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Monday, December 1, 2008

Daily Observation - It May Not Work

Tonight we are back to SBA related blogs. I have been talking to many of the local California lenders that I work with and the consensus is that the plan to move to LIBOR, thus guaranteeing that the secondary market was to follow is DEFINITELY in question this evening.

The thought was that by moving away from a prime based product to a more aggressive LIBOR based product the secondary lenders would come flying back to make a market and thus free up capital for the small business borrower. Nothing today is further than the truth according to the contacts that I have.

I am going to quote a piece from The Los Angeles Times that will perfectly echo my thoughts, then I will come back with what I believe is one of the issue behind the issue. So first the quoted material.

Loans guaranteed by the Small Business Administration have dropped sharply in the last year. Small-business operators have seen other cash sources dry up, including home-equity loans, conventional business loans and even credit cards.

One expert didn't dispute the need to unlock the secondary market for such loans but said it was unclear how, and whether, that would work.

"There is not enough detail on the program yet to really know how much impact it's going to have and whether it will result in freeing up more capital," said the chief executive of CDC Small Business Finance Corp.located in San Diego. His company makes SBA real estate loans and sells them on the secondary market.

That market has suffered as investors find higher interest rates in other markets.

The above are the more obvious reasons why the lenders might not becoming back so quickly. But I heard today that the infrastructure for the loan programs to shift from a quarterly billing cycle to a monthly adjustment cycle is extremely expensive and very complicated to make the transition to. Until this transition is made no lender is going to offer the LIBOR based product. In addition to the infrastructure the pricing is too close to Prime now and there is no real benefit for a secondary market to buy the loans because they would have no where to sell the paper after they acquired it.

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