| 504 Secondary Market Flourishes
A 504 loan first mortgage can be sold at a premium
on the secondary market in a manner similar to other
commercial mortgages. Using the secondary market,
lenders are able to provide long-term debt to existing
borrowers and receive premium fee income, without
risking their balance sheet.
Some of the reasons why a lender would sell a 504
loan first mortgage are listed below:
- Return on equity – if sold, loans do not use
a single dollar of capital but generate premium
income.
- Immediate liquidity – a loan can be sold immediately
without penalty.
- Reduced risk – once the loan is sold, the bank
has no exposure to the borrower and therefore no
capital risk.
- Increased lending capacity – by selling the loan,
capital is freed up to accommodate a customer’s
other financing needs, such as lines of credit or
short-term working capital.
- Fee income – the bank receives all origination
fees plus the premium.
- Willing partners – to further reduce risk, some
secondary market lenders will pre-commit to purchase
a first mortgage before it is originated.
- Exceed lending limits – if the loan exceeds a
bank’s limits, secondary market lenders may fund
and buy the loan at closing, reducing the need to
participate it out with another lender.
- Manage resistance – selling the loan can help
Manage geographic constraints or resistance to specific
categories.
Multi-purpose projects are the most desirable and
offer full premiums. Special use projects are also
acceptable but offer reduced premiums while hotels,
gas stations and convenience stores are acceptable
in some cases but also offer reduced premiums.
Loan amounts average $835,000 but can be as low as
$100,000 and as high as $5 million. Premiums range
from 1% to 12% and vary depending on the loan rate
and pre-payment penalty.
For further information on the secondary market for
504 first mortgage loans, contact:
Todd G. Kocourek at (888) 320-5504 or todd@ffcfc.com.
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