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New Efforts to Thaw U.S. Credit Markets

Written by: Carl Moore

Article Overview: A recent press release highlighted some of the key initiatives that are under way to help small businesses who are struggling with existing Government loans as well as get new capital flowing into the market for small businesses.

New Efforts to Thaw U.S. Credit Markets

A recent press release highlighted some of the key initiatives that are under way to help small businesses who are struggling with existing Government loans as well as get new capital flowing into the market for small businesses.
It’s important to understand what’s happening in the market and the several extraordinary steps the U.S. has taken in recent months.
1. Economic uncertainty has led to diminished small business loan demand.
2. Borrowers are, on average, less creditworthy than in previous years.
3. Lenders have also tightened credit standards.
4. At the same time, liquidity concerns have led some lenders to raise cash reserves until the economy picks up again; other lenders have slowed government lending because the secondary market for those loans is still disrupted.
Several steps have been taken:
• First, alternative base interest rate lenders can use the one-month LIBOR rate (London Interbank Offered Rate). By creating a way for loan rates to be more in line with lenders’ costs, this change helps lenders continue to be profitable despite current divergence between interest rates and costs of funds.
• Second, a new structure – Weighted Average Coupon Pools – for pools of government securities sold in secondary markets, improving profitability and adding liquidity into the secondary market for guaranteed loans. Because the average interest rate is used for these pools, they are easier for pool assemblers to create and more attractive to potential investors.

These important changes address immediate problems faced by lenders and investors, problems that reduced capital availability for small businesses.
• The Treasury Department and the Federal Reserve Board of Governors are working to ensure the new Term Asset-Backed Securities Loan Facility (TALF) program will help restore buying activity in disrupted secondary markets, generating liquidity lenders need to step up their small business lending. It has only been two months since changes to rules on rates and pooling became effective, and those changes will take time to work through the system. We think the TALF will have a strong positive effect on the secondary markets but this program also is just getting off the ground.

Participating lenders have authority to extend temporary payment relief for qualified borrowers struggling to repay their loans. The Government has asked lenders not to react to changing financial variables, such as fluctuations in personal credit scores, declining collateral values, and reduced home equity by broadly calling borrower loans.
In recent months, hundreds of lenders around the country have met to review their strategies and portfolio quality, and to encourage their use of government sponsored products, soliciting feedback on their problems and how products and services can be improved.

In response, last year the government launched a Small/Rural Lender Advantage to help small and rural lenders by streamlining the loan process so they can better reach underserved markets.
• Also modernized were programs to make the government a better partner for lenders.
• It centralized its loan process from 68 sites to six, a change long requested by lenders, to standardize procedures, upgrade technology and cut turnaround times.
• Since 2006, 7loan processing times have fallen by more than 50 percent.
• In 2007, SBA took 279 days on average to pay lenders their guaranties; today it's less than 25 days for correct loan packages.
• The current Administration also freed the program from volume limitations that caused program shutdowns in 2002 and 2004 by funding the program through modest fees and eliminating its $120 million annual subsidy. Today, lenders don’t worry about the program shutting down late in the year, enabling them to market it more vigorously.
• Also modernized were processes and technology.
Just a few thoughts regarding the different initiatives:
• Alternative Base Interest Rates: by adding monthly LIBOR rates to the approved list for consideration on interest rates give the lender flexibility in choosing or avoiding a certain rate based on the fluctuation of that market.
• Weighted Average Coupon Pools: Very interesting…basically creating another security that can be sold to investors that is in essence backed by the government so you know it won’t default….at least not before everything else in a cataclysmic meltdown, which we haven’t seen yet…close but not yet. It give the lenders a home to sell their loans that wasn’t available before
• Term Asset-Backed Securities Loan Facility: (TALF) part of the ongoing activity to restore confidence in the secondary market and create liquidity for the release of funds. This compliments the Weight Average Coupon Pools. Banks will sit on their funds and be slow to lend if they don’t have confidence they can sell those notes to get more liquidity to keep loaning money to qualified businesses.

There are new and existing lenders making loans. Those lenders not involved in loaning to residential developers have not had the short fall and defaults that have hurt so many other banks. So just because your corner big box bank said no, does not necessarily mean that it is really a no…just depends on who you ask and the quality of your package.

Notable Successful Failures
You have probably read how "Einstein was four years old before he could speak and seven before he could read. Isaac Newton did poorly in grade school. Beethoven's music teacher once said of him, 'As a composer he is hopeless.' When a boy, Thomas Edison's teachers told him he was too stupid to learn anything. F.W. Woolworth got a job in a dry goods store when he was 21, but his employers wouldn't let him wait on a customer because he 'didn't have enough sense.' A newspaper editor fired Walt Disney because he had 'no good ideas.' Enrico Caruso's music teacher told him, 'You can't sing. You have no voice at all.' And the director of the Imperial Opera in Vienna told Madame Schumann-Heink that she would never be a singer and advised her to buy a sewing machine.

Leo Tolstoy flunked out of college. Werner von Braun flunked ninth-grade algebra. Admiral Richard E. Byrd had been retired from the Navy as 'unfit for service' until he flew over both Poles. Louis Pasteur was rated as 'mediocre' in chemistry when he attended the Royal College. Abraham Lincoln entered the Black Hawk War as a captain and came out as a private. Louisa May Alcott was told by an editor that she could never write anything that had popular appeal. Fred Waring was once rejected for high school chorus. Winston Churchill failed the sixth grade."

Speaking personally, my father wouldn't allow me to go to high school. I was only 13 when he made me go to work to earn my own way. But through faith, hard work, and determination I not only graduated from college but also from graduate school. True, I started late, but I made it. You can too.

My advice to one and all is this: Don't allow your past to determine your future. Remember, failure is an event—not a person. When you stumble and fall (and you will from time to time), don't stay down. Get up, learn from your mistakes, and go on! Every day for the rest of your life commit and trust your life and way to God and he will be with you every step of the way.

Linda
Linda Shea/ Managing Partner
"We Bring Experience to the Meeting"

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Article Tags: credit markets, government loans, press release, small businesses



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