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Succeeding in today's market by letting your lender work for you

National Mortgage Professional
Sep 13, 2005

The commercial corner: The lowest rate is often not the best valueMike Boggianocommercial market, interest rate, leads The Mortgage Press is pleased to present "The Commercial Corner," a monthly column by Mike Boggiano of Silver Hill Financial LLC dedicated to answering your questions about the commercial mortgage marketplace. If you have a question that you would like answered in a future installment of "The Commercial Corner," e-mail commercialcorner@mortgagepress.com. Q: In my residential business, all of the rates available to my borrowers are very similar. However, when I looked into a commercial lead, the rates I encountered varied dramatically. Why is that? A: In the residential world, lenders underwrite borrowers by looking at their debt-to-income ratios and can lend at a high loan-to-value, often above 90 percent. The residential market is efficient and transparent, in that all of the players know what others offer. Exit strategies are dominated by agencies, and risk is well understood across borrower types. The commercial market, on the other hand, is very different. This market is fragmented, inefficient and has many types of lenders with varied exit strategies, costs and risk tolerance. Q: Whenever I have received a commercial lead, I have gone to my local bank to see if they were interested in originating a loan. Usually they were not interested, but if they were, the borrowers eventually balked at what was offered even though the rate seemed low. What could I have done to close these loans? A: Any good borrower can approach their local bank and, if the property type fits the banks parameters, get a better rate than what is offered by lenders. However, as a broker who relies on relationships for business, it is important for you to understand the implications of a commercial bank loan for your borrower. Many lenders have a matrix-driven process that allows loans to be underwritten based on certain criteria, such as credit score, property type and loan-to-value. Banks, however, have subjective loan committees, often charge lender points and legal fees, and usually require yearly audited financial statements from the borrower. The low rate offered by a bank may also involve a balloon or interest-only payment. So, banks do offer low rates, but there are other transaction costs that must be considered. Lenders offer a variety of programs, a few of which function more like a residential mortgage than a commercial loan issued by a bank. These types of programs could be considered when offering financing to your clients, as some borrowers are not shopping for the lowest rate but the easiest transaction to close. Thus, while banks often provide an inexpensive financing option, the differences between banks and lenders should be considered every time you determine how to proceed with a transaction. Such an analysis will often lead you to the conclusion that it is important to consider the entire program offered by the various lenders you consider, and not just their rates. Shop for value, not the lowest rate, and your borrowers will not be disappointed. Q: I enjoy providing excellent service to my borrowers, often by finding them the lowest rate available. Now I am considering branching out into the commercial market. Where can I start looking for the best rates? A: It is exciting to hear of your plans to offer commercial brokering to your clients. By expanding to commercial lines, you will likely find yourself becoming even more of a resource to your clients; this will lead to more business and resulting referrals. However, be cautious when choosing the loan program for your borrower. Rate is only part of the equation, and you wouldnt want to damage a strong relationship by placing a client with a lender that may not be able to meet all of their needs. For example, a lender's ability to close a loan in a fair and efficient manner has considerable value, so look for lenders with good reputations and sufficient processing staffs, not just those with the best rates. While better rates may certainly seem attractive on the surface, it is more important to look at the big picture. Paying 6.75 percent on a five-year, interest-only balloon with two points up front, annual costs for audited financial statements and significant closing feesnot to mention leaving the borrower to scramble for refinancing in four yearsmay not be as good of a choice as selecting a fixed rate of 8.75 percent for 20 years on a fully amortizing loan. As the cliché goes, always make sure you are comparing oranges to oranges. When presented with all of the facts, a savvy borrower will appreciate your recommendation on overall value and hopefully not get caught up solely in the rates. Mike Boggiano is senior vice president, national sales manager for Silver Hill Financial LLC. He may be reached at (877) 676-1562 or e-mail mikeb@silverhillfinancial.com.
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