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FEATURE ARTICLE, OCTOBER 2005
THE VALUE OF USING A MORTGAGE BROKER
Alfie Means and David Collie
With all of the capital available in today's market, why use a mortgage broker? Understandably, this question and others could cross a borrower's mind each time he or she pursues project financing. Why do I need a mortgage broker? Lenders are calling me all the time. Why should I pay a fee to a mortgage broker? What value will a mortgage broker bring to my financing need?
The nation is experiencing an environment in which the supply of real estate capital is as plentiful as it has ever been. The insatiable investor appetite for real estate has been the result of numerous factors, such as high levels of consumer spending, marginal or negative stock market returns, urban revitalizations, continued population growth and, simply, the desire to invest in something tangible. New capital sources are opening offices weekly across the nation, competition for product is fierce, underwriting standards have been relaxed and, in general, borrowers are able to secure the best loan terms and structures that have ever been available to them.
Wading through this sea of eager investors is the mortgage broker. Each day, the mortgage broker is active in the capital markets presenting multiple offerings to a variety of capital sources. The market is particularly dynamic and lenders have different tastes for product and structuring. A good mortgage broker is not only aware of a large number of capital sources, but also has developed relationships with and within these organizations. He or she has determined the strengths and weaknesses of each particular source, their decision-making hierarchy, their batting average on delivering what they quote, their degree of flexibility with respect to accommodating a borrower's needs and many more such characteristics that define the quality of a transaction. In general, a good mortgage broker has an intimate knowledge of a large number of capital sources, what makes them tick and the potential traps that exist.
Just as mortgage brokers need to know the capital sources, the capital sources need to be aware of the mortgage brokers. Lenders have neither the desire nor the means to support a large infrastructure of production staff in every market that they want to do business. In the past, lenders have attempted this business model; however, it has proven to be inefficient and costly as general real estate knowledge and borrower relationships are localized in nature. The mortgage brokerage community is the life blood for lenders wishing to deploy capital on a national level.
The defining characteristic of a good mortgage broker is that he or she approaches every assignment as an advocate of the borrower. It is of equal importance that a good mortgage broker set realistic expectations, manage those expectations throughout the process, and consistently achieve or exceed those expectations. Although many mortgage brokers have correspondent relationships with select lenders in which there exists an ethical and fiduciary responsibility, it is the borrower who pays the fee and thus it is the borrower whose needs and interests should take priority.
The value-added process of using a good mortgage broker begins with the initial assessment of the borrower's needs as they relate to the economics and the “story” of the proposed loan offering. The borrower should expect the mortgage broker to consult and set expectations prior to being engaged. While there can be “outlier deals,” an active mortgage broker should be able to size a range of results for a borrower to expect in advance of promoting the offering to the lending community.
The borrower should also expect that a quality loan offering package is created by the mortgage broker. The package should present the request in a positive but also accurate manner. Lenders appreciate and respond more efficiently and eagerly to a quality loan offering package that anticipates and addresses the various questions and information that lenders require in order to issue a deliverable quote. Key to such a loan offering package is a legitimate though aggressive financial modeling of the property, the market and the comparable rents, sales, replacement costs, and a multitude of other analytical factors. It is of the more important skills and responsibilities of the mortgage broker to create this economic analysis and then combine it with market reports, photographs, aerials, tenant reviews, demographic data, sponsorship information, etc. to most effectively promote the offering to the lending community. Lenders get loan requests every day from mortgage brokers and borrowers alike; however, they pay the most attention and provide the highest level of service to the sources which consistently show them a large volume of deal flow and consistently present in a high quality and comprehensive manner. These are the people who they trust and know, and who they rely on to place the vast majority of their investment dollars.
Once the loan offering package is complete, the mortgage broker efficiently distributes the package to the qualified set of capital sources that are most likely to pursue the specific offering. The process of creating a competitive market has begun. Once the market has been cleared, a matrix of lender quotes is presented. At this point, the mortgage broker consults with the borrower and makes a recommendation and/or asks the selected lenders to fine tune quotes in order to address specific borrower needs. As a result of the process of building a loan offering package, shopping the market, presenting an organized matrix of options and consulting with the borrower, the mortgage broker will have flushed out the most competitive terms and structure for the borrower.
After selecting the best alternative and executing an application, an effective mortgage broker will organize and manage the due diligence and closing processes. This part of the transaction is equally if not more important than procuring the most competitive deal. Many capable mortgage brokerage firms employ a closer who is experienced in avoiding the many traps that can occur in this part of the process and also make the experience more fluid. Borrowers will not only remember how good of deal they received but also how painless or painful it was to achieve. Even after the transaction is complete, the mortgage broker should always be prepared to assist with any post-closing issues or needs.
In summary, hiring a quality mortgage broker to procure financing is not only a extremely effective way to find the best terms, structures and execution in market, but it also allows borrowers to focus their time and resources on their specific discipline whether it be developing, acquiring or managing commercial real estate.
Alfie Means and David Collie, iCap Realty Advisors.
©2005 France Publications, Inc. Duplication
or reproduction of this article not permitted without authorization
from France Publications, Inc. For information on reprints
of this article contact Barbara
Sherer at (630) 554-6054.
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