Currently we are seeing decline rates at, literally 90%, from banks here in Michigan. Meaning that 90% of all commercial loan request that come in the banks doors are being turned down. 50% – 60% of these potential commercial mortgages probably make sense from a traditional auditing perspective, but the banks are not willing to take the chance as loses continue to rack up and take their toll. Several nationally and smaller local banks have simply stopped quoting rates and will not accept new loan submissions alike. One particular bank here told all of their commercial loan officers that the bank will not close a single commercial mortgage in 2008 – like it or not.
Borrowers need for commercial mortgages have obviously not gone away either and probably has increased as business look for ways to consolidate debt, launch new marketing programs, etc. in an effort to make it through the current "cycle". Business owners are absolutely starting to feel the pinch and are looking at all option that might have not been considered just a few months ago. All in all borrowers are relearning the age old "golden rule" that has seemed to be gone for many years – that is "he who has the gold, makes the rules."
The SBA commercial mortgage programs may be the answer for many business owners. Because the government guarantees a large portion of the loan it becomes a much safer loan for the bank. For example, on the 504 SBA program the government essentially Guarantees 40% of the loan so the bank's loan to value is at a very conservative 50% (the borrower puts in 10%). On the SBA 7a program, Uncle Sam essentially guarantees 75% of the loan amount, making this a solid option for the lender as well.
However, from the borrower's perspective these loans are not perfect. One of the biggest criticisms is the lack of refinance options. Businesses have to be in a mortgage that is rough 2% above market to qualify for a refinance and any cash out portions are heavily controlled. In addition the 504 program only allows purchase transactions so the borrower usually has to "swallow" the 7a terms or might have to get on without the refinance.
The 7a program has been shunned by many for 2 main reasons 1. The guarantee fee, paid to the SBA (out of loan proceeds) is expensive at 2.75% of 75% of the total the loan balance and 2. That rate the floats over prime, adjusting once per quarter. The floating component, which can be a very scary proposition for most business owners, has been the largest issue.
It pays though to be informed. Not all SBA lenders are the same. For example we work with 2 banks that allow 7a refinances up to 90% loan to value and lock the rate for 5 years and the bank absorbs the 2.75% guarantee fee …
The SBA program will likely remain the shelter of the commercial mortgage industry as Wall Street goes through the restructuring of the CMBS and CDO markets, which, no doubt will be painful for all involved.