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Prices are like interest rates. They are either going to go up, go down or stay the same. The Federal Reserve actually believes prices and interest rates are kind of the same thing. Congress explicitly stated the Fed's goals should be "maximum employment, stable prices, and moderate long-term interest rates." It is these goals that came to be known as the Fed's "dual mandate". Wait a minute. Employment, stable prices, and moderate long-term interest rates are three things. How could this be a “dual” mandate? Ensuring stable prices and moderate long-term interest rates are interpreted as a single mandate. That's because long-term nominal interest rates are set with inflation expectations in mind. For any given nominal interest rate, rapidly rising prices diminish the real interest rate that lenders receive and debtors must pay. Thus, in an unstable monetary environment with rapidly rising prices, lenders will want to charge much higher interest rates to mitigate the inflation-rate risk. Borrowers and astute lenders often mitigate long-term interest rate risk by utilizing the SBA 504 loan program for real estate purchase, real estate debt refinance and construction projects. The 504 loan is a second trust deed from SBA typically for 40% of the project. The 504 loan offers a very attractive long-term fixed interest rate. This rate to the borrower however is not established until the actual loan is pooled and sold with other loans to investors on a monthly basis. These sales are to investors that actually fund the SBA 504 loan program. The loans are pooled and sold the first Thursday of the first full week of each month. As a result, a borrower will not know what his actual 504 loan rate is until well after he is committed to the transaction. With the initial gathering of information, the turnaround at SBA to approve the 504 loan and then waiting for the sale of the 504 loans, it could be many months. Currently, the *effective yield on a 504 loan is 5.11%. Six months ago, it was only 3.07%. Lenders provide an interim second trust deed that will paid down by the 504 loan. The lender is at risk for their high LTV second until then. One way to mitigate the risks and uncertainty inherent with this interim financing prior to the SBA 504 loan paydown is to utilize a guarantee through the Small Business Loan Guarantee Program. This guarantee is available for the interim period and if necessary, can be termed out if for some reason the 504 loan paydown is delayed or never occurs. *effective yield – There are three different rates with a 504 loan: Debenture rate (yield to buyer paid semi-annually), Note rate (monthly payment by the borrower), and Effective yield (on-going fees paid). Technically the quote should have been, the debenture rate is only 3.93% but note rate is 3.97598% and the effective yield is 5.11%.
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