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
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
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
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
Commercial products = competitive
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
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
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
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
†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
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]