The SBA and PROditomania

proditomania

pro-dit-uh-MAY-nee-uh

The feeling or the belief that everyone around is out to get you.

From Latin prodere (to betray).

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TIP OF THE WEEK


Proditomania proliferated after profligate prospicience from SBA promulgation about the SBA 7(a) loan subsidy rate.

Since 2010 the SBA 7(a) loan program has operated at least at a zero or better subsidy rate.  This means that the fees collected from borrowers and lenders plus recoveries more than offsets the actual cost of SBA 7(a) loan guarantees.  The program has actually generated about $3 billion in additional revenue to the government.  Somewhat lacking probity, the SBA is now estimating that the subsidy will suddenly go in the wrong direction and actually require an appropriation (hence a subsidy) from the government for fiscal year 2020.  Now a $99 million appropriation is needed to cover a $30 billion 7(a) loan program.  That appropriation was covered in a continuing resolution that expires November 21.

A new resolution will be needed to fund the 7(a) program or it will shut down.

So why the sudden and dramatic change in the subsidy rate projection?  Why do SBA and OMB think that the program is facing potential greater defaults?  One plausible prolegomenon is if you prodnose through it all you can see the prodigious increase in highly leveraged business acquisition loans.  On January 1, 2018 with SOP 50-10-(J) SBA required an equity injection of only 10% on business acquisitions.  Since then change of ownership loans now account for about 24% of all SBA 7(a) loans.  They also have a somewhat higher average loan size.  Business acquisition loans tend to not be fully secured with collateral and do have higher default rates than the overall SBA 7(a) loan portfolio.

SBA is also concerned about business acquisition transactions utilizing an equity injection from a retirement account.  They no longer will allow lenders to process these loans on a delegated basis and instead must submit them to the loan guaranty processing center.  An official pronouncement is expected soon.

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Indices:

PRIME RATE= 4.75%

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SBA 504 Loan Debenture Rate for October

For 20 year debentures, the debenture rate is only 2.08% but note rate is 2.117% and the effective yield is 3.462%.

For 25 year debentures, the debenture rate is only 2.22% but note rate is 2.25% and the effective yield is 3.54%.

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AHEAD OF THE YIELD CURVE

Proditomania prompted the Federal Reserve to lower interest rates another quarter percent.

Their official statement indicated that “that the labor market remains strong and that economic activity has been rising at a moderate rate.”  Despite that they still needed to lower rates.

What their statement did not mention at all was the struggle to maintain the federal funds rate at their target level.  Two weeks ago the fed announced that the amount offered in overnight repo operations will increase to at least $120 billion.  At least $120 billion every day!  This demand for liquidity is forcing a Federal Reserve intervention that far surpasses what they had to do in 2008 during the last hiccup in the economy.

The Federal Reserve Open Market Committee does not meet again until December 10 and 11.

So what’s the prognosis on interest rates?

Eurodollar futures settle at a three- month lending rate that has averaged about 22 basis points more than the Fed's target over the past 10 years.

Here is a summary of what the market expects for Eurodollar futures based upon the pit-traded prices at the Chicago Mercantile Exchange:
DEC19- 1.90
DEC20-1.495
DEC21- 1.445
DEC22- 1.485
DEC23- 1.54
DEC24- 1.685

What does all this mean?

I don’t know.

A little proditomania is prompting the Federal Reserve to be protean.

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OFF BASE

If you are feeling a little proditomanic, a three day weekend approaches!

According to the Federal Reserve statistical release K.8, here are our remaining holidays for 2019:
Veterans Day November 11
Thanksgiving Day November 28
Christmas Day December 25

By the way, it is Veterans Day - a simple plural without a possessive apostrophe (Veteran's or Veterans').  The United States government has declared that the attributive (no apostrophe) rather than the possessive case is the official spelling.