The Federal Reserve Board announced plans Tuesday to create a $200 billion lending facility aimed at unfreezing secondary markets for Small Business Administration loans and consumer loans.
Under the program, loans will be made to holders of asset-backed securities collateralized by SBA-guaranteed loans, student loans, auto loans and credit card loans. This will provide liquidity to issuers of these securities, Treasury Secretary Henry Paulson said, enabling “a broad range of institutions to step up their lending” and “enabling borrowers to have access to lower-cost consumer finance and small business loans.”
To support the program, the Treasury Department will provide the Federal Reserve with $20 billion in credit protection from its remaining Troubled Asset Relief Program funds.
Secondary markets for both SBA loans and consumer loans have frozen in recent months.
“As a result, millions of Americans cannot find affordable financing for their basic credit needs,” Paulson said.
The inability of SBA lenders to sell their loans on the secondary market is one reason why the volume of 7(a) loans made so far this fiscal year, which began Oct. 1, is 55 percent below the same period a year earlier. Other reasons, according to the SBA, are reduced demand for credit and tighter lending standards.
In normal times, lenders sell 40 percent or more of the loans made through the SBA’s 7(a) business loan program as pooled securities. Today, however, that secondary market is not available to SBA lenders. The inability to sell their existing SBA loans has left many lenders without sufficient capital to make new SBA loans.
The health of the SBA’s 7(a) loan program is important because it’s a major source of long-term financing for small businesses. The government guarantee on SBA loans — which can range up to 85 percent of the loan amount — enables lenders to provide financing to small businesses that wouldn’t qualify for conventional loans.
Without a secondary market, however, many lenders have downsized their SBA departments, temporarily stopped making SBA loans “or have just flat out quit” the program, said Tony Wilkinson, president of the National Association of Government Guaranteed Lenders.
During his Tuesday press conference, Paulson said the new asset-backed securities lending facility may be expanded in the future to include commercial mortgage-backed securities.
Paulson said the federal government now has the tools it needs to get credit flowing again, but “it will take a while to do that.”
President-elect Barack Obama’s choice to head the Treasury Department, Timothy Geithner, worked on the asset-backed securities plan in his current capacity as president of the Federal Reserve Bank of New York.
“He was working right with us all weekend,” Paulson said.
Paulson said he will work “seamlessly with the next administration” to ensure a smooth transition, but he has no plans to ease back on his job over the next two months.
“I am going to run right to the end,” Paulson said.
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