Understanding Rising Default Rates

SBA Defaults Are Spiking In 2024, SBA loan defaults shot up big time. For the first time in 13 years, the program actually lost money—over $1.6 billion in defaults, leading to a $370 million negative cash flow. Early defaults (within the first 18 months) have tripled since 2022, now over 1%. (Barron’s) So, what’s driving all these SBA loan failures? 🔹 People Buying Businesses with No Money Down Let’s be real—too many people got suckered into the “buy a business with no money down” dream. They took on way too much debt and had zero cushion when things went sideways. Overleveraging is a fast track to default. 🔹 Fintech Lenders Handing Out SBA Loans Like Candy Fintech companies made it easier to get SBA loans, which sounds great—until you realize they also loosened credit standards. Now, a bunch of people who probably shouldn’t have gotten approved are struggling to keep up. (Barron’s) 🔹 Higher Delinquency Rates from Fintech Loans Fintech loans have almost double the delinquency rate of traditional banks. After 15 months, fintech lenders see a 3.53% delinquency rate, compared to 1.77% for traditional lenders. (The Financial Brand) 👉 What This Means If You’re Looking to Buy a Business 🚫 No Money Down = Bad Idea It sounds great, but most people who try it end up drowning in debt. If you don’t have skin in the game, you’re taking a huge risk. 💰 Be Careful Where You Borrow If a fintech lender is giving you money that a bank wouldn’t, ask yourself why. Higher interest rates and looser requirements often mean higher default risk. 🚨 Bottom Line: The SBA loan game is shifting. Don’t get caught up in bad financing deals just because someone on the internet told you it’s “easy” to buy a business with no money. Sadly, it turns out buying a no money down, absentee owner business actually takes money and time Sources: 🔹 SBA Loan Defaults Rising – Barron’s 🔹 Fintech Lending & Higher Default Rates – The Financial Brand.

“We’re likely at the start of a three-year cycle of increasing multifamily distress.” That’s according to Mark Silverman, leader of Locke Lord’s CMBS Special Servicer Group. According to data from Trepp, the multifamily delinquency rate in August rose to a 3-year high of 3.30%, 73% higher than the delinquency rate at the beginning of 2024. Likewise, the multifamily special servicing rate hit a 9-year high of 5.71%. What’s driving these challenges in the multifamily sector? Debt Maturities + Rising Interest Rates: A large volume of multifamily loans are coming due, with many of these loans originated at much lower interest rates. With rates now significantly higher, property owners face the challenge of refinancing at more expensive terms. This is causing sharp liquidity constraints. Increasing Operational Expenses: Operating expenses have been rising, driven particularly by higher insurance costs, as well as inflationary pressures affecting maintenance, utilities, and staffing. These rising costs are reducing margins for property owners. Softening Rent Growth: The multifamily market is also facing rent stagnation in certain areas due to a combination of factors, including a surge in new supply. As more units come online, especially in already saturated markets, landlords are struggling to increase rents at the pace needed to offset rising costs. With nearly half of the sector's $1.1 trillion in loans maturing in the next five years and over $150 billion due by 2025, the sector faces growing financial strain. Owners who can't refinance or sell may be forced to renegotiate terms or risk default, contributing to the growing distress in the market. While this is not necessarily a time to be sounding alarm bells, it is an opportunity for savvy buyers to capitalize on what should amount to a growing pool of properties ripe for repositioning.

Barrons: SBA Loans Are Going Bad. A New Risk Analysis Gives Details: 1) Barrons: To start, the SBA 7(a) acquisition data has to exclude the PPP Loan Data - Everyone applied for the PPP Program - it was a challenging time for a lot of SMBs but PPP Loans are a distant category from a profitable loan underwritten by a bank when it comes to the program to be properly judged on its profitability. PPP should be excluded. - The PPP Loan Data increased the SBA Agency’s loan book balance by 30x - its not fair to include that disaster funding in the numbers to make losses appear higher (Source: Barron's ) 2) Lumos Data: For another data source, including data on defaults for SBA 7(a) acquisitions from Lumos Data - also showing a rise in defaults but numbers driven: - Lumos Data shows a Default rate of 3.69% for 2024 - Shows uptick in default rates from 2017-2018 loan vintage above 5% - Year 3 tends to be the make or break year - As borrowers with lower rates have now seen rates rise 3% - 5% for a sustained period - Given it is variable rate debt, the rise of 5% has directly impacted a number of borrowers 3) Default Rates: To try and put context around this default rates, below are some estimates on personal credit card and high yield bond defaults. - Personal Credit Cards: 3% - 8% Default Rates - High Yield Default: 3% - 5% Default Rates - Lumos Data on SBA: 3.69% Default Rates Personal credit card on the better end is 3-4% which is in line (for now) with the Lumos Data is how we look at the data. Given the personal guarantee by the borrower. Some of the rise is expected as rates have remained elevated for longer. And in the short term default rates may remain elevated. But to start - important to remove any PPP Loan Data to fairly judge the program. It’s 30x the loan book value completely washing out the data. What other sources are out there on SBA Defaults?