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New Loan Loss Model Delayed
The board, which sets accounting guidelines, will release the rule in the first quarter of next year rather than this year as previously planned, a spokeswoman for the board said Wednesday. The FASB board discussed the topic at a meeting on Wednesday but did not vote on a final rule.
The controversial loan-loss model, opposed by many bankers, would require banks to set aside expected losses, calculated based on historical loss rates, for every loan they make as soon as the loan goes on the balance sheet. Currently, banks begin adding to provisions when loans start to sour.
Nevertheless, despite some heavy lobbying by the ICBA, most experts believe that this rule is going ahead as planned and will be fully implemented by 2019.     A leading bank auditor shared his private views with us.   He said, “The recent ICBA views on this matter may be viewed positively by their members and I appreciate their advocacy efforts, but this standard is moving ahead as planned with few changes expected with respect to the proposed model and I expect no exemptions for smaller community banks.”
In our view, we agree with the goals of this revised loan-loss model, as the current model is too backward-looking as losses are realized too late, causing wild fluctuations in bank earnings.   However, this plan may create too many unintended consequences, and hurt bank lending.   For example, it would also shorten maturities, which could make too many loans mature at the wrong time.    Additionally, FASB deferred to the Banks to develop their own expected loss models creates market disruptions, as the Banks that are too conservative will lose business to the Banks that have more aggressive forecasts on future losses.  A better idea than the proposed change is simply move all assets to a modified mark-to-market.   
Flush FHA Loosens Condo Rules
Last week, the Federal Housing Administration announced that its reserves skyrocketed.   
The agency announced Monday that the mutual mortgage insurance fund's ratio of reserves to guaranteed loans had skyrocketed to 2.07%, marking the first time since the financial crisis it was above its statutory minimum. The dramatic reversal from a year earlier, when the fund's ratio was just 0.4%, was helped by a premium cut in February.
But FHA officials downplayed the chances of another cut.
"At this point, we don't have any plans to change the [mortgage insurance premium] structure," said FHA Deputy Principal Assistant Secretary Edward Golding during a briefing with reporters on Monday morning.
Additionally, they took some additional steps to make financing condos easier as well.   A condo is now considered to be owner-occupied unless they are:
  • Tenant Occupied;
  • Vacant and listed for rent;
  • Existing (previously occupied), vacant and listed for sale; or
  • Under contract to a purchaser who does not intend to occupy the unit as a Principal Residence or Secondary Residence.  The term Principal Residence and Secondary Residence have the same meaning.
A vacation property now will be considered “owner-occupied,” which is a big boost for condo developments in residential areas.   Insurance standards were also eased for HOAs, and the recertification process was eased as well.     
The 504 Conundrum     
Despite a superior product in most cases for the customer, the SBA 504 program has lagged the larger SBA 7(a) program as of late.   We asked Chris Hurn, CEO of Fountainhead Commercial Capital, to address this topic, as he is one of the leading experts on the 504 program.
“I would say it’s more the inactions (rather than direct actions) that have helped lessen the usage of the SBA 504 loan program in the past few years.  Let me explain further.
While loan sizes were raised for the SBA 504 program in late 2010 and refinancing and the FMLP program were briefly initiated then as well, both of these latter provisions were allowed to expire at the end of September 2012.  Little action has been taken to reinstitute the refinancing provision of the 504 program (or the very helpful FMLP program), despite the overall SBA 504 program being back to a budget-neutral state. 
Other inactions have contributed to the decline of SBA 504 fundings as well:
1.       The continued allowance of commercial real estate loans within the SBA 7(a) loan program.  Now I realize this rubs some bankers the wrong way, but above a certain dollar amount (maybe $1MM?) it’s hard to argue that small business owners benefit more from this mostly floating-rate-on fixed-assets loan program (7(a)’s) versus funding the project with a 504 loan.  Sure, the banks who sell-off the government-guaranteed portion into the secondary market benefit, particularly from the recent record-setting premiums, but few of America’s small business owners are better helped in these situations with a 7(a) loan instead of a 504 loan. 
2.       SBA needs to do a better job on meaningful data collection to better help create new securitizations of SBA 504 first lien loans.  Currently, the Agency only makes available performance history of the SBA permanent second lien portion, despite the desire of many to want to dig into the risk (or relative lack thereof) on these first lien loans.  This requires these entities interested in securitizing these assets to have to extrapolate from one data set to another, somewhat less accurately than they’d really like to. 
3.       Better coordination of the SBA with other bank and credit union regulators could lessen the confusion, worry, and inconsistent interpretation of various SBA lending parameters and the risks (or relative lack thereof) associated.  There continues to be too much finger-pointing, shoulder-shrugging or misinterpretation from one regulator to another.  While there exists lots of confusion and uncertainty these days regarding most current and future bank regulations, SBA really needs to take the lead in at least clarifying matters on their lending programs. 
4.       Lastly, SBA desperately needs to get rid of the dysfunctions that have cropped up in Sacramento (Centralized Processing for all SBA 504 loans) in the past couple of years.  There shouldn’t exist the in-fighting, delays, and misunderstandings between the folks that deal with 504 loans daily, especially when this hasn’t previously existed at SPLC.  This is hardly helping grow the 504 program.  By not taking actions to put a stop to this and get SPLC back to the efficiency it had only a couple years ago, SBA is harming the 504 program’s reputation.  Those old myths about taking too long, being too complicated and cumbersome are becoming all too real again.  The Agency needs to fix this immediately if the 504 program is ever to shine as it should.”
Thank you, Chris, that was very insightful!
Clark Street Capital is a full-service bank advisory firm, specializing in the review, management, and disposition of complex loan portfolios.   We provide customized solutions for our clients, leveraging our organic and deep understanding of banking, commercial real estate, whole loans, loan sales, and workouts.   Clark Street Capital offers four primary services:
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