It's certainly not "business as usual" in the residential mortgage industry. For some time now, the pressure has been mounting in numerous ways. More brokers than ever are competing for fewer and fewer deals. Loan fees are getting squeezed. More and more borrowers are turning to online lenders who do loans very cheaply.
And now, to put the icing on the cake, there's the subprime implosion. Because of secondary market pressure, the most aggressive loan programs are already beginning to disappear - and more will certainly follow. Underwriting guidelines are tightening. Because of this, the pool of borrowers that qualify for loans will continue to shrink even further.
"One path that leads to increased income is the commercial mortgage business," says Joe Mardesich, president and CEO of Nationwide Commercial Funding, a national mortgage brokerage. "It is the ideal arena for accommodating the skills and experiences of residential mortgage brokers. There are numerous advantages for being in the commercial mortgage business and I have put together a list of those advantages."
LESS SENSITIVE TO INTEREST RATES
The residential loan business is highly sensitive to interest rates. The higher rates, the lower will be the number of homeowners who refinance, take out equity loans, or consolidate debt. And though the purchase loan business is still available, it may eventually slow if rates rise to a point where fewer people will be able to qualify as home purchasers.
In the commercial mortgage sector, however, rising rates do not have the considerable negative impact that exists in the residential mortgage sector. Here is the reason: First, most commercial mortgages have balloon payments. Most commercial borrowers have no choice but to refinance or to sell, regardless of where rates may be every 5 to 10 years. Both selling and refinancing result in new loans, which - of course - mean income for the commercial broker! Second, commercial real estate owners and investors make their money by buying, selling, exchanging, developing and refinancing. They don't stop doing deals as rates move up or down. They find ways to have increased interest costs covered by their tenants or other end-users of their properties. Homeowners, by contrast, want to buy a place in which to live and must factor interest costs into their budgets. If interest rates put homeownership out of their reach, they will remain renters, tenants of those who utilize commercial mortgages!
Third, as indicated above, rising rates can actually increase rental demand and revenue for the owners of apartments, mobile home parks, and certain other types of properties. The beneficiary is not only the owner, the developer of apartments, and the developer/owner of mobile home parks, but also the mortgage brokers who help to finance those properties.
GROWING COMPETITION IN THE RESIDENTIAL MORTGAGE BUSINESS
In the residential real estate market, more and more realtors are competing with mortgage brokers. The numbers increase daily. With the internet, people can shop online and have 5 or 6 lenders or brokers competing for their business with a mouse click. The loan products you and your competitors sell are all the same, because the secondary market is so consolidated in the residential industry. The residential mortgage business has become a frantic "commodity" business, providing revenue to the lowest bidder.
In the commercial mortgage business, the lowest bidder is not necessarily king. There is much less competition than in residential real estate. And there are many portfolio lenders who do not sell their loans to a consolidated secondary market, i.e. there are a great variety of available programs from one lender or broker to another. As a result, by specializing and developing a niche, you can develop a meaningful competitive edge.
LESS REGULATION IN COMMERCIAL
The residential industry is chock full of rules and regulations. Brokers have to disclose every penny they make, even in a yield spread. The number of disclosures that borrowers must provide seems to increase daily. Furthermore, licensing laws and regulations restrict where a residential broker may do business.
On the other hand, in the commercial mortgage business, you don't have to worry about RESPA. There are no Good Faith Estimates. No TIL's. You can pay referral fees to anyone, regardless of the service they may perform. Yield spreads are generally not disclosed. Most states do not require any licensing for commercial mortgage brokers. (These are observations, not legal advice).
THE REWARDS OF COMMERCIAL
The rewards of the commercial mortgage business can be substantial, impacting income and lifestyle. Yet, comparatively few residential brokers are reaping the rewards that await them in the field of commercial mortgages."
As a consultant-coach, who has helped countless numbers of residential brokers successfully make the transition to commercial mortgage brokering, Joe was often puzzled by why so few made the transition.
"It is because most brokers begin their careers in the residential mortgage business and attempt to do the commercial business from a residential frame of reference," explains Mardesich. "Unfortunately, that doesn't work. In fact, the better a residential broker is, the harder it can be to make a successful transition. Some of the elements that go into making a successful residential broker are precisely those elements that will hamper a commercial broker. Does that mean all is lost if you started out as a residential broker? Not at all! A lot of residential brokerage skills are transferable. You simply need to learn which skills are and are not applicable, and be prepared to learn not just new program guidelines, but also the entire process and mindset for being a successful mortgage broker."
As a service, Mardesich prepared a free Tip Sheet on the key differences that should help residential brokers make the transition to commercial mortgage brokering.
One can obtain a free copy of it by sending an e-mail to tipsheet@nationalapartmentfinance.com
Nationwide Commercial Funding, Inc specializes in commercial owner and non-owner occupied loans nationwide. Its website is www.nationwidecommercialfunding.com
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