March 9, 2016

C-Suite Wednesday -- SBA 7(a) Secondary Market Outlook for 2016

By Bob Coleman
Editor, C-Suite Wednesday

Episode 15 -- Bob Judge, CEO of Government Loan Solutions
Coleman Small Business Lending Podcast

Today's guest is Bob Judge, CEO of Government Loan Solutions, Inc. In October 2006, Bob co-founded Government Loan Solutions for the purpose of bringing greater transparency, efficiency, and productivity to the SBA marketplace. Bob is a recognized expert in the valuation of SBA-related assets as well as the SBA secondary market. GLS was acquired by Live Oak Bank in September, 2013.

Bob Coleman: "On September 15, 2008 Lehman Brothers filed for bankruptcy." Bob wasn't September 15, 2008 also the day of our first SBA Secondary Market Summit in New York?

Bob Judge: Yes it was, thank god we didn't have anyone from Lehman there.

Bob Coleman: I think we did a disservice to the 60 people in attendance talking about SBA Secondary Markets. We should have been talking about how to outfit our caves with electricity, air conditioning and a wine cellar.

Bob Judge: Especially the wine cellar.

Bob Coleman: Bob you have carved out a very specialty niche in your profession. I always loved the Jack Welch line, "Where does your parachute end up?" So tell us what you do, what is a secondary market?

Bob Judge: Basically a secondary market is a financial market which in this case allows the sale of small business loans. Lenders need to be able to sell loans in order to make more loans. This is similar to how a mortgage market works. When a mortgage lender makes a conventional loan that is guaranteed by Fannie or Freddie then they sell it to free up capital. It is the same thing with a small business lender. Many of them need to recycle the capital in order to make more loans. If you don't have a secondary market you are going to have many fewer loans created regardless of whether you have an SBA Loan or a conventional loan.

Bob Coleman: Well we certainly lived in that back in 2009, I alluded to our first Secondary Market Summit when the secondary market seized up with all of these bankruptcies and small business lending plummeted, not only in SBA lending, but nationwide conventional small business lending. How much did we lose in available capital for Main Street in 2009?

Bob Judge: At least 50%. A lot of lenders needed the secondary markets so a lot of them basically had to shut down.

Bob Coleman: Well let’s fast forward to 2016, what does the secondary market look like now, what are we facing?

Bob Judge: If we are looking at SBA 7(a) lending it's great. In fact the last three years have set a record high for amount of loans sold into the secondary market. In 7(a) lending, the guaranteed portion, last year was the first year we went over $7 billion. So that market is in excellent shape both from a price perspective and a prepayment and default perspective. Turning to the 504 market, that one is in need of a little bit more help. Mostly because it does not have a government guaranty. Even though it is slowly coming back it is definitely nowhere near what it was pre-credit crisis. I would say that is similar with other non-guaranteed sectors. There is still a lot of work to be done getting it back to the pre-credit crisis levels.

Bob Coleman: Let’s define some of these terms, when you say prepayment, what are you talking about?

Bob Judge: There are two elements to prepayment. One is loan defaults. In the case of a guaranteed security that is when the SBA will pay you off. The other element is the voluntary prepayment of the loan where the borrower pays the loan prior to maturity. These things are important to track because most markets trade a premium to par. The people that are buying these loans at a premium need these loans to hang around for as long as possible so they can recoup their premium. If prepays are high it means these loans are paying down quicker and that can be a drag on s...