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   ARTICLE   |   From Scotsman Guide Residential Edition   |   February 2017

Protect Against Rising Rates

Small-balance commercial mortgages can help you diversify in 2017

The new year has just begun, yet many Americans are already abandoning the resolutions they chose just one month ago. Although residential mortgage originators may have already misplaced their gym membership cards and skipped out on guitar lessons, there is one resolution they should focus on keeping in 2017, and that is to protect their bottom line from market uncertainty.

Ever since the presidential election this past November, mortgage professionals across the country have been identifying and executing strategies to succeed as mortgage rates rise and home refinances decline. One such strategy would be diversifying by adding small-balance commercial mortgages to their residential origination business.

Typically defined as commercial loans under $5 million, small-balance commercial mortgages make up the majority of all commercial real estate transactions. Small-business owners and investors of all types use these loans to finance apartment buildings, offices, warehouses, retail centers, and many other types of properties across the nation.

The small-balance commercial market is experiencing near-record growth, and yet many borrowers still have a difficult time securing these small loans themselves, so experienced mortgage professionals can play an important role in getting them the funding they need. Let’s look at a few reasons why residential originators should consider crossing into commercial loans this year.

A natural transition

Large-scale commercial loans are complicated, drawn-out transactions that can take many months to close and involve terms and processes that are utterly foreign to the typical residential originator. On the other hand, small-balance commercial loans have a lot in common with ordinary home mortgages because multifamily apartment loans make up the bulk of small-balance transactions.

In fact, many residential brokers break into the commercial arena by closing these types of deals. The only difference between commercial and residential multifamily properties is the number of units.

Originators looking to produce quicker results may also enjoy working with small-balance commercial loans. These loans are typically closed and funded in a few weeks. This allows originators to complete small-balance commercial transactions while still working on their existing residential business.

Many residential brokers steer clear of commercial transactions because they feel they lack the expertise and connections necessary to succeed. When it comes to multistory office buildings and mega-malls, this may be true. But small-balance commercial mortgages involve documentation and terms that should be familiar to residential originators, providing a natural transition point for originators looking to add an additional revenue stream to their business.

Accessing commercial leads

While other diversification plans can involve months of planning and business development to reach potential leads, originators who take on small-balance commercial loans may find a number of future commercial borrowers within their existing client database.

For example, small commercial borrowers regularly include doctors, lawyers, small-business owners and a variety of self-employed individuals. Originators who regularly secure home mortgages for these types of professionals can check to see if those clients have commercial needs as well. Chances are these borrowers will prefer to work with a broker they trust.

An even faster way to check for commercial opportunities is to scan the real estate owned section of closed 1003 loan applications to see which clients already own commercial properties. Those properties likely were financed with shorter-term loans, giving originators the chance to identify leads as they near the end of their loan terms.

That said, originators don’t have to go it alone. The usual referral sources, including attorneys, real estate agents, accountants and other financial professionals, often operate in commercial circles as well. Residential originators can test the waters before making the transition into commercial lending by reaching out to referral partners and asking about any commercial opportunities they may have.

Creating new business opportunities while continuing to close residential loans can seem like a daunting task, but originators who diversify with small-balance commercial loans can make life easier by generating leads from within their existing network.

Lenders will help

Originators who decide to supplement their business with small commercial loans can rely on lenders to provide assistance and resources to help ease the transition. Lenders who fund small-balance commercial mortgages understand that rising rates lead to declining home refinances, which ultimately leads to an influx of new commercial brokers. The best lenders give these originators the tools they need to succeed and work with them through every step of the transaction as they gain familiarity with commercial mortgages.

Many diversification efforts fail because originators lack the time or knowledge necessary to successfully market their new product offerings. Some small-balance lenders counter these difficulties by providing marketing support to help residential originators get their commercial business off the ground.

These resources can include communication scripts, customizable collateral, and even social media and search-engine-optimization insight. Originators can take advantage of these tools and spend their time working on building a customer base instead of a product flyer.

Some of the more nontraditional lenders provide additional help to originators and their clients by offering flexibility within their program options. Originators can meet the needs of historically underserved groups of borrowers by offering programs that don’t require tax returns or excessive documentation.

Alternatively, these new commercial brokers can build reputations as speedy solution providers by partnering with lenders that can fund deals without waiting on a loan committee’s approval. Lenders that provide these types of benefits can be a great help to residential originators looking to launch their commercial business.

•  •  •

After almost a year of speculation, the home-mortgage industry is finally seeing interest rates rise and refinances decline. Diversification is a classic strategy for protecting yourself in this type of situation, and originators who resolve to diversify with small-balance commercial mortgages have a great opportunity to protect their bottom lines and establish new revenue streams. And unlike exercising or eating less, it’s a resolution they will want to keep all year long. 


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