THERE ARE THREE MAIN BENEFITS OF SELLING USDA LOANS IN THE SECONDARY MARKET
RECYCLE LIQUIDITY
Provides capital to make the next loan. This may not be a consideration for regional or money center banks, but small community banks originate most government guaranteed loans.
MAKE A PROFIT
The income can be upfront in the form of a premium and ongoing in the form of a servicing fee. The prepayment penalty, size of the loan, term, rate reset frequency, index and spread determine the amount of premium paid.
PERFECT THE GUARANTEE
USDA’s guarantee on a commercial loan is conditional. It’s issued in lieu of the lender signing an agreement with the agency to originate, service and liquidate loans in conformity with regulations. By selling the guaranteed portion in the secondary market to a holder, lenders perfect the guarantee as rights of a holder are not contestable.
PROFIT POTENTIAL IN A USDA LOAN
LOAN AMOUNT
$5,000,000
GUARANTEE %
80%
GUARANTEED PORTION
Prime + 1.5% (MONTHLY PAY/QUARTERLY ADJUST)
SF RETAINED
0.25%
NET RATE PASSED THROUGH TO HOLDER
Prime +1.25%
TERM
25 YEARS
PREPAYMENT PENALTY
10,9,8,7,6,5,4,3,2,1
PREMIUM
15%
PAR VALUE OF GUARANTEED PORTION
$4,000,000
PREMIUM
600,000 ONE TIME UPFRONT INCOME=13.5% OF $ 4,000,000
ONGOING ANNUAL SERVICE INCOME
10,000 ONGOING INCOME- 0.25% OF $ 4,000,000
INCOME ON UNGUARANTEED
65,000 (ASSUME PRIME=5.25%= 6.5%*1,000,000
TOTAL FIRST YEAR INCOME
$675,000
RETURN ON INVESTMENT
FIRST YEAR INCOME AS %AGE OF DOLLARS INVESTED
67.5% ($ 675,000/$ 1,000,000)
BEYOND YEAR 1
7.5% ($ 10,000+$ 65,000)/$ 1,000,000