CH Capital - SBA Morgan

8/3/2019 CH Capital - SBA Morgan

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SBA 504 Secondary Market Specialist

CH Capital Partners LLC

forNorthwest Region


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First Mortgage Options For Banks

1. Hold the first mortgage in portfolio

2. Sell 85% of individual loans to an FMP Pool Originator

3. Apply to become an FMP Self-Pool Originator for the purpose of pooling

your own loans and selling 80% of each loan pool directly to the

secondary market

4. Sell 100% whole loans to secondary market lenders including Morgan

Stanley and Zions Bank


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Benefits of selling to secondary market

Benefits to Lenders:

Increased capital & liquidity via sale of the loan

Premium Income

Servicing income (FMP only)

Can offer much longer-term fixed rates

FMP works for ANY asset type

FMP works for ALL credit qualities approved by a CDC

Can offer lower rates to borrowers while realizing ahigher yield than standard priced loans

Regulator relief through minimization of CRE


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First Mortgage Pooling Program (FMP)5%Pool

Originator

15%

Seller

(Bank)

80%

Investor

(SBA Guaranteed)


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FMP Background

Mandated as part of the American Recovery &

Reinvestment Act (ARRA, aka Stimulus Bill) passed in

February, 2009

Program lasts until September 2012 or $3 billion

(whichever came first)

First pool settled in September 2010 and many pools

have settled sinceprogram is alive and well and fully

operational


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FMP Eligibility

First mortgage must have an associated debenture that funded

on or after 2/17/09 and no later than the Sept. 23, 2012

debenture funding date

The first mortgage could have funded as far back as 2007

(ground-up construction transaction where the debenture

funded in Feb. 09 or later)


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FMP Loan Pools

Loan pool guidelines A loan pool is defined as 2 or more loans

Minimum first mortgage amount is $50,000

Loan must be current for 6 months or since time offunding

All loans in a pool must be either fixed for life oradjustable

Loans must have similar indices (Prime, LIBOR,

Treasuries) SBA will guarantee 80% of each loan pool at time of loanpool sale to secondary market investors

ACH payment on 1st or 2nd of every month


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Sale To FMP Pool Originator

Sell 85% of qualifying 504 first mortgage

loans

Bank (seller) retains 15% of each first mortgage

and continues to service the loan

Bank realizes premium income on the sold

portion of each loan and servicing income of at

least 50 bps on the sold portion

Sale of the 85% interest is transparent to the

borrower; Bank is still the lender of record


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Advantages of selling to pool originator:

Can sell one loan at a time

Can sell immediately after funding of debenture

Can obtain Premium Lock at time of first-mortgagefunding

Potentially more premium due to economies of scale

Less complicated than becoming a Self-Pool Originator

Regulations allow bank to sell the 15% residual portion

with SBA approval (requirements TBD)


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Disadvantages of selling to pool originator:

Need to submit full credit & closing package

Pool Originator will have own credit requirements

Pool Originator will require an executed purchase

agreement that is much longer than normal

whole-loan agreements


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Example of selling to Pool Originator:Gross First Mortgage $1,000,000

Sale To Pool Originator $ 850,000 (85%)

Net First Mortgage $ 150,000

Interim Second Mortgage $ 800,000

Borrower Down Payment $ 200,000

Total Purchase Price $2,000,000

Bank will fund a permanent first mortgage and interim loan Once interim loan paid off by the debenture

85% of the 1st mortgage will be salable to a Pool Originator


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Pricing strategy example for the bank:

Par pricing for FMP example of 5 year swap plus 350bps

Assume a 5-year fixed par rate of 5.75% Increase par rate by 100 basis points for an effective

rate of 6.75%

Equals 4% in premium

Plus .50% in servicing income paid on 85% sold portion

Approximate annual yield of 9.25%

(servicing income + interest income)

14


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Becoming an FMP Self-Pool Originator

As Self-Pool Originator, a bank can pool self-

generated or purchased 504 first-mortgage loans;

take pool directly to market Must hold the required 15% of the seller portion +

the 5% Pool Originator portion (5% held for life of

loan pool)thus hold 20% and sell 80%.

Banks must apply and be approved by SBA to a PoolOriginator


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Advantages of being self pool originator: No loan package required for submittal to third party

No additional credit review by third party

No purchase agreement required with Pool Originator

Potentially higher premium for special purpose loans,

higher loan to value deals, weaker credit, or dated

financials


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Disadvantages of being self pool originator: Potentially less premium than selling individual loans

due to economies of scale Requirement to pool at least two loans leads to longer

hold time before sale

No premium lock at initial loan funding

Fixed rate means that if market rates increase duringhold period, premium will decline


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Bank must comply with the following

requirements to be approved as a Pool Originator:

Ability to construct program-eligible pools (balance sheet capacity

and financial expertise) Complete Pool Originator application (SBA Form 2404)

Evidence of current good standing with regulators

Most recent audited statements

Board of Directors resolution that bank intends to apply tobecome a Pool Originator or a copy of the corporation by-laws

indicating person signing the Pool Originator application has

authority to bind the company

Fingerprint cards on key personnel


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FMP: Pool Originator vs. Self-Pool Originator

Which option should a bank choose?

Let transaction details dictate which option is

better for the particular transaction(s)

The lower the 504 lending volume, the more

selling to a Pool Originator makes sense

If higher volume lender, becoming a Self-PoolOriginator makes more sense


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How Direct Capital Can Help

CH Capital Partners through exclusive relationships with

poolers will help structure loans up front to insure

eligibility and maximum value for FMP loans and/or

whole loan sales to Morgan Stanley

Selling bank will receive take-out commitment at

inception of loan process for FMP program and/or

Morgan Stanley whole loan sale program

Direct Capital will give lender price indications for alloptions bank decides which option is best.


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Secondary Market Whole Loan Sale

Sell 100% of first mortgage to Morgan Stanley

Either table fund on Morgan Stanley docs or

Fund on banks own docs and sell later CDC Direct Capital to do all underwriting at same time as

debenture processing

CDC Direct Capital to provide loan bid from Morgan

Stanley Once bank accepts, Direct Capital processes loan for

secondary market sale


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Morgan Stanley - Eligibility

Require properties to be multi-purpose (office,

warehouse, light industrial, retail (excluding retail

strip centers), manufacturing, medical or dentaloffice, research and development facilities)

No special-purpose property (gas stations, car

dealers, hotels, restaurants, car washes, bowling

alleys, golf courses, etc)


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Morgan Stanley - Collateral

Owner user Real estate

Maximum 60% loan-to-value

Require appraisal provided by lender group

Equipment

Separate equipment financing permitted


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Morgan Stanley - Process

Sale to Morgan Stanley

Direct Capital is accepting portfolios and individual

loan structures for price indications

If satisfied with price indication, Direct Capital willcollect a full package via electronic upload

Direct Capital will insure each credit meets parameters

of Secondary Market and all information is accurate

MS pricing based on 90 day, 3 yr, 5 yr, 10 yr, 20 yr

Swaps

MS par pricing example 5 year swap + 325 bps


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Morgan Stanley Cash Flow

Generally consistent with a CDCs global cash flow

method

Require projected cash flow coverage (available cash flow-

to-debt service) of 1.2x Require projected cash flow coverage excluding tenant sub-

leases of 1.0x (tenant sub-leases to contribute no more

than 20% of available cash flow if total coverage of 1.2x)

Require written explanation for any projected expansion Require written explanation for any non-recurring expenses

added to available cash flow


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Morgan Stanley - Credit

No personal bankruptcies or foreclosures

(no exceptions)

Require FICO score of at least 680 Require written explanation for any tax liens

and/or tax judgments, including an action plan

and timeline for remediation

Require written explanation for any derogatory

marks on credit in last three years


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Morgan Stanley other criteria

Maximum 1st TD loan amount of $2,500,000

Loans can either be direct table funded by

Morgan Stanley or done on banks own docs andthen sold to Morgan Stanley

Loan pricing sheet available at:

www.CDCDirectCapital.com


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Thank You For Your Time and Attention

Presented by

CH Capital Partners LLC

19720 NW Tanasbourne Drive Suite 330

Hillsboro OR 97124

T: 877 257 0865 or 503 640 5200

The report herein is not a complete analysis of every material fact in respect to any company, industry or security. The opinions expressed here reflect the

judgment of the author as of the date of the report and are subject to change without notice. Information has been obtained from sources believed to be

reliable, but its accuracy and completeness are not guaranteed. CH Capital Partners LLC a member of Cordell Financial Group is an equal opportunity lender.

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based on their specific investment objectives and financial circumstances. It should not be assumed that the recommendations made in this situation achieved

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Documents

CH Capital - SBA Morgan