Coleman Government Loan Solutions CPR Report

Transcription

1 Government Loan Solutions CPR Report Providing the most detailed monthly SBA 7(a) and 504 prepayment, default and market information Volume 5, Issue #5 May, 2011 Bob Judge, Government Loan Solutions, Editor P R E PA Y M E N T S P E E D S R I S E S L I G H T LY Bob Judge is a partner at Government Loan Solutions. Government Loan Solutions is a provider of valuation services, prepayment analytics and operational support for the SBA marketplace. Bob has 25 years of experience in the fixed income markets. He holds a B.A. in Economics from Vassar College and an M.B.A. in Finance from NYU Stern School of Business. I N S I D E T H I S I S S U E : Special points of interest: Prepayments Rise Slightly SMA Update: Growing Default Rate Rises Slightly Value Indices Mostly Higher Prepayment Speeds 1-2, SMA 1, 4-9 The Legal Beat 10 Sale & Settle Tip 11 Value Indices 13, Default Rate 14 Default Curtailment Ratios 14 & 22 April, much like March, continued to show that prepayment speeds remain at historically low levels. While prepay rates continue to creep toward 7%, we remain inside a zone of sub-4% defaults combined with sub-3% voluntary prepayments. By Jordan Blanchard Volume S MA U P D A T E : G R O W I N G 504 S E C O N DA R Y M A R K E T May was a very active month for FMP pool originators. Four pools settled worth a total of just over $18MM (guaranteed portion). A summary of each Last month, overall speeds came in at 6.70%, a slight increase over March and the seventh month in a row of sub- 7% prepayment rates. Have we reached a New Normal of single-digit prepayment speeds? Perhaps. pool is noted in the chart below. Total FMP volume through May, 2011, stands at $135,773,603. There have been 18 pools issued to date with an average guaranteed interest of approximately $7,500,000. The total number of loans pooled It wasn t long ago that a sub-15% CPR print was celebrated by lenders and investors alike. How times have changed. With access to conventional loans still a pipe dream for most small business borrowers, an extended period of mass Continued on page 2 stands at 96. The average gross loan amount is $1,767,885. Growing 504 Secondary Market The market for SBA 504 first mortgages is expanding rapidly. A brief description of each loan Continued on page 4 Pool Number Guaranteed Interest Number Of Loans Average Guaranteed Interest 1 $2,604,185 2 $1,302,092 2 $1,798,059 4 $ 449,514 3 $8,015,190 5 $1,603,038 4 $5,635, $ 563, and Government Loan Solutions. All Rights Reserved.

2 Page 2 P R E PAYMENT S P EEDS...CONTINUED prepaying of SBA loans, as we saw in , would seem a long way off. Turning to specifics, defaults ticked up by 1% to 3.81% from 3.78% the previous month. After significant decreases over the past 12 months, defaults seem to have found a level in the sub-4% range. As for voluntary prepayments, they rose by 10% to 2.89%, remaining below 3% for yet another month. As for next month, preliminary data from Colson suggests a slight decrease in in overall prepayments, but they should be above 6%. The YOY comparison to 2010 continues to show 2011 significantly below last year, with YTD prepayment speeds in 2011 at 6.25% versus 2010 at 7.37%. Turning to the default/ voluntary prepayment breakdown, the Voluntary Prepay CPR (green line) rose from 2.62% in March to 2.89%. While the VCPR again remained below 3%, the Default CPR (red line) rose last month, reaching 3.81% from 3.78% in March. Last month, prepayment speeds rose in four out of the six maturity categories. Increases were seen, by order of magni- tude, in the 8-10 sector (+59% to CPR 11.75%), <8 (+15% to CPR 11.80%), (+22% to CPR 9.34%) and (+4% to CPR 5.83%). Decreases were seen, also by order of magnitude, in (-51% to CPR 4.09%) and 20+ (-5% to CPR 5.21%). For April, another month of the New Normal. For further information on the terminology and concepts used in this article, please refer to the Glossary and Definitions at the end of the report. Data on pages Have we reached a new normal of single-digit prepayment speeds? Perhaps. Bob Judge can be reached at (216) ext. 133 or bob.judge@glsolutions.us

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4 S E C O N DA R Y M A R K E T A C C E S S... C O N T I N U E D Page 4 outlet available to sellers is noted below: First Mortgage Pool (FMP) Program First Mortgage Pool Program Through May, 2011 The FMP program allows for a lender willing to keep 15% of each first mortgage to sell the remaining 85% to a pool originator. The pool originator will purchase and retain 5% of the loan and then sell the remaining 80% to investors who receive the benefit of the SBA guarantee. 95% The FMP program offers the most flexibility to sellers because it allows for the lender to drive the approval criteria. All property types are eligible except for some narrow restrictions (golf course, casino, aquarium, zoo, etc.). FMP sellers will normally receive both premium income (depending on terms of the note) and a minimum of 50 bps per year in servicing (the SBA mandated minimum). As a reminder, for a loan to be FMP eligible, the Debenture had to have funded in February of 2009 or later, the payment date must be on the first of the month, and the borrower must agree to ACH auto deduction by Colson Services. Zions First National Bank Zions is the oldest and most active secondary market buyer. Zions accepts primarily multi-purpose properties and some special purpose properties (restaurants, automotive). Zions will consider first mortgages up to $8MM with a target debt service coverage ratio of 1.20:1 or greater. Zions is not dependent on the FMP program and may utilize the program in the future to expand allowable property types. Morgan Stanley/CDC Direct Capital Morgan Stanley s 504 wholesale loan program is administered by 5% CDC Direct Capital. The program was launched at the beginning of Morgan s target maximum is $2,500,000, but they will consider loan requests up to $5MM in certain geographic regions. Morgan accepts multi-purpose properties only, but will consider restaurants or automotive repair facilities if the building is considered multi-purpose. The target debt service coverage ratio is 1.20:1 or greater. Morgan does not currently use the FMP program, nor do they envision doing so in the future. This means there is no restriction on the date of the loan or the payment date. Morgan purchases or direct-funds loans on a servicing released basis only. Horizon West/CDC Direct Capital Horizon Partners, in conjunction with CDC Direct Capital has created a new 504 wholesale program based on the FMP program. Horizon allows almost all property types including multi-purpose, hospitality, assisted living, restaurant, and other single purpose properties. For multi-purpose properties, Horizon allows for a debt service coverage ratio as low as 1:1 if the other facets of the application are strong and the trends are positive. Horizon s program is for whole loan sales or direct-funding only with servicing released. The below table summarizes each program: Continued on next page Fundings To Date Remaining Allocation Lender/Buyer FMP Zions Morgan Horizon Whole Loan Or Partial Partial 85% Whole Whole Whole Servicing Released Or Retained Released Released Released Retained By Seller Target Maximum Loan No maximum $8MM $3MM $5MM Amount Property Type All property types Multi-purpose, some Multi-purpose All property types limited purpose Last FYE DSCR Target 1:1, but like SBA, projections may be considered. 1.20:1 1.20:1 1:1 for multi-purpose, 1.20:1 all single and special purpose

5 S E C O N DA R Y M A R K E T A C C E S S... C O N T I N U E D Page 5 First mortgage lenders or Certified Development Companies interested in learning more about any of the programs above can contact Jordan Blanchard at CDC Direct Capital (jblanchard@cdcloans.com or ). Help With Settlement, Valuation and Accounting Government Loan Solutions has expanded their successful 7A valuation and settlement business to include FMP settlement for those entities that are pool originators. GLS currently offers the following services: Pool structuring Pool valuation Bid procurement Completion of SBA form 2401 for each loan, and 2403 for each pool Assistance with settlement through Colson Gain on sale calculation Servicing valuation FMP Tips by the September 2012, program termination date (if the FMP program is not extended). Secondary Market Access Secondary Market Access (SMA) is a network of CDC s and financial companies whose main goal is to provide secondary market solutions for 504 first mortgage lenders. Our Role Our website can be found at SMA has a solution for every lender need related to the new program, including: Sale of the 85% participation interest for premium and servicing income. Sale of the 80% participation interest for those banks who desire to be the Seller and the Pool Originator. Sale of the whole loan in situations where the lender is unable to retain any long term portion. Who we Are Take out commitments for construction loans are now available from at least one pool originator. But the commitment is conditional (among other things) on the loan being poolable. That means that construction would necessarily have to be completed by May or June of 2012 in order to pool the loan GLS is a leading consulting, outsourcing and financial asset valuation company to the small business lending community. GLS is a nationwide leader in the valuation of small business loans, servicing rights and securities. For more information about our services, please contact us at (216) , or at info@glsolutions.us. Non-Traditional 504 Loan Referral Program If you have a 504-eligible transaction that you are unable to fund for whatever reason, GLS can match you with another, non-competing lender looking to fund non-traditional 504 loans. This allows you to earn referral fees, while preserving the business relationship with the borrower. Program Overview: An outlet for those transactions that you typically would not fund. All commercial property types are eligible. Can accommodate projected income and inferior credit. Loan amounts up to $10 million with 30-year loan terms. Rate terms are quarterly adjustable, with a 5-year fixed rate option available. A referral fee for you on the first mortgage portion. For more information, please contact Bob Judge, GLS, at (216) ext. 133 or at bob.judge@glsolutions.us.

6 Page 6 Secondary Market Access Providing expertise in all areas of the new SBA 504 First Lien Pool Guaranty program, including: The source for accessing the SBA 504 Secondary Market Pooling Program. Pricing bids for existing loans Pricing strategies for new loans Accepting loan tapes for bid on 85% of eligible loans Whole loan sale option Assistance with becoming a Pool Originator If you are 504 lender and wish to discuss how we can help you access the 504 secondary market, please contact: Rob Herrick, GLS, at (216) ext. 144 or via at rob.herrick@glsolutions.us

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10 Page 10 T H E L E GA L B E AT KEY CHANGES TO THE SBA 504 TEMPORARY DEBT REFINANCING By Janet M. Dery, Esp. Since the SBA 504 Temporary Debt Refinancing Program (the "Program") was enacted on September 27, 2010, there have been revisions to its eligibility and closing requirements. These revisions have been made to attract lenders and businesses to consider this type of funding when a business is looking to refinance real estate or other fixed asset financing that was based on values that have declined due to the financial crisis. To assist lenders in understanding the revisions to the program, the following is a summary of the key changes made. Perhaps the most significant change made to the Program was the removal of the maturity date requirement. Prior to the notice, the maturity date of the note had to be no later than December 31, 2012 for a loan to be eligible for refinance under the Program. Unfortunately, that date limitation, along with the other eligibility requirements, severely restricted the number of loans that were eligible to be refinanced under the Program. While the SBA's rationale for the limitation (which was the desire to address those businesses that were most in need of assistance and facing potential foreclosure) was sound, the demand for the refinance of these loans was proved to be significantly lower than expected. The removal of the maturity date requirement opens the Program up to refinance any loan that meets the other eligibility requirements, whether the loan has a definitive maturity date or is just "on demand." This provides a much wider pool from which to find loans that meet the other eligibility requirements. Another significant change is the allowance of the modification or assignment of the loan documents for the existing debt instead of requiring all new executed loan documents to represent the new debt under the Program. If the loan to be refinanced under the Program is considered "Same Institution Debt", as defined in 13 CFR section (g)(15), then the permanent loan lender, also known as the "Third Party Lender", may modify its original loan documents to reflect the new loan amount. If the loan being refinanced is from another institution, then the SBA may permit that institution to assign its documents to the bridge loan lender, also known as the "Interim Lender", which can then be modified and/or further assigned to the Third Party Lender. The attraction of this revision is the potential for lower closing costs to Borrower. Through the modification or assignment of the original documents instead of new documentation, the Third Party Lender and/or Interim Lender can: (1) potentially reduce title costs, as only an update/modification to the existing policy rather than an entire new title policy may be required; and (2) lower filing fees as only minimal documentation will be filed to represent the refinance (such as an assignment of the existing lien document or a modification to the existing lien document) rather than filing of an entirely new lien document and the termination of the existing lien document. Also, if the real estate or fixed asset is located in a state that charges recordation taxes, the assignment of the lien documents may allow the Borrower to avoid paying duplicative recording taxes previously paid on the original debt. Lastly, when the loan to be provided under the Program is insufficient to refinance the entire outstanding debt, the holder of the existing debt is allowed to accept a new subordinate note from the borrower for the deficiency (the "Deficiency Note"). Originally, such Deficiency Note had to contain at the minimum a three year stand-by requirement. With the publishing of SBA Policy Notice , there is no longer an absolute requirement regarding the stand-by. Each time a Deficiency Note is considered, the CDC can make alternative recommendations to the SBA based on the borrower's cash flow and the credit risk involved. Then the SBA will determine on a case-by-case basis whether there should be any stand-by period and, if so, how long the stand-by period should be. The possibility that a Deficiency Note will not be put on stand-by at all can encourage the existing loan holder to cooperate in working with Borrower to have its debt refinanced under the Program. For more information on the 504 Debt Refinance Program requirements contact Janet at , or jdery@starfieldsmith.com.

11 Page 11 GLS 7(a) Sale & Settlement Tip # 33 Size does matter, part deux... We recently discussed the impact that loan size has on secondary market pricing and this issue of the CPR Report updates the numbers a bit. As a refresher, since all new deals being sold will be done under the new 1086 agreement with no warranty protection, investors are much more sensitive to their risk, particularly on larger loans. As a very general rule of thumb, loans with balances of $1mm or less should trade in parity with one another, all else being equal. For each additional $1mm in loan size, lenders should plan on seeing a one point reduction in their premium. At some point, it will be possible to break up larger loans which will alleviate this problem to a degree. Scott Evans is a partner at GLS. Mr. Evans has over 18 years of trading experience and has been involved in the SBA secondary markets for the last eight of those years. Mr. Evans has bought, sold, settled, and securitized nearly 20,000 SBA loans and now brings some of that expertise to the CPR Report in a recurring article called Sale and Settlement Tip of the Month. The article will focus on pragmatic tips aimed at helping lenders develop a more consistent sale and settlement process and ultimately deliver them the best execution possible. Increase your premium dollars by eliminating brokerage fees and selling your SBA and USDA Loans Investor Direct to Thomas USAF, America s largest direct investor. Contact Mike or Vasu at

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13 Page 13 G L S V A L U E I N D I C E S M O S T LY H I G H E R In March, the GLS Value Indices came in mostly higher for a second month in a row, with four out of six indices rising once again. The Base Rate / Libor spread was down 1 basis point to +2.95% and the prepayment element decreased in five out of six maturity categories, helping the overall rise in the indices. As can be seen from below, the secondary market was mostly unchanged in every maturity except 15 year paper. For this reason, all of the indices were very close to February levels. Turning to the specifics, the largest increase was seen in the GLS VI-1, which rose by 9% to 97 basis points. The other increases, by order of magnitude, were: VI-6 (+4% to 216), VI-3 (+2% to 132) and VI-2 (+.5% to 114). The two decreases were seen, again by order of magnitude, in VI-4 (-12% to 168) and VI-5 (-9% to 203). As mentioned last month, continued low prepayments and stability in the Prime/Libor relationship have pushed the secondary market into a tight trading range. As long as that recipe doesn t change, we should remain close to current levels into the future. For further information on the terminology and concepts used in this article, please refer to the Glossary and Definitions at the end of the report. Data on pages 15-16, Graph on page 17 7(a) Secondary Market Pricing Grid: March 2010 Maturity Gross Margin Net Margin Servicing 10 yrs. 15 yrs. 20 yrs. 25 yrs. 2.75% 2.75% 2.75% 2.75% 1.075% 1.075% 1.075% 1.075% 1.00% 1.00% 1.00% 1.00% This Month Last Month Price Price Signature Securities Group, located in Houston, TX, provides the following services to meet your needs: SBA Loans and Pools Assistance meeting CRA guidelines USDA B&I and FSA Loans Fixed Income Securities For more information, please call Toll-free Securities and Insurance products are: NOT FDIC INSURED NO BANK GUARANTEE MAY LOSE VALUE Signature Securities Group Corporation (SSG), member of FINRA/SIPC, is a registered broker dealer, registered investment advisor and licensed insurance agency. SSG is a wholly owned subsidiary of Signature Bank Mos. Ago Price 6-Mos. Ago Price 1-Yr. Ago Price

14 Page 14 F ALUTL T D EDFAE U R ARTAET ES LRII GS EHSTTLOY 5H. 9I6G%H E R The fourth month of 2011 saw the default rate tick slightly higher, but once again remain below 4% for the sixth month in a row. All told, it rose by 1% to 3.96% from 3.91% in March. Turning to the chart on the right, we see a leveling off of the default rate over the past five months after a significant fall from the 8% area. Again, a period of consolidation is not unexpected after such a significant decrease brought on by the end of the recession. With renewed economic growth having more than halved the default rate in the past year, current levels of growth do not seem to be enough to bring us down into the 2%-3% range of As evidence, the March reading moved above the 6-month moving average for the first time since June of last year. This would suggest that we could be in store for a period of flat to rising defaults, at least until economic growth returns to the +3% range that would signify a recovery worthy of the name. Until then, expect defaults between 3% and 4%. For further information on the terminology and concepts used in this article, please refer to the Glossary and Definitions at the end of the report. D E FA U L T - C U R TA I L M E N T R A T I O S In our Default-Curtailment Ratios (DCR) we witnessed a decrease in both the 504 and 7a DCRs last month. Please note that an increase in the DCR does not necessarily mean that the default rate is rising, only that the percentage of early curtailments attributable to defaults has increased. SBA 7(a) Default Ratios After nearly returning to the 60% level last month, we witnessed a 4% decrease in the 7(a) DCR to 56.90% in April from 59.02% in March. A small rise in defaults, combined with a more substantial increase in the voluntary prepayment component, led to the decrease in the ratio. Turning to actual dollar amounts, defaults rose by 3% to $120 million from $116 million. As for voluntary prepayments, they rose by 7% to $91 million versus $81 million the previous month. SBA 504 Default Ratios For the 504 DCR, we recorded a slight.5% decrease in the ratio to 65.99% in April from 66.33% in March. Both voluntary prepayments and defaults decreased in April, with defaults falling by a greater percentage than voluntary prepayments, thus lowering the 504 DCR. Specifically, the dollar amount of defaults decreased by $16 million to $114 million (-13%). As for voluntary prepayments, they fell by $7 million to $59 million (-11%). For further information on the terminology and concepts used in this article, please refer to the Glossary and Definitions at the end of the report. Graph on page 22 Summary At this point in time, we are seeing stability in both the 7(a) and 504 DCRs, as defaults have come under control and voluntary prepayments remain subdued. Until we see economic growth expand beyond the current 2% range, expect more of the same in future months. The Informational Source for 504 Pooling

15 Page 15 G L S V A L U E I N D I C E S : S U P P O R T I N G D A TA Table 1: MONTH Oct-07 Nov-07 Dec-07 Jan-08 Feb-08 Mar-08 Apr-08 May-08 Jun-08 Jul-08 Aug-08 Sep-08 Oct-08 Nov-08 Dec-08 Jan-09 Feb-09 Mar-09 Apr-09 May-09 Jun-09 Jul-09 Aug-09 Sep-09 Oct-09 Nov-09 Dec-09 Jan-10 Feb-10 Mar-10 Apr-10 May-10 Jun-10 Jul-10 Aug-10 Sep-10 Oct-10 Nov-10 Dec-10 Jan-11 Feb-11 Mar-11 BUCKET BUCKET BUCKET BUCKET BUCKET BUCKET 1 CPR 2 CPR 3 CPR 4 CPR 5 CPR 6 CPR 17.68% 16.02% 14.82% 18.87% 18.32% 24.16% 17.14% 15.38% 14.42% 17.22% 17.99% 23.23% 15.70% 14.68% 13.96% 16.44% 17.45% 22.00% 15.91% 13.98% 14.19% 16.20% 17.53% 21.19% 15.58% 13.42% 13.27% 15.08% 15.41% 19.34% 16.16% 13.40% 13.05% 14.59% 15.19% 18.74% 15.49% 12.93% 12.65% 13.77% 14.33% 17.33% 15.29% 13.36% 12.96% 14.75% 13.62% 17.14% 15.70% 13.03% 12.78% 14.40% 12.49% 16.59% 15.45% 13.28% 12.87% 13.73% 12.24% 15.89% 14.03% 12.49% 12.77% 13.28% 12.36% 15.20% 12.98% 11.67% 12.16% 12.13% 11.97% 14.06% 12.08% 12.36% 11.45% 11.49% 11.49% 13.22% 12.37% 11.81% 10.46% 9.79% 11.08% 11.41% 12.86% 11.55% 10.45% 9.29% 10.61% 10.40% 12.30% 11.30% 10.36% 8.39% 9.99% 9.30% 12.96% 11.97% 10.58% 8.57% 10.47% 8.79% 13.23% 12.34% 11.23% 8.75% 9.81% 8.55% 13.12% 11.89% 11.80% 8.68% 9.92% 7.98% 13.18% 11.85% 12.36% 8.57% 8.73% 8.02% 12.40% 12.00% 12.51% 8.56% 8.23% 7.36% 13.38% 12.49% 12.36% 8.01% 7.34% 7.21% 12.79% 11.01% 11.83% 7.48% 6.70% 6.89% 12.50% 11.03% 11.35% 7.25% 7.85% 6.79% 12.16% 10.89% 11.05% 6.96% 7.13% 6.32% 11.38% 11.20% 10.59% 7.09% 7.80% 5.75% 11.20% 10.69% 10.34% 6.99% 8.00% 5.75% 10.06% 9.97% 10.05% 7.33% 8.84% 5.71% 9.92% 10.73% 10.11% 7.12% 8.75% 5.75% 9.97% 10.45% 9.73% 7.34% 8.12% 5.32% 10.58% 11.09% 10.29% 7.88% 8.53% 5.86% 10.95% 11.18% 10.42% 7.83% 8.53% 6.38% 10.33% 11.15% 10.57% 7.13% 8.59% 7.48% 10.45% 11.02% 10.16% 7.38% 8.25% 7.60% 11.29% 10.76% 10.54% 7.48% 8.01% 7.70% 11.35% 10.06% 10.28% 7.27% 7.29% 7.84% 10.89% 8.48% 8.45% 7.30% 5.61% 7.11% 11.35% 8.77% 9.04% 7.01% 6.67% 7.45% 12.00% 8.87% 7.84% 7.49% 5.03% 5.96% 11.23% 9.01% 7.57% 7.22% 4.91% 5.53% 10.44% 8.86% 7.07% 7.20% 5.13% 5.37% Rolling six-month CPR speeds for all maturity buckets. Source: Colson Services

16 Page 16 GLS VALUE INDICES: HISTORICAL VALUES Table 2: MONTH Oct-07 Nov-07 Dec-07 Jan-08 Feb-08 Mar-08 Apr-08 May-08 Jun-08 Jul-08 Aug-08 Sep-08 Oct-08 Nov-08 Dec-08 Jan-09 Feb-09 Mar-09 Apr-09 May-09 Jun-09 Jul-09 Aug-09 Sep-09 Oct-09 Nov-09 Dec-09 Jan-10 Feb-10 Mar-10 Apr-10 May-10 Jun-10 Jul-10 Aug-10 Sep-10 Oct-10 Nov-10 Dec-10 Jan-11 Feb-11 Mar-11 WAVG LIBOR 5.05% 4.96% 5.02% 3.77% 3.10% 2.90% 2.81% 2.78% 2.67% 2.75% 2.74% 3.00% 4.43% 2.06% 1.64% 1.11% 1.15% 1.06% 0.96% 0.70% 0.55% 0.48% 0.39% 0.29% 0.26% 0.26% 0.25% 0.25% 0.25% 0.26% 0.29% 0.41% 0.52% 0.46% 0.33% 0.28% 0.28% 0.27% 0.30% 0.29% 0.29% 0.30% WAVG BASE 7.74% 7.50% 7.35% 6.86% 6.00% 5.95% 5.25% 5.15% 5.00% 5.00% 5.02% 5.00% 4.56% 4.00% 3.89% 3.28% 3.26% 3.24% 3.23% 3.26% 3.26% 3.30% BASE LIBOR SPD 2.69% 2.54% 2.33% 3.09% 2.90% 3.05% 2.44% 2.37% 2.33% 2.25% 2.27% 2.00% 0.12% 1.94% 2.25% 2.14% 2.10% 2.19% 2.32% 2.57% 2.70% 2.77% 2.86% 2.96% 2.99% 2.99% 3.00% 2.99% 2.99% 2.99% 2.96% 2.84% 2.73% 2.80% 2.93% 2.97% 2.97% 2.98% 3.00% 2.96% 2.96% 2.95% INDICES LEGEND GLS VI GLS VI GLS VI GLS VI GLS VI GLS VI values for all maturity buckets for last 42 months. GLS VI HIGHEST READING LOWEST READING

17 Page 17 Government Loan Solutions The nationwide leader in the valuation of SBA and USDA assets. GLS provides valuations for: SBA 7(a), 504 1st mortgage and USDA servicing rights SBA 7(a) and 504 1st mortgage pools Guaranteed and non-guaranteed 7(a) loan portions Interest-only portions of SBA and USDA loans In these times of market uncertainty, let GLS help you in determining the value of your SBA and USDA related-assets. For further information, please contact Rob Herrick at (216) ext. 144 or at

18 Page 18 Y T D P R E PA Y M E N T S P E E D S Table 3: CPR/MO. Jan-11 Feb-11 Mar-11 Apr-11 Grand Total < % 5.96% 10.25% 11.80% 10.61% % 9.95% 7.41% 11.75% 9.56% % 6.43% 7.63% 9.34% 7.59% % 5.52% 5.62% 5.83% 5.96% % 5.78% 8.43% 4.09% 5.54% % 5.02% 5.47% 5.21% 5.24% ALL 6.13% 5.74% 6.40% 6.70% 6.25% 2011 monthly prepayment speeds broken out by maturity sector. Source: Colson Services Table 4: POOL AGE Jan-11 Feb-11 Mar-11 Apr-11 <8 22 Mos. 22 Mos. 23 Mos. 23 Mos Mos. 30 Mos. 31 Mos. 31 Mos Mos. 32 Mos. 33 Mos. 33 Mos Mos. 66 Mos. 66 Mos. 67 Mos Mos. 50 Mos. 50 Mos. 49 Mos pool age broken out by maturity sector. Source: Colson Services Mos. 51 Mos. 50 Mos. 49 Mos. ALL 45 Mos. 45 Mos. 45 Mos. 45 Mos.

19 Page 19 Y E A R - T O - D A T E C P R D A TA Table 5: < 8 BY AGE Jan-11 Feb-11 Mar-11 Apr-11 Grand Total 0-12 Mos. 8.14% 6.33% 10.15% 5.53% 7.58% Mos % 2.69% 5.53% 13.80% 11.89% Mos % 5.40% 11.73% 17.17% 13.44% Mos % 4.49% 7.38% 7.29% 7.51% 48+ Mos % 12.63% 19.55% 21.62% 17.26% BY AGE Jan-11 Feb-11 Mar-11 Apr-11 Grand Total 0-12 Mos. 4.90% 4.49% 7.41% 8.89% 6.44% Mos. 6.31% 10.85% 10.03% 8.78% 9.01% Mos % 8.56% 9.38% 13.52% 10.92% Mos. 6.54% 4.39% 7.84% 9.57% 7.09% 48+ Mos. 5.14% 5.93% 4.86% 7.32% 5.84% BY AGE Jan-11 Feb-11 Mar-11 Apr-11 Grand Total 0-12 Mos. 3.22% 0.76% Mos. 7.24% 4.73% 4.01% 7.38% 5.82% Mos. 8.01% 9.77% 19.91% 4.96% 10.85% Mos. 2.83% 14.87% 8.32% 2.08% 7.24% 48+ Mos. 2.85% 1.78% 7.84% 5.51% 4.53% 8-10 BY AGE Jan-11 Feb-11 Mar-11 Apr-11 Grand Total 0-12 Mos. 2.09% 0.48% 1.99% 10.70% 3.73% Mos % 18.09% 9.13% 16.95% 13.82% Mos % 9.47% 8.29% 10.14% 10.22% Mos. 4.62% 9.90% 6.50% 9.51% 7.80% 48+ Mos % 7.17% 9.50% 8.34% 9.22% BY AGE Jan-11 Feb-11 Mar-11 Apr-11 Grand Total 0-12 Mos % 1.76% 4.64% Mos % 2.76% 2.77% 2.81% 8.51% Mos. 5.65% 12.71% 24.05% 10.55% Mos. 9.95% 17.31% 12.38% 9.86% 48+ Mos. 5.93% 3.99% 5.19% 6.51% 5.40% 20+ BY AGE Jan-11 Feb-11 Mar-11 Apr-11 Grand Total 0-12 Mos. 2.78% 2.22% 2.82% 1.86% 2.41% Mos. 5.44% 8.00% 5.10% 4.97% 5.90% Mos. 6.82% 5.69% 11.55% 6.44% 7.73% Mos. 9.07% 5.72% 6.27% 8.12% 7.31% 48+ Mos. 4.80% 4.78% 5.18% 5.74% 5.13% 2011 YTD CPR by maturity and age bucket. Source: Colson Services

20 Page 20 GLOSSARY AND DEFINITIONS: PART 1 Default-Curtailment Ratio The Default-Curtailment Ratio (DCR), or the percentage of secondary loan curtailments that are attributable to defaults, can be considered a measurement of the health of small business in the U.S. GLS, with default and borrower prepayment data supplied by Colson Services, has calculated DCRs for both SBA 7(a) and 504 loans since January, The default ratio is calculated using the following formula: Defaults / (Defaults + Prepayments) By definition, when the DCR is increasing, defaults are increasing faster than borrower prepayments, suggesting a difficult business environment for small business, perhaps even recessionary conditions. On the flip side, when the DCR is decreasing, either defaults are falling or borrower prepayments are outpacing defaults, each suggesting improving business conditions for small business. Our research suggests that a reading of 20% or greater on 7(a) DCRs and 15% or greater on 504 DCRs suggest economic weakness in these small business borrower groups. Theoretical Default Rate Due to a lack of up-to-date default data, we attempt to estimate the current default rate utilizing two datasets that we track: 1. Total prepayment data on all SBA pools going back to This is the basis for our monthly prepayment information. Total prepayment data on all secondary market 7(a) loans going back to 1999, broken down by defaults and voluntary prepayments. This is the basis for our monthly default ratio analysis. With these two datasets, it is possible to derive a theoretical default rate on SBA 7(a) loans. We say theoretical because the reader has to accept the following assumptions as true: 1. The ratio of defaults to total prepayments is approximately the same for SBA 7(a) pools and secondary market 7(a) loans. Fact: 60% to 70% of all secondary market 7(a) loans are inside SBA pools. The default rate for secondary market 7(a) loans closely approximates the default rate for all outstanding 7(a) loans. Fact: 25% to 35% of all outstanding 7(a) loans have been sold into the secondary market. While the above assumptions seem valid, there exists some unknown margin for error in the resulting analysis. However, that does not invalidate the potential value of the information to the SBA lender community. The Process To begin, we calculated total SBA pool prepayments, as a percentage of total secondary loan prepayments, using the following formula: Pool Prepay Percentage = Pool Prepayments / Secondary Loan Prepayments This tells us the percentage of prepayments that are coming from loans that have been pooled. Next, we calculated the theoretical default rate using the following equation: ((Secondary Loan Defaults * Pool Prepay Percentage) / Pool Opening Balance) * 12 This provides us with the theoretical default rate for SBA 7(a) loans, expressed as an annualized percentage. 2. GLS Long Value Indices Utilizing the same maturity buckets as in our CPR analysis, we calculate 6 separate indexes, denoted as GLS VI-1 to VI-6. The numbers equate to our maturity buckets in increasing order, with VI-1 as <8 years, VI-2 as 8-10 years, VI-3 as years, VI-4 as years, VI-5 as years and ending with VI-6 as 20+ years. The new Indices are basically weighted-average spreads to Libor, using the rolling six-month CPR for pools in the same maturity bucket, at the time of the transaction. While lifetime prepayment speeds would likely be lower for new loans entering the secondary market, utilizing six-month rolling pool speeds allowed us to make relative value judgments across different time periods. We compare the bond-equivalent yields to the relevant Libor rate at the time of the transaction. We then break the transactions into the six different maturity buckets and calculate the average Libor spread, weighting them by the loan size. For these indices, the value can be viewed as the average spread to Libor, with a higher number equating to greater value in the trading levels of SBA 7(a) loans.

21 Page 21 GLOSSARY AND DEFINITIONS: PART 2 Prepayment Calculations SBA Pool prepayment speeds are calculated using the industry convention of Conditional Prepayment Rate, or CPR. CPR is the annualized percentage of the outstanding balance of a pool that is expected to prepay in a given period. For example, a 10% CPR suggests that 10% of the current balance of a pool will prepay each year. When reporting prepayment data, we break it into seven different original maturity categories: <8 years, 8-10 years, years, years, years and 20+ years. Within these categories we provide monthly CPR and YTD values. In order to get a sense as to timing of prepayments during a pool s life, we provide CPR for maturity categories broken down by five different age categories: 0-12 months, months, months, months and 48+ months. As to the causes of prepayments, we provide a graph which shows prepayment speeds broken down by voluntary borrower prepayment speeds, denoted VCPR and default prepayment speeds, denoted as DCPR. The formula for Total CPR is as follows: Total Pool CPR = VCPR + DCPR SBA Libor Base Rate The SBA Libor Base Rate is set on the first business day of the month utilizing one-month LIBOR, as published in a national financial newspaper or website, plus 3% (300 basis points). The rate will be rounded to two digits with.004 being rounded down and.005 being rounded up. Please note that the SBA s maximum 7(a) interest rates continue to apply to SBA base rates: Lenders may charge up to 2.25% above the base rate for maturities under seven years and up to 2.75% above the base rate for maturities of seven years or more, with rates 2% higher for loans of $25,000 or less and 1% higher for loans between $25,000 and $50,000. (Allowable interest rates are slightly higher for SBAExpress loans.) Risk Types The various risk types that impact SBA pools are the following: Basis Risk: The risk of unexpected movements between two indices. The impact of this type of risk was shown in the decrease in the Prime/Libor spread experienced in 2007 and Prepayment Risk: The risk of principal prepayments due to borrower voluntary curtailments and defaults. Overall prepayments are expressed in CPR, or Conditional Prepayment Rate. Interest Rate Risk: The risk of changes in the value of an interest-bearing asset due to movements in interest rates. For pools with monthly or quarterly adjustments, this risk is low. Credit Risk: Losses experienced due to the default of collateral underlying a security. Since SBA loans and pools are guaranteed by the US government, this risk is very small. Secondary Market First Lien Position 504 Loan Pool Guarantee Program As part of the American Recovery and Reinvestment Act (AKA the Stimulus Bill), Congress authorized the SBA to create a temporary program that provides a guarantee on an eligible pool of SBA 504 first liens. The program was authorized for a period of two years from the date of bill passage February, The eligibility of each loan is dependent on the date of the SBA Debenture funding. To be eligible, the Debenture must have been funded on or after February 17, 2009, and prior to February 16, The total guarantee allocation is $3 Billion. HR 5297 provides for a two-year extension from the first pooling month. The SBA announced that they will begin issuing the first pool guarantees in September, 2010 for early October settlement. For the purposes of the program, a pool is defined as 2 or more loans. A pool must be either fixed (for life) or adjustable (any period adjustment including 5 or 10 years). If the pool is comprised of adjustable rate loans, all loans must have the same base rate (e.g. Prime, LIBOR, LIBOR Swaps, FHLB, etc.). Finally, each loan must be current for the lesser of 6 months or from the time of loan funding. Congress mandated that this be a zero subsidy program to the SBA (and the US taxpayer). The SBA has determined the program cost (management and expected losses) can be covered by an ongoing subsidy fee of.167%.

22 Page 22 Government Loan Solutions The nationwide leader in the valuation of SBA and USDA assets. GLS provides valuations for: SBA 7(a), 504 1st mortgage and USDA servicing rights SBA 7(a) and 504 1st mortgage pools Guaranteed and non-guaranteed 7(a) loan portions Interest-only portions of SBA and USDA loans In these times of market uncertainty, let GLS help you in determining the value of your SBA and USDA related-assets. For further information, please contact Rob Herrick at (216) ext. 144 or at

23 Page 23 Powered By: Phone: (216) Fax: (216) Web Site: G o v er nm en t Lo a n S o lu t io n s 812 Huron Road Cleveland, OH Partners Scott Evans Bob Judge Rob Herrick CPR Report Staff: Robert E. Judge II, Production Assistant Government Loan Solutions, Inc. (GLS) was founded by three former Bond Traders in Cleveland, OH. Scott Evans, Rob Herrick and Bob Judge possess a combined 70 years experience in the institutional fixed income markets, 40 of which are in the loan securitization business. GLS formally began operations in January, Our mission is as follows: The purpose of Government Loan Solutions is to bring greater efficiency, productivity and transparency to the financial markets. Through the use of proprietary technology, we intend to aid lenders in all aspects of their small business lending, help loan securitizers be more productive in their operational procedures and provide quality research to the investor community. Services available include: Lenders: Manage loan sales to the secondary market Process loan settlements via our electronic platform, E-Settle Third-Party servicing and non-guaranteed asset valuation Model Validation Specialized research projects Mortgage Servicing Valuation Loan Securitizers: Manage loan settlements and pool formation Government Loan Solutions CPR Report is a monthly electronic newsletter published by Publishing. The opinions, unless otherwise stated, are exclusively those of the editorial staff. This newsletter is not to be reproduced or distributed in any form or fashion, without the express written consent of or Government Loan Solutions. Government Loan Solutions CPR Report is distributed in pdf format via . Spreadsheets relating to the presented data are available to paid subscribers upon request. The subscription to the Government Loan Solutions CPR Report is free to all members of the SBA Community. To subscribe, please contact at (800) or via at: bob@colemanpublishing.com Loan and IO accounting Loan, Pool and IO Mark-To-Market Specialized research projects Institutional Investors: Loan, Pool, and IO Mark-To-Market Specialized research projects Portfolio consulting For additional information regarding our products and capabilities, please contact us at: Phone: (216) at: info@glsolutions.us web: EDITORIAL DISCLAIMER DISCLAIMER OF WARRANTIES GOVERNMENT LOAN SOLUTIONS (GLS) MAKES NO REPRESENTATIONS OR WARRANTIES REGARDING THE ACCURACY, RELIABILITY OR COMPLETENESS OF THE CONTENT OF THIS REPORT. TO THE EXTENT PERMISSIBLE BY LAW, GLS DISCLAIMS ALL WARRANTIES, EXPRESS OR IMPLIED, INCLUDING BUT NOT LIMITED TO IMPLIED WARRANTIES OF MERCHANTABILITY AND FITNESS FOR A PARTICULAR PURPOSE. Limitation of Liability - GLS shall not be liable for damages of any kind, including without limitation special or consequential damages, arising out of your use of, or reliance upon, this publication or the content hereof. This Report may contain advice, opinions, and statements of various information providers and content providers. GLS does not represent or endorse the accuracy or reliability of any advice, opinion, statement or other information provided by any information provider or content provider, or any user of this Report or other person or entity. Reliance upon any such opinion, advice, statement, or other information shall also be at your own risk. Prior to the execution of a purchase or sale or any security or investment, you are advised to consult with investment professionals, as appropriate, to verify pricing and other information. Neither GLS, its information providers or content providers shall have any liability for investment decisions based upon, or the results obtained from, the information provided. Neither GLS, its information providers or content providers guarantee or warrant the timeliness, sequence, accuracy, or completeness of any such information. Nothing contained in this Report is intended to be, nor shall it be construed as, investment advice.