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Home Ownership and Equity Protection Act Amendments May Chill Sub-Prime Lending in Effort to Reduce Predatory Loans

National Mortgage Professional
Sep 07, 2002

Start thinking "small" in small commercial dealsArt "Ski" Swiatkowskicommercial loans, underwriting, diversifying offerings, As I made my way to the exhibit area at the Texas Association of Mortgage Brokers 2004 Annual Convention and Marketplace in Houston, a friendly Texas mortgage broker intercepted me. She hit me with an all too familiar inquiry, "My residential loan volume is down and I'm looking for alternatives to make up for the lost business. Would you tell me why I should be considering small commercial deals?" Most residential mortgage professionals are just like this Texas broker. For them, commercial lending is a mystery. And without any motivation to prompt further investigation and education, that's exactly how it will remain. If you've been thinking about exploring the commercial lending arena but just haven't taken the next step, here are a few thoughts to get the wheels of progress turning: Start Small Instead of looking for any and all commercial transactions, focus on small commercial deals, loans of $1 million or less. These transactions are not as complex as large deals, and the learning curve is much shorter, enabling a residential broker to get active rather quickly. Also, there are many more small commercial properties and borrowers than there are large commercial. The potential for finding properties and borrowers who fit the small commercial profile is significantly greater. The large commercial arena is the highly competitive domain of the experienced commercial broker and the major commercial players such as the insurance companies, credit companies, pension funds and Real Estate Investment Trusts (REITs). Diversify Your Offerings For those of you who have been in the mortgage business since 2000, you've experienced one of the longest-running strong origination markets the industry has seen. Seasoned mortgage professionals know that the mortgage industry runs in cycles. In fact, we've already seen a drop in residential lending volume. Wouldn't it be wise to expand your program offerings into an area like small commercial loans, which are not so directly affected by fluctuations in the residential interest rates? This kind of diversity can certainly help pay the bills in slow residential markets. It's just smart business. Less Competition Means More Opportunity Competition for residential business has been quite fierce for the past several years. Until a "shake out" eliminates the weaker companies and originators, it will likely continue to be so. On the other hand, there are far less players active in the small commercial arena. Do you need evidence? Look under the mortgage category in the Yellow Pages. Other than the banks and thrifts that typically have very rigid underwriting guidelines, you will find comparatively few commercials loan sources. This looks like an opportunity to me Known Client Base Whether you realize it or not, you might already know some commercial loan prospects. In fact, you may have closed a residential loan for them. Look in your closed loan files. By reviewing the loan application, you may well find business owners, entrepreneurs and investors who may own or would like to acquire a small commercial or income producing property. If you've delivered good service in the past and followed up on a regular basis, you've done the hard part by having established the relationship. These are the best and easiest sources of additional business. Tap Into Your Current Referral Sources Talk to the referral sources that you now get your residential business from. Whether you deal with real estate agents, attorneys, accountants or financial planners, these sources usually have sufficient information on their clients to know who might be a good prospect for a small commercial loan. Ask Your Local Bank for a Loan No, I don't mean ask for a loan for yourself, but ask for deals that your local banks cannot or will not do. As I mentioned, they usually have rigid documentation and underwriting requirements. Because of the nature and methods of operation of many small businesses and small investors, they are unable to provide the information a bank wants. And although they may have great credit, these institutions often turn them down. Again, this sounds like an opportunity for the savvy broker. This Isn't Rocket Science Yes, there are differences between residential and commercial lending, but there are no differences that can't be understood with a little knowledge. Many wholesale lenders are more than happy to help a neophyte learn the ropes. Some even offer Web-training to help you learn their products. Give them a call. There are a number of books on the subject of commercial lending, as well as courses offered by the National Association of Mortgage Brokers through its state affiliates. NAMB's newest commercial course is "Small Commercial Lending for the Residential Broker." Contact your state association to find out when this and other commercial courses will be offered in your area. Some alternative small commercial lenders (non-bank sources) have reduced required documentation and have simplified the submission processes, consequently making it easier than ever before for a residential mortgage originator to venture into the commercial side of the business. Show Me the Money Let's get down to the main reason most of you will want to pursue commercial business money. First, let me say that I'm not suggesting you abandon your residential business to become a commercial specialist. I've seen many brokers successfully make the leap, but for most residential originators, I'm simply talking about expending their program menu in order to increase revenue. What I am suggesting is that with a little effort you can realize some handsome commissions. What's a handsome commission? Well, three points on a $300,000 deal is doable. It's possible to see two to four-plus points on a small commercial deal, depending on the focus of your marketing. I hope I've provided you with some food for thought and motivation to continue your exploration of the small commercial lending arena. It's an exciting and profitable segment of the mortgage industry and holds great potential for those mortgage professionals who are willing to gain the knowledge and take action. Art "Ski" Swiatkowski is a vice president and director of business development for InterBay Funding LLC. He can be reached at (215) 283-4520 or e-mail [email protected]
Sep 07, 2002
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