As the residential side of the business has taken a beating, many residential mortgage brokers and loan officers are taking a hard look at the business side of the business. The idea is to diversify your business/income with the intention of weathering this storm.
However, the reality is that the commercial side is in no better position than the residential side. The restrictions are widespread and the secondary market on the commercial side has exactly the same problems. Major players like Zion’s, Bank of the West and Sterling are losing their liquidity and have slowed their lending to a crawl. For example, Zion just announced that it will no longer consider deals above $2,500,000 in preference to loans below $2,000,000.
As a result, commercial mortgage brokers are forced to work with players who are still financing deals. SBA lenders, portfolio (also known as balance sheet) lenders, and commercial hard money lenders are the main sources. These three continue to lend and are not directly linked to the problems of the secondary markets. The exception to this is that some SBA sources sell their debt on the secondary market, but at the end of the day, Uncle Sam still guarantees most of the loan balance.
One of the easiest deals to make is hard money, from a financing standpoint. The lender is usually a person who lends their own money and will make the decision directly. However, the terms offered by hard money lenders are harsh and many borrowers will not accept them. 3%-6% points are the norm with a rate of 13-16% being the market. The trick here is finding the borrower with the right set of circumstances who will essentially be forced to agree to these terms. It sounds harsh but it’s true. If your borrower has a viable “Plan B”, he will never accept this deal. Examples of the right circumstances include a business owner losing a substantial amount of principal due to foreclosure or a builder losing a great opportunity on another project due to very short time constraints.
SBA lenders or banks can be a very strong source for owner-occupied deals. However, SBA loans have their own set of quirks and one of the main ones is that brokers are not allowed to pay points on settlement status. Instead, the bank must pay the broker a referral fee or pay it outside of closing. The challenge here is that most SBA lenders are not broker friendly and will suggest that the broker have a separate agreement with the borrower and get paid outside of closing. If you haven’t hounded a borrower for months with a $15,000 fee, believe me it’s not easy to collect. And you will need the borrower to sign a substantial fee agreement that will stand up in court. This is one of the biggest surprises for residential brokers entering the business: how vulnerable your rate can be if it’s not set up correctly from the start.
As mentioned above, portfolio lenders or banks have many of the same problems as SBA lenders. In fact, many portfolio lenders use the SBA to guarantee their loans, so we’re getting the terminology a bit wrong here. But the point here is that many traditional banks that still lend their own capital and don’t sell on the secondary market are not broker-friendly. For many, it is a matter of pride to get their own deals. So you, as a commercial mortgage broker, need to find a portfolio lender who likes the deal, who will let you in on the deal, and who will let you get paid at closing. Otherwise, you will have the same problems mentioned above and you had better be protected or you will have a very unpleasant story to show for all your hard work.
No corner of the mortgage business is left out of the news. Residential players must be prepared for the realities of today’s market. Learning to work with these sources is a big step in the right direction and brokers will have a much better chance of being successful and getting paid for all their hard work.