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SBA 504 Secondary Market Specialist
CH Capital Partners LLC
forNorthwest Region
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First Mortgage Options For Banks
1. Hold the first mortgage in portfolio
2. Sell 85% of individual loans to an FMP Pool Originator
3. Apply to become an FMP Self-Pool Originator for the purpose of pooling
your own loans and selling 80% of each loan pool directly to the
secondary market
4. Sell 100% whole loans to secondary market lenders including Morgan
Stanley and Zions Bank
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Benefits of selling to secondary market
Benefits to Lenders:
Increased capital & liquidity via sale of the loan
Premium Income
Servicing income (FMP only)
Can offer much longer-term fixed rates
FMP works for ANY asset type
FMP works for ALL credit qualities approved by a CDC
Can offer lower rates to borrowers while realizing ahigher yield than standard priced loans
Regulator relief through minimization of CRE
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First Mortgage Pooling Program (FMP)5%Pool
Originator
15%
Seller
(Bank)
80%
Investor
(SBA Guaranteed)
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FMP Background
Mandated as part of the American Recovery &
Reinvestment Act (ARRA, aka Stimulus Bill) passed in
February, 2009
Program lasts until September 2012 or $3 billion
(whichever came first)
First pool settled in September 2010 and many pools
have settled sinceprogram is alive and well and fully
operational
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FMP Eligibility
First mortgage must have an associated debenture that funded
on or after 2/17/09 and no later than the Sept. 23, 2012
debenture funding date
The first mortgage could have funded as far back as 2007
(ground-up construction transaction where the debenture
funded in Feb. 09 or later)
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FMP Loan Pools
Loan pool guidelines A loan pool is defined as 2 or more loans
Minimum first mortgage amount is $50,000
Loan must be current for 6 months or since time offunding
All loans in a pool must be either fixed for life oradjustable
Loans must have similar indices (Prime, LIBOR,
Treasuries) SBA will guarantee 80% of each loan pool at time of loanpool sale to secondary market investors
ACH payment on 1st or 2nd of every month
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Sale To FMP Pool Originator
Sell 85% of qualifying 504 first mortgage
loans
Bank (seller) retains 15% of each first mortgage
and continues to service the loan
Bank realizes premium income on the sold
portion of each loan and servicing income of at
least 50 bps on the sold portion
Sale of the 85% interest is transparent to the
borrower; Bank is still the lender of record
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Sale To FMP Pool Originator
Advantages of selling to pool originator:
Can sell one loan at a time
Can sell immediately after funding of debenture
Can obtain Premium Lock at time of first-mortgagefunding
Potentially more premium due to economies of scale
Less complicated than becoming a Self-Pool Originator
Regulations allow bank to sell the 15% residual portion
with SBA approval (requirements TBD)
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Sale To FMP Pool Originator
Disadvantages of selling to pool originator:
Need to submit full credit & closing package
Pool Originator will have own credit requirements
Pool Originator will require an executed purchase
agreement that is much longer than normal
whole-loan agreements
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Sale To FMP Pool Originator
Example of selling to Pool Originator:Gross First Mortgage $1,000,000
Sale To Pool Originator $ 850,000 (85%)
Net First Mortgage $ 150,000
Interim Second Mortgage $ 800,000
Borrower Down Payment $ 200,000
Total Purchase Price $2,000,000
Bank will fund a permanent first mortgage and interim loan Once interim loan paid off by the debenture
85% of the 1st mortgage will be salable to a Pool Originator
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Sale To FMP Pool Originator
Pricing strategy example for the bank:
Par pricing for FMP example of 5 year swap plus 350bps
Assume a 5-year fixed par rate of 5.75% Increase par rate by 100 basis points for an effective
rate of 6.75%
Equals 4% in premium
Plus .50% in servicing income paid on 85% sold portion
Approximate annual yield of 9.25%
(servicing income + interest income)
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Becoming an FMP Self-Pool Originator
As Self-Pool Originator, a bank can pool self-
generated or purchased 504 first-mortgage loans;
take pool directly to market Must hold the required 15% of the seller portion +
the 5% Pool Originator portion (5% held for life of
loan pool)thus hold 20% and sell 80%.
Banks must apply and be approved by SBA to a PoolOriginator
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Becoming an FMP Self-Pool Originator
Advantages of being self pool originator: No loan package required for submittal to third party
No additional credit review by third party
No purchase agreement required with Pool Originator
Potentially higher premium for special purpose loans,
higher loan to value deals, weaker credit, or dated
financials
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Becoming an FMP Self-Pool Originator
Disadvantages of being self pool originator: Potentially less premium than selling individual loans
due to economies of scale Requirement to pool at least two loans leads to longer
hold time before sale
No premium lock at initial loan funding
Fixed rate means that if market rates increase duringhold period, premium will decline
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Becoming an FMP Self-Pool Originator
Bank must comply with the following
requirements to be approved as a Pool Originator:
Ability to construct program-eligible pools (balance sheet capacity
and financial expertise) Complete Pool Originator application (SBA Form 2404)
Evidence of current good standing with regulators
Most recent audited statements
Board of Directors resolution that bank intends to apply tobecome a Pool Originator or a copy of the corporation by-laws
indicating person signing the Pool Originator application has
authority to bind the company
Fingerprint cards on key personnel
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FMP: Pool Originator vs. Self-Pool Originator
Which option should a bank choose?
Let transaction details dictate which option is
better for the particular transaction(s)
The lower the 504 lending volume, the more
selling to a Pool Originator makes sense
If higher volume lender, becoming a Self-PoolOriginator makes more sense
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How Direct Capital Can Help
CH Capital Partners through exclusive relationships with
poolers will help structure loans up front to insure
eligibility and maximum value for FMP loans and/or
whole loan sales to Morgan Stanley
Selling bank will receive take-out commitment at
inception of loan process for FMP program and/or
Morgan Stanley whole loan sale program
Direct Capital will give lender price indications for alloptions bank decides which option is best.
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Secondary Market Whole Loan Sale
Sell 100% of first mortgage to Morgan Stanley
Either table fund on Morgan Stanley docs or
Fund on banks own docs and sell later CDC Direct Capital to do all underwriting at same time as
debenture processing
CDC Direct Capital to provide loan bid from Morgan
Stanley Once bank accepts, Direct Capital processes loan for
secondary market sale
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Morgan Stanley - Eligibility
Require properties to be multi-purpose (office,
warehouse, light industrial, retail (excluding retail
strip centers), manufacturing, medical or dentaloffice, research and development facilities)
No special-purpose property (gas stations, car
dealers, hotels, restaurants, car washes, bowling
alleys, golf courses, etc)
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Morgan Stanley - Collateral
Owner user Real estate
Maximum 60% loan-to-value
Require appraisal provided by lender group
Equipment
Separate equipment financing permitted
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Morgan Stanley - Process
Sale to Morgan Stanley
Direct Capital is accepting portfolios and individual
loan structures for price indications
If satisfied with price indication, Direct Capital willcollect a full package via electronic upload
Direct Capital will insure each credit meets parameters
of Secondary Market and all information is accurate
MS pricing based on 90 day, 3 yr, 5 yr, 10 yr, 20 yr
Swaps
MS par pricing example 5 year swap + 325 bps
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Morgan Stanley Cash Flow
Generally consistent with a CDCs global cash flow
method
Require projected cash flow coverage (available cash flow-
to-debt service) of 1.2x Require projected cash flow coverage excluding tenant sub-
leases of 1.0x (tenant sub-leases to contribute no more
than 20% of available cash flow if total coverage of 1.2x)
Require written explanation for any projected expansion Require written explanation for any non-recurring expenses
added to available cash flow
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Morgan Stanley - Credit
No personal bankruptcies or foreclosures
(no exceptions)
Require FICO score of at least 680 Require written explanation for any tax liens
and/or tax judgments, including an action plan
and timeline for remediation
Require written explanation for any derogatory
marks on credit in last three years
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Morgan Stanley other criteria
Maximum 1st TD loan amount of $2,500,000
Loans can either be direct table funded by
Morgan Stanley or done on banks own docs andthen sold to Morgan Stanley
Loan pricing sheet available at:
www.CDCDirectCapital.com
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Thank You For Your Time and Attention
Presented by
CH Capital Partners LLC
19720 NW Tanasbourne Drive Suite 330
Hillsboro OR 97124
T: 877 257 0865 or 503 640 5200
The report herein is not a complete analysis of every material fact in respect to any company, industry or security. The opinions expressed here reflect the
judgment of the author as of the date of the report and are subject to change without notice. Information has been obtained from sources believed to be
reliable, but its accuracy and completeness are not guaranteed. CH Capital Partners LLC a member of Cordell Financial Group is an equal opportunity lender.
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