Treasury Moves to Break Logjam in Secondary Credit Markets

Aiming to get loans flowing to small businesses, the U.S. Treasury will start gobbling up securities backed by Small Business Association loans by the end of this month.

The Treasury Department announced today that by the end of March it will start buying securities backed by Small Business Administration loans. The reason? To unblock secondary markets for such loans in order to pump liquidity into local banks and get credit “flowing again to entrepreneurs and business owners.”

Treasury says it’s hired an investment manager who will be authorized to buy securities backed by parts of loans packaged on or after July 1, 2008.  The so-called “7(a) loans,” partially guaranteed by the SBA, are issued by banks to small businesses to support their operations.

Buying up securities “will help clear the backlog of securities that has built up since the beginning of the credit crisis last year, providing pool assemblers and banks with a source of liquidity so that new lending can occur,” according to the announcement by Treasury.

Further, Treasury said it would “stand ready to purchase new securities to ensure that community banks and credit unions feel confident in extending new loans to local businesses.” Between now and when its authority under the Emergency Economic Stabilization Act  authority expires on December 31, Treasury will buy new securities backed by the guaranteed pieces of 7(a) loans.

“By making this pledge, Treasury provides assurances to community banks and other lenders that they can sell the new 7(a) loans they make, providing them with cash they can use to extend even more credit,” according to the department’s statement.

In another move aimed at unlocking credit markets, Treasury also plans to make direct purchases of securities linked to SBA’s 504 Community Development Loan Program. The program melds government-backed loans with mortgage loans originated by private lenders to supply long-term financing of up to $10 million that “directly supports economic development within a community.”

The SBA has also temporarily eliminated fees for borrowers and third-party lenders on its 504 Certified Development Company Loans. The loans provide long-term, fixed-rate financing for the major fixed assets of growing small businesses. Those assets include land, buildings, and machinery and equipment.

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