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   ARTICLE   |   From Scotsman Guide Residential Edition   |   June 2017

3 Clear Paths to Commercial Mortgages

Residential originators have choices when looking to diversify their business

With the midway point of the year fast approaching, residential originators across the country are taking a step back and evaluating their performance in the first six months of 2017. Thanks to rising interest rates and dwindling home-loan applications, it’s a safe bet that many mortgage professionals have earned less than they did at this point last year. If they’re going to survive, these originators will need to do something to change that in the second half of 2017.

The problem is that supplementing a mortgage company’s product offerings with new products and capabilities often requires an additional investment of time and resources that most originators — especially those in smaller companies — simply don’t have. To make a difference to their bottom line in the near term, originators must identify a strategy that, while inexpensive and easy to adopt, still provides immediate opportunities for success.

That’s why adding small-balance commercial mortgages makes sense for so many residential mortgage companies. When planned properly, this market can generate additional revenue without distracting loan originators from their primary role and without committing their companies to additional overhead. An additional benefit is that most originators are already being offered these types of transactions from past clients and referral partners or, possibly, they have potential deals waiting for them in their current database.

The best part? Originators can choose their level of involvement, which is important because every company has a different amount of available resources and commercial expertise. Instead of needing to find people with the necessary talent to create separate operating systems, companies who partner with a quality commercial lender can easily choose what level of commitment they wish to make.

Here are three ways that originators and mortgage companies can incorporate commercial lending into their existing business, ranked from lowest to highest level of involvement.

1. Refer loans to a lender partner

Residential mortgage companies already see plenty of commercial deals, so why not earn additional income by collecting some basic information and referring these deals to a commercial lending partner that can carry the ball forward.

Make no mistake: Commercial lending isn’t easy, but simply referring commercial opportunities to a trusted partner is the easiest way to break into the industry. Originators don’t need any additional training to get started and their work is concluded before the commercial transaction begins — meaning they can avoid the more challenging aspects of processing the commercial loan.

Of course, the amount of income a mortgage company can generate through referring commercial deals is less than what it could make if it brokered the transactions. Senior management must decide which is more important — the amount of income they can generate through commercial loans by devoting more resources to the venture, or a small additional revenue stream that doesn’t take focus away from their residential business.

Smaller companies, in particular, can benefit from forming a correspondent relationship, because they can close loans in their own name.

If a company wants to begin referring commercial deals, it is crucial to partner with a trustworthy commercial lender. The ideal partner is one that makes it easy for residential originators to refer transactions and generally works to build strong relationships. At the same time, originators will want to identify a commercial lender that can be counted on to close deals and provide positive experiences for everyone involved. After all, in a working referral relationship, many reputations are on the line during each transaction.

When mortgage companies align with the right lender, they can create strong referral relationships that generate income without committing to large costs or investments of time.

2. Broker commercial deals

Mortgage companies that want to increase the income they can generate from small-balance commercial loans may wish to broker such transactions. This step requires some additional resources, but the opportunity for a higher return makes the investment worthwhile for many residential organizations.

It is important to note that brokering commercial transactions is different and more complicated than closing residential deals. But if originators focus on small-balance transactions, which commonly involve loan amounts of $2 million or less, the transition won’t seem as drastic. In addition, the most common small-balance commercial deals involve multifamily buildings with five-plus units. These behave quite similarly to the two- to four-unit investor transactions that residential originators have been closing for years.

Still, mortgage companies that want their loan officers to originate commercial deals should look for help. This, again, is where the right commercial lender comes in handy. Lender partners who focus on empowering residential originators can provide a wealth of resources to help them rapidly expand in this area, including communication scripts, customizable collateral, and other tools designed to save originators time and money. This service isn’t common, but it can make a huge difference for companies that aren’t sure where to start when breaking into the commercial brokerage business.

3. Establish a correspondent relationship

The third choice for residential mortgage companies that want to break into the commercial market involves forming a correspondent partnership with a commercial lender. Naturally, this option requires a greater investment of time and resources, but companies that go this route also have an opportunity to generate more revenue than they could by referring or brokering commercial deals. White labeling or table funding small-balance commercial deals also gives a mortgage company the greatest amount of control over each transaction.

Smaller companies, in particular, can benefit from forming a correspondent relationship, because they can close loans in their own name without needing the warehouse capability to initially fund the transaction. If these companies are already seeing a regular stream of commercial deals that they currently are unable to close on their own, becoming a correspondent for a larger lender could be a smart move.

Once again, the viability of this path depends greatly on the quality of the commercial lending partner. After all, the lender is the one that actually underwrites and funds the loans. Originators will want to make sure they can rely on their commercial lender to fund transactions quickly and painlessly before they form any sort of partnership.

As a final note, residential loan originators who are interested in incorporating commercial lending into their existing business should consult with legal counsel to determine whether or not additional licenses and disclosures are required in those states where they do business.

•  •  •

Over time, commercial mortgages have developed a reputation for being overly difficult and time-consuming. Although that may be the case for the big deals that make front-page news, smaller commercial deals that small-business owners and local investors require are well within reach for residential originators. If originators partner with a quality commercial lender and choose from one of the three clear paths described here, they can position themselves for success in 2017 and beyond — even if interest rates continue to rise.  


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