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

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

September 7, 2002

Start thinking "small"...as 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
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
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
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 aswiatkowski@interbayfunding.com.


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