acquire new loans are up 1.75% (10-year loans) to 2.5% (25- year loans)
the beginning of the year.
The par pool
at year-end had a coupon of 3.25% (prime rate -2.25%). In May, the predominant
coupon on 25-year par pools is 2.9% (prime rate – 2.60%).
Three-month LIBOR is 2.52%, which is down 30 basis points
since December 21.
historically been a leading index. As such, most forecasters are expecting a 25-basis
point cut in the LWSJ Prime Rate later in December or January 2020. This means
that investors can hold on to higher coupons by switching from LIBOR based
investments to investments tied to the prime rate. Third party pricing of loans,
par pools, and strips are up since the beginning of the year. However, premium
pool prices of newly issued pools have exhibited a decline.
Is it time to buy?
On May 23rd, 2019 the ten-year treasury had a 2.29% bond equivalent
yield (BEY). A current offering on SBA 522511 has a 3.1% BEY at a 14% CPR. SBA
pools and treasuries are both 0% risk weighted. While a rate cut is not a foregone
conclusion, even if prime goes down 25 basis points (pool yield of
approximately 2.85%) or 50 basis points (pool yield of approximately 2.60%)
this pool retains the yield advantage and has minimal interest rate risk.
Moreover, as rates decline, it is reasonable to expect that speeds will slow
down thereby increasing the pool yield.
Eighty-eight percent of the
dollar volume pooled went into par pools in March, making it abundantly clear
that strip buyers are willing to take on the prepayment risk.
Those are my thoughts. Always happy to discuss. JOEL BANES (901) 261-5950