Monday, September 13, 2010

The SBA and nescient

NESH-uhnt, NESH-ee-uhnt, NES-ee-uhnt
Lacking knowledge or awareness.
From Latin ne- (not) + scire (to know).
Nescient SBA lenders and borrowers don’t realize that the rules of the game are changing.

SBA has released a new SOP that will be effective October 1, 2010.

There are several changes with this new SOP.

For example, historically, a 7(a) lender could not finance Other Real Estate Owned (OREO) with a 7(a) loan because SBA perceived this as self-dealing. Now these same lenders can finance their OREO with a 7(a) loan. They always could with a 504 loan.

In addition, the definition of a passive business has changed. Under the previous guidance, these businesses were ineligible for SBA financing unless more than 50% of their revenue was from sources other than rent (the “sufficient services” test). The new guidance eliminates the “sufficient services” test in order to make SBA loan guarantees available to more of these types of businesses. Does that mean mini-warehouses are eligible?

For business acquisitions, the lender has to verify the financial information relied upon in the business valuation.

Other changes may soon happen. Legislation to increase the SBA loan limit on a 7(a) loan to $5,000,000, temporarily allow 504 loans to used for debt refinance, and increase the SBA 7(a) guaranty to 90 percent and waive the guaranty fee through the end of the year may be considered this week. If it passes by the Senate, it still needs to be reconciled with the House and then go to the President. The House however does not come back from their summer vacation until next week.

SBA should also soon make official the “alternative size” standard for 7(a) loans. What is the alternative size standard? Under SBA's 504 program, a business concern can not have tangible net worth not in excess of $8.5 million and average net income after Federal income taxes (excluding any carry-over losses) for the preceding two completed fiscal years not in excess of $3.0 million

It sounds like another whole new SOP will have come out again.
SBA LIBOR Base Rate September 2010 = 3.26%
SBA Fixed Base Rate September 2010 = 5.36%

504 Debenture Rate for August
The debenture rate is 3.52% but note rate is 3.57% and effective yield is only 4.93%.

The yield curve is getting a little steeper.

Last Thursday, the 30-year bond yield gained 11 basis points to 3.84 percent as the government sold $13 billion of the long term bonds. It fell on August 25th to 3.46 percent, the lowest level since March 2009.

Is the bond market telegraphing hope about the economy?

Keep your eye on Wednesday’s release by the Federal Reserve on Industrial Production and Capacity Utilization for the month of August.

In July, the capacity utilization rate for total industry moved up to 74.8 percent, a rate 5.7 percentage points above the rate from a year earlier but 5.8 percentage points below its average from 1972 to 2009.

Here is what capacity utilization rates have done:

1997- 83.6
1998- 83.0
1999- 82.4
2000- 82.6
2001- 77.4
2002- 75.6
2003- 74.6
2004- 79.2
2005- 80.7
2006- 82.4
2007- 81.5
2008- 79.9
2009- 69.9
2010- 74.8

What does all this mean?

I don’t know.

One of the Federal Reserve’s favorite gauges of the economy is the capacity utilization rate. The Federal Reserve watches capacity utilization rates to see if production constraints are threatening to cause inflationary pressures. Bottlenecks or shortages often lead to inflationary pressures that would drive prices even higher. Several analysts have pointed to a rate between 81% and 82% as a tipping point over which inflation is spurred.

Capacity utilization at 74.8% is still far below normal - and well below the the pre-recession levels of 81.2% in November 2007.

That means we still have a long way to go before interest rates really start to go up.
The rules are always changing.

As a matter of fact, today is the anniversary of the the Knickerbocker Rules formalized by Alexander Cartwright in 1845 on September 13th. They are considered to be the basis for the rules of the modern game of baseball.

The rules consisted of twenty general guidelines to the rules of baseball. Several of the rules are still around in some form today, while others are in direct contrast to current rules.

For example, the 10th rule stated- A ball knocked out of the field, or outside the range of the first and third base, is foul.

A ball knocked between the baselines and beyond the field was not initially a home run but a foul, to be ignored (after finding the ball). The early ball fields had very deep fences (if any) and an over-the-fence knock was an unlikely event.

It wasn’t until 26 years later that the home run became part of the game.

The first home run hit in MLB history was by Ezra Sutton of the Cleveland Forest Citys on May 8, 1871 against the Chicago White Stockings in the National Association. Sutton hit a second home run in the game to be the player to hit the first and second home runs in MLB history. What a great trivia question! Uncle Ezra, as admiring Boston fans called him, was considered one of the greatest third basemen of all time. While with the Athletics he made the first error in the first National League game ever played. If you are wondering what kind of name Ezra is, it is a book in the Old Testament. Ezra was a Jewish priestly scribe who led about 5,000 Judean exiles living in Babylon to their home city of Jerusalem in 457 BC.

Home runs keep the game interesting these days.

A Diamondbacks error in the top of the ninth allows Jason Giambi to come to the plate with two out and a man on first in a 2-2 game. He reaches down for a pitch low on the outside corner and drives it over the fence in centerfield. The Rockies walk off to their tenth win in a row, 4-2. Giambi has four hits this month, three of them homers.

The Rockies pulled within 1 1/2 games of first place in the NL West. San Diego comes into Coors Field for a three-game series starting Monday night. With a few more wins and some help from the Dodgers, who play the Giants beginning on Tuesday, the Rockies could soon move into first place.

Only 10 days until summer officially ends. And there are only 109 days left in the year.

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