The September expiration date for the Small Business Administration's (SBA) secondary market program for the first lien position means that first mortgages will no longer be eligible for a government guarantee.

But a securitization market source said that there is some activity afoot to develop a mechanism for a private-label securitization of those first mortgage loans on a general programatic basis.  

"There are several parties working on providing a mechanism that take the place of the guarantee that the SBA had been giving under the expired legislation, that is a trend that might occur in the next year," said the source, who works on the structuring side.

The SBA, under its 504 program, has typically provided financing on a second mortgage basis. The first mortgage involved, for the same business, is funded via the private sector. Under the American Recovery and Reinvestment Act of 2009, the SBA was temporarily allowed to provide a guarantee for the first mortgage loan, as well as the secondary loan.

Another market source familiar with the SBA's first mortgage loan program [FMLP] said that in June 2012 thirteen pools formed for $53 million. He estimated that the total amount  outstanding is close to $1.2 billion to $1.3 billion out of a potential $3 billion that the program was authorized to guarantee.

"The industry is interested in averting a situation where the September deadline is reached for the program authorization and the SBA is no longer able to do these deals," said the source familiar with the SBA program. "There is a lot of initiative currently on Capitol Hill advocated by those within the industry to extend or to find a way to provide continued financial support for these pools at least until the $3bn that was ear marked for this program is utilized."

However, the program is still set to end on Sept. 22 and at this point Congress has not made any indication that it intends to alter the program and the fund.

"Most of the principles that have worked on the originating these first lien mortgages are working in earnest to preserve the program as opposed to looking to securitizing the first mortgage loan," the source said. "That being said, the model has been formed in this government program and it would only take a very shrewd private investor to be able to replicate much of what we have done here in developing a securitization instrument that operates somewhat like the mechanics on the first mortgage loan program."

The securitization market source said the same parties involved in making the first mortgage loans under the 504 program are the ones that are working on setting up a mechanism that would take the place of the SBA guarantee that was provided for in the legislation.   

"The SBA program wasn't that large but there is a potential of about  $6bn in first mortgages that will happen in the fiscal year 2012 that would potentially be available for the securitization program," the source stated.

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