Filling the refi void: Small commercial originations provide competitive advantage in shrinking marketSalomon WancierLending,diversify revenue stream Now that the boom of the century has ended, brokers accustomed to a hot refinance market have some hard choices to make in 2004. According to David Berson, chief economist for Fannie Mae, residential refinance originations are expected to plunge 75 percent this year due to rising interest rates. As ominous as this sounds, it's hardly the end for brokers who are prepared to adapt to the changing environment. Essentially, brokers have two choices: They can fight it out with everyone else to maintain their share of the shrinking refi market, or they can seize the opportunity to expand their business by diversifying their revenue stream with new products. Small-balance commercial real estate lending for loans up to $1 million may offer a solution. Not only is commercial real estate a natural extension of residential brokers' existing business, it can also be quite lucrative. In addition, small-balance commercial lenders are now catering to the residential broker community, making it easier than ever to enter this new area of business. Diversification is the key to growth in a down market The refi boom has conditioned most brokers to work with a high volume of customers. If brokers wish to maintain this level of volume, they will need alternative mortgage products to diversify and fill the void. Fortunately, there is a large pool of small, commercial properties in every town and city, from the suburbs to downtown business districts. Next time you're out driving, take note of all the small commercial properties that probably never caught your eye before. Chances are, this vast supply of product has also escaped the notice of your residential competition. This spells opportunity for brokers interested in developing a profitable niche in multi-family, mixed-use, office, retail, self storage, warehouse, light-industrial or qualified mobile home park properties. Obviously, there are also other opportunities to diversify in the aftermath of the refi downturn. These include reaching out to baby boomers approaching retirement, which will lead to more volume in second home sales, vacation homes and reverse mortgages. Another potential business source is an increase in home equity loans, as soaring home values lead customers to home improvements rather than relocation. However, branching into small balance commercial real estate makes more sense than any of these other strategies because it provides competitive advantages that are mission-critical in a down market. Commercial products = competitive advantage For the time being at least, there is relatively little competition among brokers in the commercial market due to perceived difficulties in closing small commercial deals and the historical shortages of lenders focused on doing them. Secondly, brokers can enter the small-balance commercial market by tapping into their residential client base. Commercial real estate is everywhere, and it's quite likely that the average residential broker has already been exposed to multiple commercial leads through their residential clients. Commercial deals are more profitable with new lending partners As previously noted, the lack of competition among lenders and brokers for small-balance commercial products has created great opportunities for brokers ready to increase their revenue streams. However, it would be impossible for most brokers to seize the benefits of small-balance commercial originations without the emergence of at least a few specialized lenders focused on easing brokers into the small-balance commercial market. This brings us to our most important competitive advantage with the small-balance commercial product: Working with new specialized lending partners, brokers can originate small-balance commercial loans that are potentially more lucrative than residential products due to a combination of attractive yield spread premiums and upfront broker points and fees. What to Look for in a Commercial Lending Partner For most brokers, the ideal partner will be a lender dedicated to smoothing their transition into the small-balance commercial market, even if that means guiding them every step of the way. In short, brokers should look for a lending partner with a program that demonstrates strong commitment to broker alliances and personalized service. Lenders who see themselves as broker partners are more likely to have a small balance program that is attractive to borrowers, profitable for brokers and easy for both. Here are some key features to look for: †No lender points and low fees; †Attractive terms for borrowers including high loan-to-value ratios, long loan terms and a variety of program options; †Fast pre-approvals and an upfront lender commitment to quick closings; and †Volume-based preferential pricing and marketing support. The key to success is in your hands. Diversification into small-balance commercial lending can be your answer to the residential refi market slide. Making it happen is as easy as mining your existing relationships and partnering with the right lender. Salomon Wancier is a marketing manager for Silver Hill Financial LLC. He can be reached by phone at (305) 631-5186 or by e-mail at [email protected].
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