PPP Update
On Tuesday, the US Senate approved a new $484 billion coronavirus relief package, including an additional $310 billion for the Paycheck Protection Program. The House is expected to vote today, and a signing should be completed by tomorrow.
The agreement was passed by a voice vote after days of negotiations between congressional Democrats and Treasury Secretary Steven Mnuchin, with the talks lasting until approximately midnight on both Sunday and Monday.
The deal includes an additional $310 billion for the Paycheck Protection Program (PPP), including $60 billion specifically for community banks and smaller lenders, as well as $75 billion for hospitals, $25 billion for testing, and $60 billion for emergency disaster loans and grants, according to a summary obtained by The Hill.
- Agricultural enterprises with no more than 500 employees are eligible
- At least $30 billion available for banks and credit unions between $10 - $50 billion in assets
- At least $30 billion available for banks and credit unions less than $10 billion in assets, as well as community financial institutions
We had a few questions and we got them answered by one of the leading SBA 7(a) lenders.
Are there loans that have been submitted to SBA already that were not approved (i.e. a waiting list)?
No. You either submitted and got an etran number before money ran out or you didn’t. The queue is at the bank level, not SBA.
What happens if the loans are not funded in ten days?
In theory, the authorization would be revoked. SBA has indicated that if we are in the closing process, they would be flexible. We have not wanted to test that flexibility.
Are the rules going to change from the final rule issued earlier this month?
There were two Interim Final Rule issuances after passage of the bill. We expect more. At the very least, we expect more guidance on loan forgiveness.
How many days after the law is passed will the portal open up?
SBA is asking for a bit of delay so they can institute some of the changes, like the small bank carve out. Congress and the White House likely won’t agree to any significant delay (one or more days). We don’t know yet, but I would say within 24 hours of the president signing the bill.
Thank you for your insight!
For the most part, the bank made exceptions for noncustomers who already knew someone at the bank, said American Bank Chief Executive James Arnold.
“It was a sprint and a mad dash to get all your people in as quickly as you could,” Mr. Arnold said. “It’s an unintended consequence of a large stimulus package that not everyone could get in the boat before they closed the door.”
And, smaller banks appeared to do better at getting the dollars out to their customers. One of the worst things you could do was put an initial application form on your website, because it often led to a deluge of applications that could not be accommodated. For example, Union Bank & Trust ($4.6 billion in assets) was the #2 lender in the program through the first 72 hours.
We know of numerous businesses that could not get loans with the big 4 banks. The New York Times reported that the largest banks provided their large customers with “concierge treatment.” We know of one Chicago business with $7MM in deposits at Chase and they didn’t get their PPP loan processed. Here’s what a former colleague said about Wells:
“Wells Fargo is a train wreck. On Saturday, April 4th (a day AFTER SBA began accepting applications), Wells Fargo made a questionnaire available to its existing customers who had an online banking business account. I filled out that questionnaire that same day. On Monday, April 6th, Wells Fargo notified its customers that if you hadn't filled out a questionnaire, you would no longer be able to because of the high demand. They then sent updates to me every couple days letting me know that I'd soon be able to fill out an application in order to formally apply for a PPP loan. At long last, yesterday, April 15th I was finally provided a link to the application and invited to apply for a PPP loan. Twelve days after SBA started accepting applications and the same day the SBA announced that 90% of the funds had been allocated.”
In fairness, this program was designed to have a lot of unhappy applicants. There is an unlimited demand for free money, and essentially 80% of these loans are grants. Other grant programs are always way oversubscribed. Perhaps, there should have been more restrictions on business size, such as no public companies, etc. These frivolous lawsuits are without merit, as no bank is required to approve every customer for a loan on a first-come, first-serve basis. We also expect that some lenders will not be able to fund and close these loans within the ten-day period, and we are not sure what happens to those customers.
This program should be a great source of fee income for banks, who are scrambling with shrinking margins and eroding credit quality. According to an analysis by NPR, banks handling the program made more than $10 billion in fees. The SBA also saw an approximate 4-fold increase in the number of lenders participating in the program versus SBA 7(a) in the prior year. We only know of one bank that did not participate in the program, so everyone seemed to be sharing in the fee income from these loans.
Housing Finance Update
For a mortgage in forbearance to be eligible to be purchased by Fannie and Freddie, a loan must have been closed between Feb. 1 and May 31 and cannot be delinquent for more than 30 days. Cash-out refinances will not be eligible, Fannie and Freddie said on their websites.
Eligible mortgages will also be priced at a level commensurate with their risk in order to “mitigate the heightened risk of loss” to the GSEs, the FHFA said.
Fannie and Freddie said that they would impose an additional loan-level price adjustment on eligible mortgages: 5% for first-time homebuyers and 7% for non-first-time homebuyers.
This is designed to provide additional liquidity to the mortgage market. Banks are largely well positioned to manage their liquidity needs, but mortgage servicing used to be done primarily by banks, but now roughly 2/3 of all serviced loans are done by non-banks, who tend to be riskier enterprises – an unintended consequence of Dodd/Franks. Mortgage servicers are required to advance funds to their investors, creating a cash crunch. They are pushing for the Federal Reserve to set up a liquidity facility.
Lawmakers in both parties have begun warning about a looming crisis and are urging the Federal Reserve chair, Jerome H. Powell, and Treasury Secretary Steven Mnuchin to take swift action. This month, a bipartisan group of senators warned Mr. Mnuchin that $100 billion of mortgage payments could be delayed this year and that standalone mortgage servicers, whose annual net profits they estimated amounted to less than $10 billion combined, could become insolvent. House Democrats have echoed those concerns.
The FHFA agreed this week to limit the advances on loans serviced by Fannie and Freddie to 4-months of advances. This will help ease the liquidity strain somewhat, but seems insufficient without additional liquidity support from the Federal Reserve. Unfortunately, if these mortgage servicers go under, who would take on this responsibility?
“Amid job losses and employment stability concerns, we expect the housing market to also experience a downside shock,” Duncan continued. “In our view, the negative shock will apply to both the home purchase and rental markets. On the demand side, early indications are that the purchasing benefit of lower interest rates are being offset by the downturn in employment. On the supply side, the number of listings is falling, as those with homes to offer may either be hesitant to allow strangers to tour their home or worry that the lack of demand is placing downward pressure on the sales price they might otherwise receive. On net, the expected effect is about a 15 percent decline in home sales in 2020, translating into a decline in purchase originations from $1.28 trillion in 2019 to $1.11 trillion in 2020. On the flip side, compared to 2019, refinances are expected to pick up in 2020 by approximately $400 billion to $1.41 trillion.”
Special thank you to Jerry Hubbard of FTN Financial for his insight.
Escape from the City?
Carlo Siracusa, president of Residential Sales for N.J.-based Weichert Realtors said while inventory is low due to sellers pulling homes off the market, demand remains high because of a new wave of city dwellers shopping in the suburbs.
“They’ve been confined to a small space the last 45 days and want out,” he said. “There’s a sense of urgency.”
The prospect of a mini-exodus is a real possibility, said Jonathan Bowles, executive director of the Center for an Urban Future, a Manhattan think tank focused on the local economy.
“New York is the epicenter for this pandemic,” he said. “Everybody knows that, and it’s understandable for people to think maybe a less dense place would be safer the next 12 to 18 months.”
After 9/11, some predicted the city would see a population decline spurred by fears of terrorism, he said. Instead, the population grew as the city demonstrated its ability to keep residents safe.
The catch: It may require long or repeated shutdowns to address the virus, which could itself spur suburban flight. What’s the point of paying crazy rent on a cramped apartment if you can’t enjoy the city?
West Virginia Governor Jim Justice predicted a revival of rural areas. All of this talk is a tad premature, but some of the worst places to be during this pandemic is in the core areas of our largest cities. Perhaps, the downtown boom touted by many will be coming to an end.
RIP, Department Store?
“The department stores, which have been failing slowly for a very long time, really don’t get over this,” said Mark A. Cohen, the director of retail studies at Columbia University’s Business School. “The genre is toast, and looking at the other side of this, there are very few who are likely to survive.”
At a time when retailers should be putting in orders for the all-important holiday shopping season, stores are furloughing tens of thousands of corporate and store employees, hoarding cash and desperately planning how to survive this crisis. The specter of mass default is being discussed not just behind closed doors but in analysts’ future models. Whether or not that happens, no one doubts that the upheaval caused by the pandemic will permanently alter both the retail landscape and the relationships of brands with the stores that sell them.
At the very least, there is expected to be an enormous reduction in the number of stores in each chain, which once sprawled across the American continent like a pack of many-headed hydras.
Department store chains account for about 30 percent of the total mall square footage in the United States, with 10 percent of that coming from Sears and J.C. Penney, according to a January report from Green Street Advisors, a real estate research firm. Even before the pandemic, the firm expected about half of mall-based department stores to close in the next five years.
Co-tenancy clauses in many retail leases can create a negative spiral as one department store vacates a shopping center. Landlords need to come up with creative solutions for vacant department stores. Office can be a great re-use of a department store as it allows a company to keep its workers on 1-2 floors.
Bank Attorney Perspective
We asked Jim McAlpin, a partner with Bryan Cave Leighton Paisner LLP and leader of that law firm’s banking practice, to give us some thoughts on what he is seeing from his bank clients. Jim also serves on a bank board so his perspective is noteworthy.
"I’ve never been more proud to be associated with the banking industry then I have been over the past two weeks. In my opinion, community and regional banks saved the day in the roll out of the Paycheck Protection Program. These banks provided counseling, fast paced assistance and a personal touch and I could fill several pages with the testimonials of praise and thanks I have heard from businessmen and businesswomen. This may have been the finest hour for community and regional banking in our great country.
I’m concerned about the impact of the economic downturn we are facing. PPP was the best idea to come out of Washington since lifting the national 55 mile per hour speed limit, but it is a short term remedy. As the national business shutdown enters a second month banks are beginning to receive more and more requests for payment deferments. That is just a leading indicator of the trouble to come for borrowers across a wide range of industries. Unlike most downturns, this one has been government imposed and is not isolated in depth by geography or to just a few areas of the economy. Regardless of the diversity in loan portfolios this downturn will be felt by most banks, and soon. The banking industry is much better capitalized than it was at the beginning of the last downturn, and liquidity levels are generally strong. The lessons of the recent great recession are also still firmly imbedded in the minds of the leaders of banks and their boards. Already there has been a significant tightening of underwriting standards, and obtaining a new business loan is materially harder then two months ago. Hopefully banks will also take seriously the need for objective, proactive steps early in the process of addressing problem loan situations. Most commercial lenders are not very good at workouts, the skill sets are just different. Overall, I think banks are better prepared for this downturn. What remains to be seen is how deep and long the downturn will be and the impact it will have on banks themselves.
The impact of the virus related disruption on bank M&A activity has been sudden and jolting. Deals that were close to the end are still closing. Deals that were in the early to mid stages have either stopped or are being reevaluated, often by both sides. It is not yet close to being clear how the M&A playing field will be “reset”. All crystal balls are cloudy at present. However, as in the most recent recession, there will clearly be opportunities for those banks with expansion goals and strong balance sheets. This is the time for bank CEOs and bank boards to be thinking forward. Yes, there are challenges to be overcome and a wave of loan workouts and defaults in the near term future. But we will come out of this. Then, as Warren Buffett once said, the outgoing tide will reveal who still has their swimsuits on. Those banks which are prepared and well positioned will reap great rewards in the merger opportunities that will result from the strong incoming tide."
