Even with interest rates unexpectedly remaining at relatively low levels, most mortgage practitioners would agree the heyday of the refinance boom has come and gone. The days of phones ringing off the hook and mortgage lenders struggling to keep up with surging loan demand have passed, and many lenders and brokers now are getting back in touch with Realtors and searching out other ways to originate more purchase money loans, or mortgages issued to homebuyers at the time of purchase. But there is another arena that more mortgage lenders may soon be pursuing as they seek to fill the void left by dwindling refinancing loan volume: commercial mortgages.
Scott Rielly, sales director at Silver Hill Financial in Foxboro, said residential mortgage brokers should look to other avenues to get business now that the refinance boom has slowed.
“They can’t afford not to [get involved]” in commercial loan products, Rielly said. “There are only so many revenue streams residentially.”
Within the last year, and especially since January, Rielly said he has seen a growing number of residential mortgage brokers interested in commercial mortgages.
“They are looking for something that is easy, something they can grasp onto” to bolster business, Rielly said.
Silver Hill offered eight informational programs on commercial mortgages to loan originators in May and another eight are scheduled for the month of June.
“It’s demand” that’s driving program offerings, Rielly said, adding a recent seminar in Braintree brought in about 100 mortgage brokers. “It’s worked well for us.”
Rielly spoke to mortgage brokers at the 2005 New England Mortgage Showcase, sponsored by the Massachusetts Mortgage Association and held at the Seaport Hotel in Boston last week. In his “Offer More, Make More” seminar, Rielly discussed Silver Hill’s small-balance program, which includes loans ranging from $100,000 to $1 million, and how it can bring more profits to brokers.
Silver Hill is a national commercial real estate lender based in Florida. With a program that allows for financing for strong borrowers of loans up to $1 million, Rielly said brokers can do deals with Silver Hill that they may not be able to do with a bank.
Silver Hill, Rielly explained, generally offers higher loan-to-value ratios than banks. In certain cases, Silver Hill will provide financing with a 90 percent loan-to-value.
Rewarding Opportunity
A small-balance program like Silver Hill’s enables a commercial loan broker to increase income potential by earning up to 4 points. A point is 1 percent of the total loan value. Brokers are allowed to charge up to 2 points when they originate the loan, although they are not obligated to do so. Silver Hill doesn’t charge any points to the borrower. Brokers are also permitted to earn a maximum of 2 additional points with the yield spread premium, depending on the loan rate that is accepted by the borrower.
Borrowers pay a $500 lender fee paid at closing to Silver Hill. However, Rielly said if a loan is closed with the company by the 15th of any given month, the $500 fee is waived. Borrowers also pay a $250 fee at closing if they decline to arrange for an automatic monthly repayment deduction from one of their accounts.
Rielly said some of the benefits of commercial mortgages include less competition and that, by dabbling in commercial lending, brokers can leverage more business from their existing client base. Rielly advised brokers to simply ask old customers about possible leads in the commercial lending world.
“Chances are these people know someone” with commercial real estate financing needs, Rielly said. “Or they own something [commercial property] themselves.”
Commercial mortgages have been successful for local brokers, according to Silver Hill statistics. Recently, a mixed-use property in Clinton was sold for $817, 500. The broker walked away with more than $8,600 in commission fees. An office building in Jamaica Plain that recently sold for $360,000 gave another broker a good paycheck; the commission was more than $11,000. Boston mixed-use properties also have provided a hefty sum of money to brokers. Recently, Silver Hill closed a $740,000 commercial loan in Boston for which the broker took home $22,330 in commission.
According to Silver Hill literature, the company finances all types of properties, including multifamily, warehouse, self storage, retail, light industrial and mobile home parks. Properties can be owner-occupied or investment properties.
There are a variety of loan types available to borrowers with several different terms. There is a six-month adjustable loan; two-, three- and seven-year fixed rate loans that then become adjustable; and full-term fixed-rate programs. The 15-, 20- and 30-year fully amortizing loans are available on all property types. Rielly noted there are prepayment penalties which vary based on the loan type.
The company’s philosophy is that a strong borrower deserves a favorable loan rate, so there is a concentration on underwriting based on the borrower’s credit score and financial strength rather than property cash flow. Silver Hill focuses on a borrower’s ability to repay a loan with all his or her income.
When banks do the underwriting, “the property [income often] has got to service the debt by itself” before a loan is approved, Rielly said.
Silver Hill has taken on more riskier deals, Rielly explained.
“We’ve financed vacant buildings,” Reilly said, adding the borrower was able to support the debt using other income. “No bank would touch that.”
Silver Hill’s approach is to start with a borrower with a credit score of 600 or higher. The company will underwrite using a debt coverage ratio and debt to income.
“[The borrower is] getting two ways to qualify,” Rielly said.
Realizing residential mortgage brokers may be more comfortable with the residential mortgage process, commercial loan closings are similar to residential closings, Rielly said.
“There is not a lot of ancillary junk in there,” Rielly said.
So how can brokers reach potential commercial borrowers? Rielly suggested including a commercial lending message on voicemails, e-mail signatures and on business cards. Prior clients can also be a strong avenue for potential clients.
“Look at your old [mortgage applications], send [old customers] an e-mail,” Rielly said.
Working with title companies to obtain data and pursuing small-business owners with letters, phone calls or personal visits can also result in new business.
For brokers that succeed in the commercial lending arena, there are benefits. Silver Hill offers a rewards program that allows brokers to accumulate points for closing loans. The points are redeemable for merchandise, like a plasma television or cruise. The points are based on loan size.
Rielly said brokers ultimately will need to diversify their revenue stream and commercial mortgages have proven to be a strong resource for both the lenders, like Silver Hill, and brokers.
