 80% interest to investors through a broker/dealer, similar to SBA 7(a) guarantee sales, keeping a 20% unguaranteed portion in its loan portfolio (or 5% in the case in which an 85% interest in a first mortgage loan had been purchased from another party). To create a pool, the 504 First Lien Pooler needs only to sell two similarly structured loans (i.e., fixed or floating, but not one of each), which is a low hurdle to create a pool.
With the government credit enhancement, the 80% interest can be sold to investors at a premium to face value, allowing the financial institution to book a profit on the premium. For appropriately priced loans premiums are in the 6%-8% range. In addition, 50 basis points in servicing is retained by the institution that closed the first lien position.
“The reason we are applying to become a 504 First Lien Pooler is to use the Bank’s balance sheet more efficiently and to generate significant fee income,” said Tim Moffett, head of Government Guaranteed Lending at Country Bank. “Our loan portfolio is relatively full, yet we are receiving a constant flow of quality owner-occupied transactions from new and existing borrowers that we want to accommodate. By pooling and selling 80% interests in 504 first liens, we can do five times as many loans compared with a single portfolio loan,” commented Moffett.
ValueXpress will joint venture with other U.S. community banks to develop a 504 First Lien Pooling program, including the origination/purchasing of first mortgage loans originated in conjunction with 504 second mortgage loans, underwriting the loans, forming the pools, selling the 80% interest in the pools and servicing the loans. Contact Michael Sneden, Executive Vice President of ValueXpress, at msneden@valuexpress.com for additional information.
