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SBA 504 Interest Rates Update: April 2022

Apr 2022

April interest rates for Small Business Administration (SBA) 504 loans rose sharply compared to March. Higher 504 debenture rates, treasury yield rise, yield curve inversion and fast 504 prepayment speeds all played a part, per Eagle Compliance, LLC (Eagle), the firm responsible for the marketing, pricing, and sale of the certificates (debentures) sold to investors to fund the SBA 504 Loan Program.

For small business owners looking to refinance or buy commercial real estate, now is the time to get ahead of this rising rate environment.

• The April 25-year effective fixed interest rate for standard 504 loans is 4.680% and 4.690% for refinance loans (compared to 3.929% and 3.943% in March).
• The April 20-year effective fixed interest rate for standard 504 loans is 4.620% and 4.634% for refinance loans (compared to 3.766% and 3.780% in March).
• The 10-year effective fixed interest rate for standard 504 loans is 3.820% and 3.824% for refinance loans (set bimonthly).

Eagle provided commentary following the April bond sale:

“We’ve written extensively this year about the “never before” credit market environment in 2022. It features the Fed moving to from QE to “quantitative tightening” (QT) at a time of a 7-plus percent US consumer inflation rate. In recent weeks Fed leadership signaled an increasingly hawkish policy outlook. The credit market reaction was turbulent, but generally orderly underneath the surface. The market reaction in this “never before” environment accounts for the vast majority of the rise in 504 debenture rates. Fast 504 prepayment speeds also were a factor.

“Yields Rise and the Curve Inverts. At the April 7 504 debenture pricing, the 10-year Treasury yield was 65 bps higher than at the setting of the March debenture rates. In addition, expectation for more aggressive Fed QT inverted much of the Treasury yield curve including the key 7- to 10-year (7/10) segment. The 7-year Treasury yield was 10 bps more than the 10-year Treasury. In contrast, on March 10 the 10-year yield was 3 bps above the 7-year yield.

“504 Loan Prepayment Speeds Are Important. Why did the inverted 7/10 segment of the curve affect the April 504 debenture rates? The answer is rooted in the market-expected pace of 504 loan-backed debenture pool voluntary prepayments, known as “constant prepayment rates” or CPRs. Investors now expect 504 pools to prepay at about 10% CPR compared to the 5% long-term convention. This means the expected average lives of new 504 pools are in the 6- to 7-year range. Additional spread over the 10-year Treasury pricing benchmark must be offered to investors because yields in the 6- to 7-year part of the curve now are higher than the 10-year point. This additional m/m spread in April was 10 bps for the 25-year pool and 20 bps for the 20-year pool. April voluntary prepayments totaled $314 million, the third highest on record.

“It seems unusual that 504 prepayments remained so high, recently in excess of 1% of the $28 billion outstanding portfolio balance per month, in a sharply rising rate environment. Consider that the weighted-average debenture rate on the outstanding 504 portfolio is 2.42%, about 100 bps out of the money compared to the April 504 debenture rates. The incentive to refi a 504 based simply on the replacement interest rate cannot be much in play for 504 borrowers. For example, refi of a hypothetical $1 million, 2.42% 20-year 504 loan balance with a new 3.50% 25-year loan, results in rough savings of $250 per month in P&I, which seems paltry.

“If So, Then Why the High Prepayments? We’ve heard at various times that prepayments may be high due to 1) persistent rebound in prepayments suppressed by Section 1112 P&I relief, 2) generational transfer of business properties and 3) owners extracting some value from commercial properties that appreciated since the bottom after the GFC. All or some of these factors might well interact. There is no industry-wide data to test these educated guesses.

“Sharply Rates Higher Everywhere. In summary, the combination of sharply higher 10-year Treasury yield and wider spread over Treasury resulted in materially higher debenture rates in April. Interest rates are sharply higher everywhere since March. For example, the U.S. average 30-year mortgage rate and the 25-year Morgan Stanley 504 1st lien rate today would probably be above 5%. Further, the market currently projects a Prime Rate of 5.5% by year end. Next month could be interesting in the market with the FOMC policy announcement scheduled for Wednesday, May 4,” according to Eagle.

The SBA 504 Loan Program provides up to 90% financing at below-market, fixed interest rates and long amortization terms up to 25 years for the purchase of major fixed assets, such as owner-occupied commercial real estate, renovations, new construction, energy efficient “green” initiatives and/or fixed heavy duty machinery and equipment, as well as the refinance of commercial mortgage and other business debt with or without a cash-out option.

504 loans are paired with private-sector commercial loans and provide up to $5 million of aggregate SBA eligibility on standard 504 projects; up to $5.5 million per 504 energy efficient green project not exceed $16.5 million in the aggregate; and up to $5.5 million per eligible small manufacturing project with no limit on total SBA dollars available. These are SBA 2nd mortgage loan portions only; there is no limit on overall project dollar size.

For more information about SBA 504 loans in Alabama, Florida or Georgia, contact a Florida First Capital Loan Officer or email us at info@ffcfc.com. Phone: 850.681.3601 or toll-free at 888.320.5504.