Commercial Mortgage Training – In This Current Credit Crisis
As the residential side of the business has taken a harsh beating many residential mortgage brokers and loan officers are taking a hard look at the commercial side of the business. The idea is to diversify their business/income with the intent of for a long time this storm.
However, the reality is that the commercial side is not in a better position than the residential side. Restrictions are across the board and the secondary market on the commercial side has the exact same issues. Major players such as Zion’s, Bank of the West and Sterling are losing their liquidity and have slowed their lending to a crawl. For example Zion’s just announced they will no longer consider deals above $2,500,000 with a preference for loans below $2,000,000.
As a consequence commercial mortgage brokers are forced to work with the players that are nevertheless funding deals. SBA lenders, portfolio (aka balance sheet) lenders and commercial hard money lenders are the major supplies. These three are nevertheless lending and are not directly tied to the woes of the secondary markets. The exception to this is some SBA supplies do sell their debt off on the secondary market but at the end of the day Uncle Sam nevertheless guarantees the bulk of the loan balance.
One of the easier deals to get done is hard money, from a funding point of view. The lender is often an individual that is lending their own money and will make the decision directly. However, the terms that hard money lenders offer are harsh and many borrowers will not accept them. 3% -6% points are the norm with a rate of 13 -16% is market. The trick here is to find the borrower with the right set of circumstances that will basically be forced to accept these terms. Sounds harsh but it’s true. If your borrower has a viable “Plan B” they will never accept this deal. Examples of the right circumstances include a business owner losing a significantly amount of equity due to foreclosure or a builder that will lose a major opportunity on another project due to very short time restraints.
SBA lenders or edges can be a very substantial source for owner occupied deals. However SBA loans has their own set of quirks and a major one is that brokers are not allowed to be paid points on the settlement statement. Instead the broker has to be paid a referral fee by the bank or paid outside of close. The challenge here is that most SBA lenders are not broker friendly and will suggest the broker has a separate agreement with the borrower and get paid outside of close. If you haven’t chased a borrower for months on a $15,000 fee, take my information on it that it’s not easy to truly collect. And you’ll need the borrower to sign a significantly fee agreement that will keep up up in court. This is one of the biggest shockers for residential brokers entering the business – how unprotected their fee can be if not set up properly from the beginning.
As talked about above portfolio lenders or edges have many of the same issues as SBA lenders. In fact many portfolio lenders use the SBA to guarantee their loans, so we are tripping over terminology here a little bit. But the point here is that many traditional edges that nevertheless truly lend their own capital and don’t sell off to the secondary market are not broker friendly. For many it’s a matter of pride that they source their own deals. So you as the commercial mortgage broker need to find a portfolio lender that likes the deal, will let you be involved in the deal and allow you to get paid at close. If not you will have the same issues mentioned above and you better be protected or you’ll have a very nasty story to show for all of your hard work.
No corner of the mortgage business is except from the current issues. Residential players should be prepared for the realities of the current market. Learning how to work with these supplies is a huge set in the right direction and brokers will have a much better chance of succeeding and getting paid for all of their hard work.