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Tightened Lending Standards, SBA 504 Debt Refinancing Program, CRE Loan Delinquency and Rate Expectations

Feb 2016

As we wonder when a tighter Fed policy will register with the rates market, there has been a noticeable change in commercial bank lending standards. Following are details and a graph that were included in a Credit Suisse piece that analyzed the Fed's “Senior Loan Officer Opinion Survey on Bank Lending Practices.”

Tightened Lending Standards

The survey was made available to Fed officials for their Jan. 26-27 FOMC meeting. It was reported that banks, on balance, tightened their standards on commercial and industrial (C&I) and commercial real estate (CRE) loans in the fourth quarter of 2015. The 73 domestic, and 24 U.S. branches of foreign banks, also indicated they expected standards on C&I and CRE loans to tighten over 2016.

SBA 504 Debt Refinancing Program

The timing of the Small Business Administration (SBA) 504 Loan Program's initial Debt Refinancing Program in 2010 ironically coincided with an easier lending policy by banks, and still resulted in $2+ billion of loans being funded by the program. Perhaps the 504 Debt Refinancing Program's reintroduction later this year is arriving at a more fortuitous time for small business borrowers.

Commercial Real Estate Loan Delinquency

An offset to that recent Fed survey is in a Feb. 4 article in the American Banker magazine where reference is made to: “Federal banking regulators issued a joint statement in December that warned of a "substantial" rise in exposure to loans backed by commercial real estate that often included loosened underwriting standards. Total CRE loans, meanwhile, increased 6% in the third quarter from a year earlier, to $1.2 trillion, according to the most recent data from the Federal Deposit Insurance Corp.”

Following is a chart from that article showing that increase in lending, and also showing the improved delinquency rate from its peak in 2010. For the SBA 504 Loan Program, the annualized default rate is 0.87% as of Feb. 1.

Rate Expectations

When the Fed announced its 25 bps rate hike in December, the accompanying announcement suggested as many as four more rate hikes in 2016, with March being the likely first one. Market sentiment appears to be taking that off the table, a view that is reinforced by an observation from Fed Governor Leal Brainard: “market volatility and weak emerging market growth reinforce the case for watchful waiting.”

Adding to the attractiveness of Treasuries is a Feb. 3 announcement that Treasury will reduce the issuance amount of maturities with five-years or longer terms by $18 billion over the next quarter. This reflects smaller deficits, but will also enhance the scarcity value for existing Treasuries, which are very cheap when compared to European and Asian sovereign debt.

The value of U.S. Treasuries supports the value for $U.S. denominated credit product, though investors continue to seek additional spread premium because of elevated price levels on the benchmark Treasuries.

Source: Frank Keane, fiscal and selling agent for Eagle Compliance, LLC - the entity responsible for marketing, pricing and selling SBA 504 Loan Program funding securities.

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