SBA 504 Secondary Market Specialist CH Capital Partners LLC for Northwest Region

First Mortgage Options For Banks

1. 2. 3. Hold the first mortgage in portfolio Sell 85% of individual loans to an FMP Pool Originator Apply to become an FMP Self-Pool Originator for the purpose of pooling your own loans and selling 80% of each loan pool directly to the secondary market Sell 100% whole loans to secondary market lenders including Morgan Stanley and Zion s Bank

4.

Benefits of selling to secondary market Benefits to Lenders:

        Increased capital & liquidity via sale of the loan Premium Income Servicing income (FMP only) Can offer much longer-term fixed rates FMP works for ANY asset type FMP works for ALL credit qualities approved by a CDC Can offer lower rates to borrowers while realizing a higher yield than standard priced loans Regulator relief through minimization of CRE

First Mortgage Pooling Program (FMP)

5% Pool Originator 15% Seller
(Bank)

80% Investor
(SBA Guaranteed)

FMP Background
Mandated as part of the American Recovery & Reinvestment Act (ARRA, aka Stimulus Bill) passed in February, 2009 Program lasts until September 2012 or $3 billion (whichever came first) First pool settled in September 2010 and many pools have settled since program is alive and well and fully operational

FMP Eligibility
First mortgage must have an associated debenture that funded on or after 2/17/09 and no later than the Sept. 23, 2012 debenture funding date The first mortgage could have funded as far back as 2007 (ground-up construction transaction where the debenture funded in Feb. 09 or later)

FMP Loan Pools Loan pool guidelines

A loan pool is defined as 2 or more loans Minimum first mortgage amount is $50,000 Loan must be current for 6 months or since time of funding All loans in a pool must be either fixed for life or adjustable Loans must have similar indices (Prime, LIBOR, Treasuries) SBA will guarantee 80% of each loan pool at time of loan pool sale to secondary market investors ACH payment on 1st or 2nd of every month

Sale To FMP Pool Originator

Sell 85% of qualifying 504 first mortgage loans

Bank (seller) retains 15% of each first mortgage and continues to service the loan Bank realizes premium income on the sold portion of each loan and servicing income of at least 50 bps on the sold portion Sale of the 85% interest is transparent to the borrower; Bank is still the lender of record

Sale To FMP Pool Originator

Advantages of selling to pool originator:

Can sell one loan at a time Can sell immediately after funding of debenture Can obtain Premium Lock at time of first-mortgage funding Potentially more premium due to economies of scale Less complicated than becoming a Self-Pool Originator Regulations allow bank to sell the 15% residual portion with SBA approval (requirements TBD)

Sale To FMP Pool Originator

Disadvantages of selling to pool originator:

Need to submit full credit & closing package Pool Originator will have own credit requirements Pool Originator will require an executed purchase agreement that is much longer than normal whole-loan agreements

Sale To FMP Pool Originator

Example of selling to Pool Originator:

Gross First Mortgage Sale To Pool Originator Net First Mortgage $1,000,000 $ 850,000 (85%) $ 150,000

Interim Second Mortgage $ 800,000 Borrower Down Payment $ 200,000 Total Purchase Price $2,000,000

Bank will fund a permanent first mortgage and interim loan Once interim loan paid off by the debenture 85% of the 1st mortgage will be salable to a Pool Originator

14 Sale To FMP Pool Originator

Pricing strategy example for the bank: Par pricing for FMP example of 5 year swap plus 350 bps Assume a 5-year fixed par rate of 5.75% Increase par rate by 100 basis points for an effective rate of 6.75% Equals 4% in premium Plus .50% in servicing income paid on 85% sold portion Approximate annual yield of 9.25% (servicing income + interest income)

Becoming an FMP Self-Pool Originator As Self-Pool Originator, a bank can pool selfgenerated or purchased 504 first-mortgage loans; take pool directly to market
Must hold the required 15% of the seller portion + the 5% Pool Originator portion (5% held for life of loan pool) thus hold 20% and sell 80%. Banks must apply and be approved by SBA to a Pool Originator

Becoming an FMP Self-Pool Originator

Advantages of being self pool originator:

No loan package required for submittal to third party No additional credit review by third party No purchase agreement required with Pool Originator Potentially higher premium for special purpose loans, higher loan to value deals, weaker credit, or dated financials

Becoming an FMP Self-Pool Originator

Disadvantages of being self pool originator:

Potentially less premium than selling individual loans due to economies of scale Requirement to pool at least two loans leads to longer hold time before sale No premium lock at initial loan funding Fixed rate means that if market rates increase during hold period, premium will decline

Becoming an FMP Self-Pool Originator

Bank must comply with the following requirements to be approved as a Pool Originator:
Ability to construct program-eligible pools (balance sheet capacity and financial expertise) Complete Pool Originator application (SBA Form 2404) Evidence of current good standing with regulators Most recent audited statements Board of Directors resolution that bank intends to apply to become a Pool Originator or a copy of the corporation by-laws indicating person signing the Pool Originator application has authority to bind the company Fingerprint cards on key personnel

FMP: Pool Originator vs. Self-Pool Originator

Which option should a bank choose?

Let transaction details dictate which option is better for the particular transaction(s) The lower the 504 lending volume, the more selling to a Pool Originator makes sense If higher volume lender, becoming a Self-Pool Originator makes more sense

How Direct Capital Can Help

CH Capital Partners through exclusive relationships with poolers will help structure loans up front to insure eligibility and maximum value for FMP loans and/or whole loan sales to Morgan Stanley Selling bank will receive take-out commitment at inception of loan process for FMP program and/or Morgan Stanley whole loan sale program Direct Capital will give lender price indications for all options bank decides which option is best.

Secondary Market Whole Loan Sale

Sell 100% of first mortgage to Morgan Stanley Either table fund on Morgan Stanley docs or Fund on banks own docs and sell later CDC Direct Capital to do all underwriting at same time as debenture processing CDC Direct Capital to provide loan bid from Morgan Stanley Once bank accepts, Direct Capital processes loan for secondary market sale

Morgan Stanley - Eligibility Require properties to be multi-purpose (office, warehouse, light industrial, retail (excluding retail strip centers), manufacturing, medical or dental office, research and development facilities) No special-purpose property (gas stations, car dealers, hotels, restaurants, car washes, bowling alleys, golf courses, etc)

Morgan Stanley - Collateral Owner user Real estate Maximum 60% loan-to-value Require appraisal provided by lender group Equipment Separate equipment financing permitted

Morgan Stanley - Process

Sale to Morgan Stanley

Direct Capital is accepting portfolios and individual loan structures for price indications If satisfied with price indication, Direct Capital will collect a full package via electronic upload Direct Capital will insure each credit meets parameters of Secondary Market and all information is accurate MS pricing based on 90 day, 3 yr, 5 yr, 10 yr, 20 yr Swaps MS par pricing example 5 year swap + 325 bps

Morgan Stanley Cash Flow

Generally consistent with a CDC s global cash flow method Require projected cash flow coverage (available cash flowto-debt service) of 1.2x Require projected cash flow coverage excluding tenant subleases of 1.0x (tenant sub-leases to contribute no more than 20% of available cash flow if total coverage of 1.2x) Require written explanation for any projected expansion Require written explanation for any non-recurring expenses added to available cash flow

Morgan Stanley - Credit No personal bankruptcies or foreclosures (no exceptions) Require FICO score of at least 680 Require written explanation for any tax liens and/or tax judgments, including an action plan and timeline for remediation Require written explanation for any derogatory marks on credit in last three years

Morgan Stanley other criteria Maximum 1st TD loan amount of $2,500,000 Loans can either be direct table funded by Morgan Stanley or done on banks own docs and then sold to Morgan Stanley Loan pricing sheet available at: www.CDCDirectCapital.com

Thank You For Your Time and Attention

Presented by CH Capital Partners LLC 19720 NW Tanasbourne Drive Suite 330 Hillsboro OR 97124 T: 877 257 0865 or 503 640 5200

The report herein is not a complete analysis of every material fact in respect to any company, industry or security. The opinions expressed here reflect the judgment of the author as of the date of the report and are subject to change without notice. Information has been obtained from sources believed to be reliable, but its accuracy and completeness are not guaranteed. CH Capital Partners LLC a member of Cordell Financial Group is an equal opportunity lender. The solutions discussed may not be suitable for you, even if your personal situation is similar to the example presented. Investors must make their own decisions based on their specific investment objectives and financial circumstances. It should not be assumed that the recommendations made in this situation achieved any of the client's goals mentioned. This example is hypothetical and does not represent any specific clients, investments or strategies. Mutual funds are sold by prospectus. Please consider the investment objectives, risks, charges and expenses carefully before investing. The prospectus, which contains this and other information, can be obtained by calling your Financial Advisor. Read it carefully before you invest. Variable annuities are sold by prospectus. Please consider the investment objectives, risks, charges and expenses carefully before investing. Withdrawals from an Annuity before 59 1/2 may incur 10% tax penalty. All guarantees from an Annuity are based upon the claims-paying ability of the insurance company. CFG or any of it s affiliates reserves the right to share information between various businesses that CFG is affiliated with. It will still concur with the privacy act.