Your Slice of Stimulus

For most individuals and small businesses, the easiest way to benefit from the stimulus efforts is to borrow. Whether it be refinancing a home mortgage or applying for a SBA loan, their has never been a better time to access cheap debt. 30 year fixed rate mortgages are under 5% and SBA loan fees, which can be 2-3% of the principal amount have been waived until years-end. The absence of fees and increase of federal guarantees to 90% LTV through the end of this year makes the 7(a) and 504 programs very attractive sources of financing. 504 loans can be 20-year amortizations with rates below 5.5%.

The Fed's balance sheet has grown well over a trillion dollars over the past year in an effort to stabilize credit markets and keep capital accessible. The Fed owns $692B of mortgage back securities and represents over 70% of this market's activity. Fed activity combined with huge inflows of private money into short-term bond funds continues to keep rates down. If there is inflation anywhere, it exists in fixed income assets. Money market funds yield near zero, high yield bond spreads are below pre-Lehman levels and some Bond ETF's are trading at up to 5% premiums to their Net Asset Values. Is there an asset bubble in debt securities? Low yields means high prices for debt. To borrow is to sell debt and there is never a better time to sell than when buyers are paying too much. Best of all, if the critics of the Fed are correct and we suffer from rampant inflation and higher taxes, your debt obligation balance declines in real terms without doing a thing and the interest tax deduction becomes more valuable.

Of course, don't borrow just for the sake of borrowing, but small business owners with solid investment or growth opportunities should not pass them by on the assumption that no one is lending. The SBA loan volume in its most recent financial quarter was up 18% from the previous year and nearly as high as 2007 quarterly levels. Again, this market is supported by the Fed's TALF buying whose balance has risen from $6B in April 2009 t0 $42B at the end of September. Sure, lending standards have tightened and reporting requirements have risen, but if a small business has good financial management and planning and a compelling business case, the lending markets are open. If the Fed buying activity winds down and SBA fee waivers are not extended, this window of opportunity may close.