The drought is here. On top of the summer drought, prepayment speeds of pools continue to rise. In a normal market, one expects to see a rise in prepayment in the three-to-five year range with speeds declining thereafter. And yet, the prepay speed of pools over three years have spiked, and they are not declining after five years. It is pretty clear that the new SBA amortization method is affecting seasoned pools.
It wouldn’t be fair to judge a new pool by the current speeds, however. New pools and pools seasoned less than two years have seen a minimal rise in speed. Why? First, the structure of new pools requires that the shortest maturity be 94% of the longest maturity versus the previous rule of 80%. Secondly, the old pools had artificially low speeds followed by inflated speeds. In looking forward, it is uncertain how beneficial the historical data is. At Hanover Securities, we are focused on the new rules: proper diversification (see our “Now and Later Pools”) and garnering Community Reinvestment Act (CRA) credit whenever possible.
In my 34 years in the business, these two rules have remained constant:
1) The best medicine for an SBA portfolio is new pools that are performing at the slowest speeds.
2) There are two seasonal buying opportunities, one is RIGHT NOW during the summer break before the majority of investors return to their desks in September.