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   ARTICLE   |   From Scotsman Guide Commercial Edition   |   February 2017

Brokers Must Have the Right Stuff

Lenders are looking for partners who bring value and professionalism to the table

c_2017-02_Spot_GraysonDuring the Great Recession, lenders were burned on hundreds of millions of dollars in loans that were poorly or even fraudulently originated by amateur commercial mortgage brokers looking to make a quick buck.

The pre-recession bubble exuberance, when it seemed anyone with the impulse could operate as a commercial mortgage broker, is long gone. Since then, in the aftermath of the recession that took hold in late 2007, government regulation (once nonexistent in the commercial real estate lending space) has gained momentum. Compliance is now a serious part of every lender’s due-diligence process.

Today, succeeding as a commercial real estate broker requires a full-time commitment to expanding your knowledge base and transactional skills, as well as exhibiting a high level of service and professionalism when interacting with borrowers and lenders.

Bygone era

The proliferation of commercial mortgage brokers came about during the internet’s infancy in the 1990s and early 2000s — and in conjunction with the growth of mortgage-backed securitizations. During that era, lenders truly needed mortgage brokers, and vying for their business was an integral part of any lender’s origination model. The more loans a lender could pool, securitize and sell, and the faster that was accomplished, the more money the lender could make.

There was simply no viable, cost-effective way for a lender to originate loans directly and obtain the kind of return on investment that could be achieved by tapping into the pipelines of mortgage brokers. It simply didn’t make sense for a lender to spend a fortune on television or radio advertising when it could spend a small fraction of that money on brokerage-convention attendance and advertising in mortgage-broker publications.

At that time, corralling a handful of high-performing brokers was the key to closing hundreds, or thousands, of loans a year. Pay-per-click internet ads were just coming of age, mortgage lenders weren’t anywhere near cyberspace, and the general public still relied heavily on the advice of professionals or personal referrals, not Google searches, when it came to seeking financial advice and guidance.

As a broker back then, you had your pick of the crop in terms of lenders. If you didn’t like the compensation or service one lender offered, or if a lender gave you grief over the quality of your loan submissions, you could simply go down the line to the next wholesale lender willing to put up with you (and maybe even pay you more).

Brokers’ clients had fewer options as well. You may have been the only, or one of only a few, mortgage brokers in your immediate area. If your clients didn’t particularly like your service, yet didn’t qualify for bank financing, they were stuck with you anyway. Not surprisingly, the wholesale-securitization lender model, and lack of borrower access to financing on a broad scale, spurred the propagation of low-quality mortgage brokers and enabled their success.

Changed game

By the end of the first decade of the 21st century, the internet had permeated every aspect of our lives, and consumers became as comfortable finding mortgages online as they were in seeking out their soul mates via the internet. The Great Recession ended and a new breed of crowd-funded or institutionally backed lenders with tech-savvy emerged in the marketplace.

Online advertising became an affordable and effective way for those lenders to procure direct-borrower clients without the need to go through a commercial mortgage broker. What didn’t robustly re-emerge after the Great Recession, however, was the commercial mortgage-backed securitization market and the fly-by-night broker. Both had been diminished as a consequence of the economic downturn.

Today there are very few commercial real estate lenders operating under a dedicated broker-origination model, nor are there many lenders securitizing commercial real estate loans near pre-recession levels. What’s more, if as a broker you happen to aggravate one securitization lender, that may very well be it for you.

Banks do not put up with inexperienced or unprofessional brokers, tech-based lenders attract their borrower clients through online advertising, and portfolio lenders don’t lend at the same volume that securitization lenders used to. They make smart, selective loans and exercise the same degree of caution when choosing referral sources — if they accept wholesale business at all. And with most lenders, obtaining loan approvals as a referral partner or broker isn’t a walk in the park, either.

Almost every lender now requires a signed formal agreement, a background check, proof of licensure and, in some cases, a credit check. If you are able to gain approval as a referral partner, you are often expected to maintain a certain level of production, achieve a defined conversion ratio on your applications and stay below a maximum default level for the loans you originate.

In fact, it’s not uncommon to see a claw-back provision in a referral-partner agreement, authorizing a lender to recoup any commission paid to you on a loan closing in the event a borrower defaults within the first 30 to 60 days. Brokers who don’t value their lenders, act unprofessionally, are dishonest, or provide incomplete and confusing submissions, now quickly find their broker agreements voided.

New opportunities

The good news is that lenders still value productive, volume-centric partnerships. If you are able to establish a good broker or referral partnership with a lender, provide that lender a steady stream of business, and act professionally and courteously, you will likely be offered a number of opportunities to reap substantial benefits.

Work hard and conduct your business appropriately, and you just might find yourself offered a correspondent or private-label relationship, preferred pricing, marketing support or even increased commission incentives. If you can demonstrate that you are a productive and professional partner who provides clear and organized loan submissions, and works within the expectations and guidelines that your lenders stipulate, the opportunities for success as a commercial mortgage broker are still boundless. 


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