Loan originations under the 504 loan program are proceeding at a considerably slower pace in this year than the blistering start of the SBA’s fiscal year 2022.
Still, originations, are comparable to other recent years, while far below the pace set at the start of last year. 504 loan originations are down 44.5% compared to FY2022, though they are down just 6.8% compared to the same period on FY2021. We believe this slowdown is primarily due to the rapidly rising interest rate environment and fears of a recession. Unpaid Principal Balance of SBA 504 loans stood at $30.87 billion as of September 30, 2022, up 6.7% compared to the $28.94 billion figure at year-end FY2021. Unlike SBA 504 loans, SBA 7(a) loan originations are doing quite well so far in FY2023. In fact, 7(a) loans have jumped 52.5% compared to the previous year. The unpaid principal balance of 7(a) loans is $107.14 billion at September 30, 2022, up 3.1% compared to year-end FY2021.
The 7(a) program has shown steady growth in loan outstandings in recent years that continued through the end of FY2022 (3.1% in FY2022, 6.8% in FY2021, and 2.3% in FY2020). 504 loans have shown accelerating growth, rising 6.7% to $30.9 billion at year-end FY2022, 6.4% in FY2021, and 5.5% in FY2020. Of course, the published 504 loan figures in the chart above include only the CDC/SBA second lien portion of a 504 loan package, If we include the private lender portion of the same loan projects, which typically accounts for roughly 50% of 504 projects, The total for SBA 504 loan outstandings (1st and 2nd liens combined) would be somewhere in the neighborhood of $69 billion, still below 7(a) totals, but equal to approximately 65% of the 7(a) balance.
Charge-off rates for the major SBA loan programs remain very low. The chart to the left shows charge-off rates for the CDC/SBA-held second lien position (504 Regular), as well as charge-off rates in the short-lived FMLP program (504 First Lien), authorized in 2009 and ending in 2012. This program held pools of 504 first liens. While accurate data on the privately-held 504 first lien loans is not available, the fact that these loans are in a last loss position after the second lien loans leads to a presumption that charge-off rates would be considerably lower than for the second lien loans.