Some of the notable factors contributing to this systemic change include a sustained federal financial spending policy, continued growth of wages and labor shortages. Other factors include a vacillating energy transition from fossil fuels to carbon-neutral sources and intensifying geopolitical concerns.

“Commercial real estate credit is attractive since it offers equity-like returns with lower levels of risk due to its seniority in the capital stack.”

Considering this new macroeconomic backdrop, a popular question is, what does this mean for investor portfolios? One prudent move would be to increase allocations in collateral-based cash flows backed by hard assets such as real estate.

More specifically, it makes sense to increase one’s exposure to private real estate credit as banks, which traditionally have been leaders in commercial mortgage lending, have restrained their lending practices. This has created opportunities for nonbank lenders to gain market share from bankable sponsors eager to get their projects financed.

At the same time, the asset class’s expanded revenues have created a compelling risk-adjusted yield, whereby when inflation moves up, so does revenue. This is a major change from the past 10 years when the theme was long growth, long duration and fixed income. We are now in a different environment where the playbook has changed and investors need to adapt.

Investment solutions

The ability to generate stable, inflation-linked income through commercial real estate credit offers a positive solution for investors who might be facing financial obligations or challenges. This asset class offers substantial variations in strategies, risk levels and the ability to invest across the capital structure, including both senior and junior positions. It also allows investors to tailor allocations that align with their long-term goals.

Pension funds, for example, typically seek low-risk credit funds that tend to lend against stable-yielding assets. These assets can generate cash flows that match required payments to their beneficiaries.

That said, not all investors are the same. Many have liabilities that are subject to cost-of-living adjustments that may result in higher payments when inflation rises. Traditional investment approaches typically use long-duration bonds to manage the long-duration liabilities.

During the recent market cycle, however, traditional approaches showed weakness as inflation and interest rates rose quickly. For instance, it is common practice to use swaps and other derivatives to replicate the bond positions necessary to hedge liabilities. As interest rates increased over the past two years, the values of these leveraged derivative positions declined, generating significant losses and creating a short-term liquidity crunch for investors who utilized substantial leverage.

Rethinking bond exposure

Historically speaking, if stocks go down, then bonds rally and investors seemingly always have a shock absorber in their portfolios. But this notion is changing.

Banks had more than $600 billion in unrealized losses at the end of 2022, according to the Federal Deposit Insurance Corp. The Federal Reserve, meanwhile, has about $1.1 trillion in unrealized losses in its System Open Market Account, with a large percentage of that total tied to U.S. Treasury bonds.

Therefore, every time there is a rally in bonds, what will the Fed do? Many believe they will sell, thus driving bond prices down. Moreover, Japan, which happens to be the largest foreign holder of U.S. bonds, is mimicking this playbook. These sales will eventually lead to an increased bond supply, along with investors such as banks and the Fed being underwater in their bond portfolios.

These conditions mean that investors need to think about how much they own in stocks and bonds, with a particular emphasis on the bond market. Alternative products such as commercial real estate credit can help them earn a bond-like yield without the same duration or volatility associated with traditional fixed-income products.

Finding yields

Private real estate credit vehicles that generate stable income while having some inflationary protection can help investors reduce surplus volatility. Investors can also earn higher yields to better achieve their capital-deployment goals with less complexity.

Furthermore, commercial real estate credit is attractive since it offers equity-like returns with lower levels of risk due to its seniority in the capital stack. Tighter capital standards, unrealized losses and higher loan-loss reserve requirements are forcing banks and other financial institutions to hold more capital and issue fewer loans, which is providing opportunities for nonbank lenders to fill the gap.

The multifamily housing sector is an excellent example of this trend in the commercial real estate market. There is a shortage of about 6.5 million single-family homes in the U.S. right now, a result of many factors that include a slowdown in construction dating back to the 2008 financial crisis. Even if multifamily rental units are included in this equation, there is still a deficit of about 2.3 million homes.

The lack of housing, coupled with the need for lenders to step up and fill the gap, provides an abundance of opportunity for well-capitalized nonbank lenders. They can deploy capital into high-quality loans at attractive spreads using relatively conservative underwriting metrics. Commercial real estate credit also offers a strong inflation linkage, produces recurring cash flows and helps to protect returns in a more volatile environment.

Having stable cash flow and the ability to grow income in today’s inflationary environment is highly attractive for investors. This cash-flow resiliency has been particularly true across sectors that private investors currently favor, such as built-to-rent homes and industrial warehouses.

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The Federal Reserve appears to be putting a pause on interest rate hikes for the time being, but many experts believe that the commercial real estate market will deal with what is being described as a “higher-for-longer” rate environment than what was originally expected. In the past, the Fed, the European Central Bank and the Bank of Japan used quantitative easing as a road map to indicate their desire to be protective against elevated rates.

Today, they don’t have that visibility as wages, the transition to clean-energy sources, geopolitical concerns and other fiscal issues are all disruptive variables. One thing being learned in the U.S. is that there’s more money in the system than many people had expected. The consumer economy continues to show strength, the services economy is swelling and wage growth has been only nominally subdued. Fed policymakers may not be done with their job until they inhibit the growth of the labor force.

As a result, this higher-for-longer rate environment has created unparalleled opportunity for commercial real estate credit. By staying patient, disciplined and at the forefront of the market, private lenders are strategically positioned to be major players among the sources of mortgage capital and should therefore have a place in every investor’s portfolio. ●

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This also holds true for commercial mortgage brokers. Having ironclad agreements with borrowers is an essential part of the business. Those who have such agreements must make sure they are enforceable as intended. When it comes to these contracts, the devil is in the details.

“The broker agreement should have a description of the services that will be provided, as well as those that won’t.”

Imagine a mortgage broker who is approached by a developer seeking an eight-figure loan on a commercial property that it’s planning to build. If the broker successfully connects the developer with a funding source and the loan is closed, the fee to the originator is likely to be substantial.

The agreement states, however, that it is not a commitment to fund a loan. After all, that would be the decision of the lender, and the broker might not find a willing money source if there are problems with the deal that are identified during the due-diligence process. Also, the broker might decide after looking closely at the proposed transaction that it’s not worth shopping around.

Nightmare scenario

In an actual legal case that had a similar fact pattern, the court decided that even though the broker connected the borrower with a funding source and the loan closed, the broker was not entitled to compensation. The reason is that, at the last minute, the developer terminated the agreement. As a result, there was no obligation to pay the broker because the agreement was not a commitment.

The moral of this story is that the agreement was unclear about what was (and wasn’t) covered under the contract. Of course, the broker does not commit to fund a loan no matter what. But the agreement should have been clear that the developer, once the broker connected their project with a funding source that led to a closed and funded loan, irrevocably agrees to pay the broker’s fees, even if the agreement is terminated by either party. Crystal-clear agreements are essential for safeguarding each party’s rights.

The business of putting people together to achieve an objective can be ephemeral. Contracts must be clear about which services are being offered and which are not. A broker (usually) does not guarantee that a client will find a lender. But if they do, the broker expects to be paid for the referral.

In the example above, the court determined that the payment of a due-diligence fee (essentially, compensation for the broker’s out-of-pocket expenses in vetting the borrower before approaching any lenders) was the only fee that needed to be paid. Since the agreement was terminated, it was judged that the broker should not profit from the 100-basis-point fee on the closed loan.

Time to act

No one would reasonably argue that this kind of agreement should not have a termination section, or even a term for the length of the services being rendered. After all, nobody wants to be bound forever to support a hopeless case.

In either the term or termination section of the contract, there should also be a survival clause in which each party agrees that the payment of a success fee is required even after the contract expires or terminates. The end of the contract should be the end of the broker’s search for a funding source, but it doesn’t mean that their success in locating a funding source does not merit a fee.

The survival clause needs to be based on any sort of closed transaction between the borrower and lender, or any affiliate of either party. The final deal could turn out much smaller, be unsecured, or even involve a different property that replaced the one originally intended. To ensure there is no confusion, mortgage brokers should make sure their email trails reflect the arrangement. Email is evidence, after all.

When writing a contract, be sure to include the important word “irrevocable.” In other words, the borrower must pay the subject fee without conditions. The broker did his or her job and should be compensated, even if there were five years of starts and stops on the deal. If there are any other fees in the arrangement (such as a due-diligence fee, attorney fees or expenses for lien searches), these should be carefully described as a reimbursement for the broker’s time and labor, rather than any sort of success fee.

Legal details

The broker agreement should have a description of the services that will be provided, as well as those that won’t. For example, the broker could agree to speak to at least 10 funding sources but not more than 15.

The broker may offer a proposed structure to a potential lender, but the final deal could be much different. There should be no implied promise of a lender accepting a proposal. After all, since the funding source bears the risk, it should be allowed to make any changes it finds acceptable.

Beware of applicable laws. For example, if a broker includes an equity component, they need to comply with any laws relating to the solicitation of a securities offering. They must also be aware of usury restrictions or any states with consumer disclosure laws that apply to commercial transactions.

Agreements can address these issues or be silent, depending on a broker’s strategy to govern their services. One approach would be to have both sides promise to obey the law (which they must anyway), and include an indemnification from the borrower if the originator unknowingly and non-negligently incurs civil penalties through the violation of applicable laws.

Whether this is enforceable will depend on the state involved, whether it is the broker’s, the borrower’s or the location of the project. A better approach, potentially, is to include a general indemnification from the borrower that it will reimburse the broker for any losses borne by them in the provisions of their services, except those resulting from the broker’s negligence.

A final piece of caution: Whoever signs the agreement must exist and have assets backing them. A promise of indemnification from an entity that does not yet exist is most likely worthless. If a special-purpose entity without any assets signs the contract, but the ensuing transaction is with a different special-purpose vehicle, legal entity or person, you may have great difficulty in obtaining any fees.

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Many businesspeople think that contracts exist purely to enrich attorneys. That view is, at best, ignorant of the facts. There are plenty of examples of businesses that have entered into oral contracts in which the transaction ended with one side taking advantage of the fact that no written agreement existed. If written properly, the contract binds the parties to the terms of the deal.

It is incumbent upon commercial mortgage brokers and the other members of a contractual agreement to ensure that their rights are protected. This requires the development of a properly written contract that clearly outlines all fees to be paid and the circumstances governing their payment. Without these legal protections, you may find yourself out in the cold. ●

The post The Devil Is in the Details appeared first on Scotsman Guide.

By understanding these hurdles and the financial tools available, potential homeowners can navigate the process more confidently and make informed decisions. One of the most significant barriers to homeownership is accumulating the initial downpayment.

For many aspiring homeowners, especially first-timers, saving this sum can feel like an impossible challenge. As property prices continue to soar, accumulating the funds for a downpayment or securing a mortgage with a less-than-stellar credit history can take time and effort.

Financial lifeline

Downpayment assistance programs represent a lifeline for those looking to bridge the gap between their savings and the required downpayment. These programs are financial aid initiatives designed to help potential homeowners cover the upfront purchasing cost. They aim to reduce the barrier of hefty downpayments while making homeownership more accessible.

There are a number of different types of downpayment assistance programs. Grants offer funds that a borrower doesn’t need to repay. It’s free money offered to qualified buyers to assist with their downpayment.

Low- or zero-interest loans are another form of downpayment assistance with minimal to no borrowing costs. Some of these loans might be forgivable after the borrower resides in the home for a specific duration. Deferred-payment loans allow for the repayment to be postponed for a set period, or until the property is sold or refinanced. Other programs might match the buyer’s contribution to the downpayment up to a certain amount, doubling their financial capacity.

There are hundreds of these downpayment assistance programs throughout the country. Federal, state and local governments often have initiatives to encourage homeownership, especially in certain neighborhoods, or for specific groups like veterans or first-time buyers. An example at the federal level are the homeownership vouchers through the U.S. Department of Housing and Urban Development.

Many nonprofit organizations, driven by a mission to promote community development and homeownership, offer downpayment assistance. Organizations like the National Homebuyers Fund or NeighborWorks America are notable examples. These bodies, which often work at the city or county level, have programs tailored to residents’ needs. They may focus on revitalizing certain neighborhoods or cater to local populations, such as teachers or public service workers.

Game-changing assist

While criteria can vary based on the source and type of downpayment assistance program, some common eligibility requirements include income restrictions or first-time homebuyer status. Others require homebuyer education or residence requirements.

Since many downpayment assistance programs are designed for low- to moderate-income buyers, applicants must fall below certain income thresholds to qualify. Some programs are exclusively for first-time homebuyers. It’s worth noting that “first time” often includes someone who hasn’t owned a home in the past three years.

To ensure informed homeownership, some programs require applicants to complete a homebuyer education course. Most of these programs require the purchased property to be the buyer’s primary residence, meaning that investment properties typically don’t qualify. There might be limits on the property’s purchase price to ensure the program caters to those who need it most.

Downpayment assistance programs can be a game changer for aspiring homeowners, turning their dream into tangible reality. By understanding the nuances of these programs, mortgage originators can help potential homeowners navigate options more confidently and take a significant step closer to holding the keys to their new home.

Dynamic combination

When you mix downpayment assistance with an FHA loan, you create a synergy that can turn homeownership dreams into reality. These financing tools forge a dynamic combination that can have a transformative impact on the lives of new homeowners.

The primary advantage of an FHA loan is lenient criteria. With lower downpayments and flexible credit requirements, these products already pave a smoother path to homeownership. Add to that the benefit of downpayment assistance and you have a solution that significantly reduces the upfront costs of buying a home.

FHA loans have democratized the homeownership process, ensuring it’s not just a privilege for those with hefty savings or impeccable credit scores.By combining an FHA loan with downpayment assistance, the initial financial strain is reduced, allowing a buyer to focus on their monthly mortgage payment and other homeownership expenses.

Rewarding journey

While the path to homeownership — especially with tools like FHA loans and downpayment assistance — can seem labyrinthine, the proper knowledge and approach can make it a rewarding journey. Equip your clients with the right insights, remain diligent, and you’ll soon find them holding the keys to their dream abode. Remember, every homeowner was once a first-time applicant.

Even the reduced downpayment of an FHA loan can be daunting for many. But downpayment assistance paired with an FHA loan can bridge the financial gap. Together, these tools weave a narrative of empowerment, inclusivity and hope.

They symbolize a nation’s commitment to ensuring that every individual, irrespective of their financial standing or past credit mistakes, has a shot at the American dream of owning a home. From young couples stepping into their first homes, to single parents providing stable environments for their children, to retirees finding comfort in their golden years, FHA loans and downpayment assistance programs resonate in every corner.

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At the crossroads of dreams and reality, it’s heartening to know that tools like FHA loans and downpayment assistance programs are ready to guide, support and unlock doors. They are more than just financial instruments; they are enablers of dreams, testaments to resilience and pillars of communities. With these tools in hand, the path ahead is promising and achievable. ●

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State and local HFAs support the purchase, development and rehabilitation of affordable homes and rental apartments for low- and moderate-income families. These agencies play a crucial role in providing affordable housing across the country. (And yes, HFA is not to be confused with FHA or Federal Housing Administration loans.)

“You or your company may have had a prior unsatisfactory experience in the HFA space. The good news is that time and technology have facilitated important progress.”

Not all housing finance agencies are alike. How they operate and function can vary widely. Typically, HFAs act as independent organizations overseen by a board of directors that’s appointed by an elected official. For state-level HFAs, the governor is usually the appointing authority.

You or your company may have had a prior unsatisfactory experience in the HFA space. The good news is that time and technology have facilitated important progress.

Shapes and sizes

Let’s begin by distinguishing HFA models. Some of these agencies operate as full-scale mortgage banking institutions with in-house loan origination, secondary marketing, servicing and other centralized business units required to conduct mortgage lending. A small number of HFAs are approved seller-servicers through Freddie Mac, Fannie Mae and Ginnie Mae. They do not rely on a lender as the master servicer.

Some HFAs are more focused on multifamily finance or niche products to serve their specific market. Some have a contractual partnership with a mortgage lender or another HFA to conduct some or all the activities required to manage a first-mortgage product offering and downpayment assistance. This partnership creates a master servicer that is the conduit to buy all of the loans originated through the HFA’s program by partner lenders.

You may know or already work with some of these institutions. For instance, U.S. Bank is a master servicer that works with more than 40 state and local HFAs across the country. HFAs with servicing capabilities include the Idaho Housing and Finance Association, as well as ServiSolutions, which is a division of the Alabama Housing Finance Authority. Lakeview Loan Servicing, one of the nation’s largest servicers, also works with multiple state HFAs.

To work with an HFA or its master servicer, an originating lender will need the systems and process support to sell whole loans and comply with the agency’s policies and procedures. Lenders will need to complete an application obtained from the HFA or its master servicer, in addition to paying an application review fee. In most cases, it is similar to being approved to deliver loans to a correspondent.

Questions will be asked about your company’s financial condition, production levels, quality control and appraisal process. Be prepared to provide information on any active legal actions, audit reports, resumes of key personnel, proof of insurance and other details. In addition, there may be less common requirements, such as actual office presence in a specific state.

Pots of money

Congress established the tax-exempt bond program in 1968 to fund affordable housing, allowing for the creation of many of the state housing finance agencies. This provided state HFAs with a vital funding source. Tax-exempt bond financing can produce below-market interest rates on 30-year fixed-rate mortgages for first-time homebuyers. This is especially important in a rising-rate environment like today’s.

In 2019, state HFAs financed more than 64,200 mortgages in the U.S. with these bond programs. These agencies also built or rehabilitated more than 46,200 affordable rental units through multifamily bonds. When Congress created the bond program, each state could issue these low-interest bonds up to a cap of $50 per state resident. Due to program effectiveness along with strong lobbying efforts, this limit has grown over the years to $120 per capita in 2023.

Some HFAs also rely on the to-be-announced (TBA) secondary market. The TBA market is a mechanism to obtain pricing for the future sale of securities and is a common form of mortgage-backed securities trading. HFAs can supplement their tax-exempt bond programs by leveraging this standard taxable source of funding.

In addition, many state and local agencies benefit from other federally funded programs. The Community Development Block Grant program received $3 billion in funding in 2023, while the Home Investment Partnerships Program was funded at $1.5 billion. These programs can pay for specific housing needs, such as downpayment assistance and home improvements.

Tax-exempt bond programs generally require additional documentation. Beyond credit qualification, the lender will need to provide documented proof of the borrower’s maximum household income and first-time homebuyer status. Therefore, if a lender is participating in a program that is funded by the sale of tax-exempt bonds, expect to see a loan delivery checklist that contains more documentation for each file.

One example is the need to ensure that a borrower signs the recapture notice. Borrowers may be subject to recapture — a tax to the federal government for the benefit of a lower-interest mortgage. Recapture tax is rarely sought but is required to be paid if all three of the following conditions occur: the home is sold within nine years of being purchased; the borrower’s income exceeds allowable limits at the time of sale; and the borrower profits from the sale.

Rolled-up sleeves

Downpayment assistance programs are an important tool to support first-time homebuyers and purchase-market production. More than ever, originators need to offer these programs. Even if a borrower is ultimately able to qualify without downpayment assistance, the originator has demonstrated their value and is likely to earn future referrals by having more ways to help the client qualify.

Many large banks have stopped participating in some or all state HFA programs. This is due to slim profit margins that don’t support the additional resources needed to ensure the quality of loans. Even the more nimble independent mortgage banks have been vocal in recent years about the lack of consistency in program guidelines, processing, required technology support or manual workarounds.

Anyone interested in expanding homeownership opportunities in underserved communities should applaud the government-sponsored enterprises (GSEs) and advocacy groups for their efforts to bring more consistency to downpayment assistance programs. In the past few years, there has been silent but impactful work to develop standard subordinate legal documents for these programs.

This will reduce the time and expertise needed by a lender to review documents and comply with GSE requirements for downpayment assistance. Docutech and DocMagic were part of the legal team that created these documents, which are now available for the 16 states that are currently using them as pilot participants.

Another advancement is the HFA1 tool that’s now available through the National Council of State Housing Agencies. This tool indicates the alignments and differences for programs offered by 23 state HFAs. Lenders will find details on mortgage and downpayment assistance qualification, closing, delivery and other instructions.

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Despite the complexity of participating in dozens or hundreds of programs, it can be beneficial and lucrative for lenders and originators who can patiently put the required support in place and build a name for themselves as experts in the field. HFA websites will often post lists of their best lenders to refer potential homebuyers.

Real estate professionals who work in the first-time homebuyer market will look for an originator with the widest product menu and the ability to make deals work by explaining to the borrower how they might benefit from a subsidy for the downpayment or closing costs. These subsidies could feature deferred payments, payments forgiven over time or grants that will never need to be repaid. ●

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The novice approached the two luminaries and asked, “If you could name one thing that is responsible for your success, what would it be?” He expected the billionaire businessmen to speak about the importance of hard work or maybe discuss secret metrics for success. The answer that each provided simultaneously surprised him. It was one word: focus.

“The preliminary discussion to have with a client — before considering any other contingencies — centers on whether a deal has legs.”

Buffett and Gates are legendary for their abilities to cut out all the noise and focus on top priorities. Each of them are incredibly protective of their time and are very selective about what they work on.

Steve Jobs, arguably one of the most successful business leaders of our time, had the same take-no-prisoners focus. When Jobs returned to Apple in 1997 as its CEO, he famously reviewed the scores of product initiatives being pursued at the time and eliminated almost all of them, distilling the company’s focus down to what would become four iconic products.

What does this have to do with commercial mortgage brokers? Everything. Brokers who want to get deals funded and maximize their incomes need to focus on the loan requests that have the highest chances of success. Of course, this is easier said than done.

Picking winners

The most successful mortgage brokers are protective of their time and only focus on viable loan requests. Part of this process is to learn how to spot the winners. Another aspect of the process is being comfortable with saying no. This may entail learning some new habits — or breaking old ones.

When brokers receive loan requests, they need to understand the good, the bad and the ugly of each potential deal. From there, they need to make calls on whether the loans are fundable.

Brokers could go through the files and look for liabilities — tax liens, ownership glitches, credit issues, etc. — and ponder whether these problems can be resolved. Then they could run the numbers to see if the files are workable. But there are other, more efficient ways to get the job done.

Right questions

The preliminary discussion to have with a client — before considering any other contingencies — centers on whether a deal has legs. There are some crucial questions you will need to ask.

Does the loan request fall within the chosen lender’s parameters?A broker needs to determine whether the loan request  is too high or too low for the lender in question. Work with the borrower to hammer out what’s needed in terms of the loan amount or terms. A lender won’t want to fund a deal if the borrower doesn’t have a plan. For example, borrowers who put “max LTV” in their loan requests probably don’t have explicit uses in mind for the additional leverage.

Will the project at hand service the debt at today’s interest rates? One of the first things a lender will do is a debt-service-coverage ratio (DSCR) calculation. Head off an instant rejection by beating them to the punch.

For example, with bridge loan rates hovering in the 11% to 12% range today, do a quick calculation to find out whether the borrower’s income will cover the debt. Brokers can simply take the requested loan amount and multiply it by the interest rate to get a picture of what the annual interest payments will be. Compare this figure against the borrower’s net operating income.

If the proposed loan won’t allow for a positive DSCR, formulate a strategy for the borrower that could make the request more appealing. For example, look at their profit-and-loss statements or tax returns to find items like depreciation or one-time expenses, which can be added back to the equation to enhance net operating income. An interest reserve, which is a capital account created by the lender to fund the loan’s interest payments for a period of time, is another option if the borrower has a solid story.

Right metrics

Brokers also must determine whether the property qualifies under the lender’s parameters. The disconnect between the borrower’s estimate of property value and the appraised value is one of the more common reasons for a deal to fail. Yet the lender’s quote for loan-to-value ratio, cash out and the total funding amount all hinge on this estimate being realistic.

Consider whether the metrics the borrower is using are reliable. For example, the purchase price of the subject property will control the valuation, regardless of whether the borrower thinks the property is worth more. When a borrower says a property is worth $3 million but the purchase price is $2 million, a lender is not going to approve $2.5 million for the purchase.

In addition to valuation, there are many factors related to the property that need to be fleshed out. The location is key for determining population and other demographics. Tertiary markets — some suburban and most rural areas — are difficult to qualify in today’s market and may result in a quick rejection.

Crime statistics can come into play. Take, for instance, a property that was in an area where a resident had a 1 in 13 chance of becoming the victim of a violent crime. The lender passed.

Asset class also can impact a lender’s interest. Office properties are difficult to fund now, so these deals will require extra effort to persuade a lender. Look at all fundamental performance metrics to determine whether the property is worth the time.

It’s always wise to check the borrower’s numbers. Find historical financial reports and see whether the property’s income has gone up or down over the past few years. Resolve the red flags that will inevitably come up during underwriting, so you don’t waste time on a deal that’s not viable.

Borrower qualifications

Does the borrower have the qualifications the lender is seeking? Different lenders have different expectations for their borrowers. For many, prior experience in the asset class is paramount. For others, it’s liquidity, and for others, it’s credit. A common example with a bridge loan is to require the borrower to have a net worth equal to or greater than the loan amount, with liquidity — cash in the bank — that’s at 10% of the loan amount.

The borrower’s character also comes into play for some lenders. A cursory search can uncover a criminal background or a history of litigation. It’s always better to discover these issues before the lender does, so you can let go of a deal with a fatal flaw.

When working with multifamily properties, take a moment to Google the property address to see what the ratings and reviews look like. This is a way to catch badly managed properties and uncover elevated crime statistics. If you find something negative, see if there’s a good explanation for it.

From there, dig in and see if other red flags come up. If the lender likes the borrower’s story, there’s a greater likelihood they may be willing to tackle some problems. But if the deal doesn’t have the fundamentals to begin with, there is virtually no chance of being funded. Why waste time resolving a situation that has no solution?

When you’re speaking with a borrower, learn to focus on what you need to know. This may require reading between the lines. For example, a borrower may offer up a recent appraisal of the property. From their perspective, this saves time and money while proving their valuation claims.

The lender will have a different perspective and several questions. Why do they have a recent appraisal? Was it performed for another lender? Did that lender turn down the deal? What has the borrower done to overcome an objection from another lender?

Letting go

Rejecting a deal is difficult because it’s counterintuitive to turn away business. But relying solely on volume is deceptive. It’s easy to get seduced into thinking that a risky deal is worth a phone call at the very least. One call won’t hurt, right?

Let’s say you have a little extra time. You make a quick phone call to a lender to float a so-so deal. Nothing ventured, nothing gained. One phone call leads to one rejection and zero income. The problem with this habit is that it’s not sustainable. A broker who makes 100 useless calls over the course of a year can wind up with a serious loss of income.

Your time would be better spent honing skills that will allow you to quickly identify the deals that will close. Brokers need to focus their time and resources on these types of deals. Let the others go before they steal your precious time.

It’s also a good idea to periodically evaluate how you get your leads. If brokers find they’re getting stuck with too many loan requests that are no good, they need to explore ways to improve their networking connections and put more time into marketing efforts.

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Commercial mortgage brokers don’t need to be successful billionaires to run their businesses like one. They can thwart the time thief. By focusing only on what’s important, they can improve deal flow, get clients over the finish line and revel in rising income.

At the same time, there are ancillary benefits for brokers who focus on the best deals. These include better business relationships, larger professional networks, and strong reputations with lenders for thoroughness and quality deals that are worth considering. ●

The post Escape the Time Thief appeared first on Scotsman Guide.

Every journey has a story. Imagine a new broker who is learning about SBA loans from his high-performing colleagues. The broker quickly realizes that the leaders in this space have carved out loan niches for themselves. Some specialize in specific industries while others focus on distinct loan purposes.

“A well-prepared borrower who has all documentation in order and a clear understanding of the steps involved can significantly streamline the process.”

Inspired by these observations, the broker decides to concentrate his efforts toward funding SBA loans in specific sectors such as hospitality and gas stations. He quickly sees the number of loans he’s completing skyrocket. The lesson is clear: Amid the variety of SBA loans, finding and mastering a niche can set a trajectory for success.

Over the years, the SBA has undergone significant transformations as the agency has adapted to the ever-changing needs of businesses and the broader economy. For brokers just learning about it, the government agency doesn’t offer direct loans. Instead, the SBA helps small businesses secure capital by guaranteeing repayment, sometimes for as much as 85% or 90% of the amount borrowed, from a bank or other lending institution.

Know the details

The SBA offers a variety of loan programs, each designed to support different business needs. The 7(a) loan program is the agency’s most common offering, with loans of up to $5 million for a range of business purposes, including working capital, expansion or equipment purchases.

The 504 loan program, available through a certified development company (CDC), is also popular, with financing tailored for major fixed-asset purchases such as real estate or large equipment. It offers long-term, fixed-rate financing of up to $5.5 million. At the other end of the spectrum, the SBA’s microloan program supports smaller businesses with loans of up to $50,000. These loans average $13,000 in size and are ideal for startups or other small companies in need of a modest capital boost.

The SBA has worked to streamline the lending process and shorten the wait times for borrowers. But myths abound. One such misconception is the time-intensive nature of an SBA loan. With the right partnerships, originating these loans can be as efficient as other traditional financing mechanisms.

“Brokers who are persistent, willing to delve deep, question the status quo and relentlessly pursue the best for their clients are the ones who truly stand out.”

The SBA process employs a tiered structure, with timelines that fluctuate based on the loan’s size, purpose and specific program being utilized. There are many nuances to the deal that can make the process speed up or slow down. For 7(a) loans, the time frame can vary significantly. Simple cases can require as little as 20 days, while complex transactions involving construction could extend beyond 90 days.

The 7(a) process encompasses three primary phases: packaging, underwriting and closing. Packaging speeds hinge on the borrower’s responsiveness and can take as little as 48 hours if documentation is promptly provided, although it usually lasts one to two weeks. Underwriting is contingent upon the deal’s complexity and takes one to two weeks on average. The closing phase can take approximately three to six weeks, although it’s not uncommon for this period to be extended due to additional third-party reports that are necessary for more intricate deals.

Throughout these stages, the borrower and broker must gather comprehensive financial data, not only for the business in question but also for any personal guarantors or associated businesses in which the borrower has a majority ownership stake. This thorough vetting process ensures a robust and transparent financial overview, which is critical for successful loan approval.

Dual-track process

The SBA 504 loan program is a dual-track process that demands synchronized efforts between a conventional lender and a certified development company (CDC). The CDC serves as the local delivery partner for the SBA loan.

As the borrower navigates through the application, the bank initiates its underwriting procedures in tandem with the CDC, which is responsible for securing SBA approval for their subordinate lien position or second trust deed. This coordination is crucial since the 504 loan is designed for the acquisition or refinancing of real estate or other significant fixed assets, thereby necessitating a layered approach to due diligence.

During this time, critical assessments such as property appraisals and environmental reports are conducted to ensure compliance with federal guidelines and to evaluate any potential risks. In addition, the process includes securing proper title documentation and insurance coverage. These steps are integral to safeguarding the interests of all parties involved in the transaction.

Typically, the entire 504 lending process from application to disbursement spans a period of 60 to 90 days. But it’s essential for mortgage brokers to communicate to clients that this timeline can be affected by the complexity of the deal and the promptness of submitting the required documentation. As such, a well-prepared borrower who has all documentation in order and a clear understanding of the steps involved can significantly streamline the process.

Watch for challenges

SBA loans are not without their challenges. For brokers wanting to originate them, it’s imperative that they go beyond a surface-level understanding and truly immerse themselves in the intricate processes that define this space. They must be responsive, organized and tenacious.

Clients are often navigating unfamiliar terrain when seeking SBA loans. Their anxieties, questions and concerns are valid. Brokers need to be responsive to their needs and ensure open channels of timely communication. In moments of uncertainty, a prompt reply or a reassuring update can make a world of difference.

The SBA loan process can be likened to piecing together a jigsaw puzzle. Each piece, whether it’s a financial document, a business plan or a property appraisal, holds significance. Brokers need to take a methodical and organized approach to ensure that no detail is overlooked. It’s all about maintaining thorough documentation, streamlined workflows and structured client interactions.

Central to a broker’s success is a systematic approach to loan origination. It starts with an in-depth understanding of the borrower’s needs. This foundation then paves the way for collecting the relevant documents and ensuring they align with the loan program’s prerequisites. But it doesn’t stop there. It’s also important to provide a thorough cash-flow analysis to evaluate the financial health of the business and discern its viability.

The SBA loan process can be complex, and brokers will find that tenacity comes in handy. Regulations evolve, client needs vary and economic climates shift. It’s a domain that demands a broker to be both knowledgeable and resilient. Brokers who are persistent, willing to delve deep, question the status quo and relentlessly pursue the best for their clients are the ones who truly stand out.

Lasting partnerships

As commercial mortgage brokers become successful, it’s easy to become focused on the allure of rate shopping. The prospects of landing the most competitive rates and the highest referral fees are enticing for any firm.

Possibly more important for long-term success, however, is relationship building. By forging lasting partnerships with lenders, brokers will find that such connections are the true cornerstones of success.

The SBA loan journey is often filled with intricate processes, meticulous documentation and constant communication. In such a scenario, the quality of the relationship with the bank can significantly influence the overall experience for both the broker and the borrower. It’s about finding lenders that offer not only competitive rates but also a collaborative spirit, a willingness to guide and a commitment to transparency.

Brokers should seek out banks that resonate with their working styles, values and goals. This alignment is about more than just transactional interactions. It’s about shared vision and mutual respect. This can lead to a smoother and quicker process. By nurturing this relationship through regular check-ins and ensuring open channels of communication, the resulting ties may lead to faster response times as well as exclusive access to special offerings.

These relationships also create a ripple effect that enhances the experience for a client, expedites their loan process, and often leads to better terms and conditions. Having a solid relationship with a bank can boost a client’s confidence in the broker’s abilities.

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In the realm of SBA lending, it’s easy to get lost in the numbers and the allure of quick wins. But it’s relationships that make the real difference. These deep-rooted connections with banks aren’t just about smooth transactions; they are the backbone of your success. Every broker can crunch numbers, but the real leaders in this space dive headfirst into the world of relationship building.

This isn’t just about sealing a deal. It’s about forging partnerships that last. To those standing at the edge of the water, don’t just dip your toes in. Dive deep, embrace the challenges and remember that with genuine relationships and a clear focus, successful SBA lending is not merely achievable but also inevitable. ●

The post Navigating the SBA Loan Landscape appeared first on Scotsman Guide.

These tools, as they continue to advance, are projected to drive a 7% (or $7 trillion) increase in global gross domestic product and boost productivity growth by 1.5 percentage points over a 10-year period, according to Goldman Sachs. Even now, AI and machine learning are revolutionizing the mortgage sector by streamlining processes, improving risk assessment and reshaping the lending landscape.

“Welcome to the future of mortgage origination — a future where AI and machine learning spearhead progress.”

These technologies are making processes more efficient, fueling an era of increased accuracy, reduced risk, and better experiences for lenders and borrowers. Allied Market Research reported that the global mortgage market, which generated nearly $11.5 trillion in 2021, is projected to reach $27.5 trillion by 2031, with a compound annual growth rate of 9.5% from 2022 to 2031. A main driver for this projected growth is the increased investment in software that speeds up the mortgage application process.

Navigating the complexities of this technological evolution will enable the mortgage industry to examine some of its existing challenges while ensuring that the benefits of AI are realized without compromising ethics or fairness in lending practices. Welcome to the future of mortgage origination — a future where AI and machine learning spearhead progress.

Seismic shift

The loan origination process has historically been a labor-intensive and time-consuming effort. Mortgage originators have had to scrutinize mountains of paperwork, verify financial documents and manually evaluate creditworthiness — a lengthy process that could take several weeks. The arrival of AI and machine learning, however, has brought about a seismic shift in how this process is executed, offering a host of benefits.

One of the most notable advantages of AI and machine learning in mortgage origination is the automation of repetitive tasks. Intelligent algorithms can now handle tasks such as data entry, document verification and information extraction that once required substantial human involvement. This cuts the workload for mortgage originators and reduces the chances of errors that accompany manual data entry.

The loan origination process also becomes considerably more efficient with AI and machine learning. Algorithms can analyze massive quantities of data in a fraction of the time it would take a human, facilitating faster loan approval times. Borrowers no longer have to endure long wait times for decisions on their applications, resulting in a more positive experience.

 “Ethical AI development is imperative to avoid bias, discrimination and unfair lending practices.”

In addition, AI and machine learning support a more borrower- focused approach. These technologies enable lenders to provide personalized services and faster response times. A borrower can receive real-time updates on the status of their application, the result of a more transparent and less stressful process.

AI and machine learning algorithms can analyze a multitude of data points far beyond what traditional approaches could accomplish. These technologies consider financial data and factors like borrower behavior and online digital history. This broad analysis results in more informed lending decisions, increasing the probability of approved loans that manual processes may have overlooked.

The adoption of AI and machine learning in mortgage origination can lead to substantial cost savings. Lenders can allocate resources more efficiently and reduce the need for extensive manual labor. These savings can be passed to borrowers through lower fees and interest rates.

Weigh risks

Risk assessment is a pivotal stage in mortgage origination. Traditionally, lenders relied heavily on financial data such as credit scores and income verification. Today, AI and machine learning integration unlocks a wealth of digital data sources, offering a complete understanding of borrower risk.

AI and machine learning are expanding risk assessment capabilities by examining a borrower’s online digital history, which comprises social media activity, mobile device usage, payment systems and online transactions. This provides insights into an applicant’s financial behaviors and lifestyle choices that were not previously visible.

AI algorithms identify elusive patterns and anomalies in a borrower’s digital history, enabling highly informed lending decisions. These algorithms can recognize responsible financial behavior and detect potential issues like erratic income sources or unusual spending habits, considerably minimizing a lender’s default risk.

Additionally, AI acts as a vigilant protector, combating fraud by continually monitoring online activities and transactions. AI quickly detects anomalies and suspicious patterns, safeguarding both lenders and borrowers.

AI’s objectivity and consistency decrease the potential for human error, generating more reliable risk assessments. Customized risk profiles tailored to an individual’s circumstances offer a more equitable lending environment while faster decisionmaking benefits borrowers.

Eliminate errors

Mortgage originators can modernize operations and improve lending practices by implementing AI and machine learning solutions. These advanced technologies can contribute to a more equitable and efficient lending ecosystem by reducing costs, eliminating errors and mitigating bias. Responsible AI adoption supports principles of fairness and accuracy in the mortgage industry while producing multifaceted rewards.

Traditional mortgage origination processes are resource-intensive, requiring ample human labor to perform tasks such as data entry and document verification. AI and machine learning automation markedly reduce the need for manual involvement. This improved operational efficiency gradually lowers overhead costs, aiding originators in allocating resources more effectively.

Manual processes are susceptible to human error — and in mortgage origination, errors can be costly. AI and machine learning excel in consistency and accuracy, eliminating the likelihood of errors in tasks that can be automated. This results in a more dependable origination process, benefiting lenders and borrowers by preventing costly mistakes.

Bias in lending, such as digital redlining, is a challenge associated with these technologies. AI and machine learning systems can be designed for transparency, auditability and continuous fairness monitoring. Ethical AI development practices and diverse, representative datasets ensure that lending decisions are based on objective criteria rather than the perpetuation of historic biases. Systematic audits and oversight are key to maintaining fairness and compliance.

Prudent navigation

The adoption of AI and machine learning in mortgage origination produces transformative benefits, but unique challenges call for prudent navigation. Because AI and machine learning greatly depend on borrower data for risk assessment and automation, ensuring the privacy and security of data is paramount.

Lenders must employ robust data encryption, secure storage practices and strict adherence to data protection regulations. Building trust through transparent handling practices is critical to assure borrowers of their data’s safety.

Ethical AI development is imperative to avoid bias, discrimination and unfair lending practices. Using diverse and representative datasets for training, routinely auditing algorithms for fairness, and maintaining transparency in lending decisions are critical steps in establishing ethical AI practices and ending digital redlining.

The highly regulated mortgage industry demands strict adherence to rules and standards. AI and machine learning integrations must align with these regulations, requiring close collaboration with legal experts to certify compliance, particularly when AI-driven decisions have financial implications for borrowers.

Maintaining transparency in lending decisions is of great importance since AI and machine learning algorithms operate in ways that can be difficult to understand or interpret. To build trust, borrowers must have explanations for how these technologies are used in lending processes.

While automation is a key advantage, human oversight remains essential. Striking the right balance between automation and human intervention affirms that AI-driven decisions support organizational goals and consider complex cases or exceptions.

AI and machine learning technologies evolve rapidly. Keeping pace with advancements and adapting systems accordingly are ongoing challenges. Investments in ongoing training — and having a keen eye for evolving best practices — are vital to remain competitive and compliant.

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Integrating AI and machine learning into mortgage origination marks a profound shift in the lending landscape that offers promise, opportunity and challenges. AI and machine learning will modernize the origination process by providing operational efficiencies, faster approval times and better client experiences.

Borrowers benefit from faster decisions while lenders enjoy cost savings and enhanced accuracy. By implementing these technologies responsibly and addressing challenges diligently, mortgage originators can lead the industry toward a more competitive, compliant and borrower-centric future. ●

The post The Sky’s the Limit appeared first on Scotsman Guide.

The average U.S. homeowner possessed an impressive $288,000 in equity at the midpoint of 2023, according to CoreLogic. This was a substantial increase from the $182,000 recorded prior to the COVID-19 pandemic. One popular way to access home equity is with a second mortgage.

“Non-QM second-lien mortgages also offer greater creativity in underwriting, making it possible for borrowers with less-than-perfect credit histories or irregular income streams to access equity.”

A second mortgage provides homeowners with a convenient and flexible source of funds. Whether the funds are used to finance home improvements, consolidate debt, subsidize education or secure additional investments, second mortgages are an effective means to achieve personal financial goals.

In 2022, this market expanded with the introduction of a nonqualified mortgage (non-QM) version of a second lien. Non-QM loans are those that cannot be purchased by the federal government or the government- sponsored enterprises, Fannie Mae and Freddie Mac. Conventional and non-QM second mortgages are tools for mortgage originators to help clients meet their financing needs.

Second lien

A second mortgage is a type of loan that is taken out on a property that already has a primary mortgage in place. It is also commonly referred to as a second lien because it is subordinate to the first mortgage. In case of default, the first mortgage lender has priority in recouping their money from the sale of the property.

Because of the existing first mortgage on a property, a second mortgage is taken out against the portion of the home that has already been paid off. A lender will determine how much equity is in the home and will then structure a loan against a portion of it, leaving the first mortgage fully intact.

Second mortgages are popular with borrowers for many reasons. First, unlike other types of loans, the money from a second mortgage can be used for almost any purpose. Second, interest rates on second mortgages are substantially lower than other kinds of consumer debt products. This is why it’s especially appealing to use funds from a second mortgage to pay off high-interest credit cards.

Finally, when a borrower takes out a second mortgage on their home, they can receive the entire amount of the loan in a lump sum at closing. Depending on their circumstances and how they intend to use the funds, this can be particularly advantageous to the borrower.

Informed decisions

Understanding the intricacies of second mortgages is crucial, as it can empower homeowners to make informed decisions and maximize their equity without compromising their long-term financial security. Like any major financial decision, there are pros and cons to consider when borrowing funds in this fashion.

Second mortgages often come with lower interest rates compared to credit cards or personal loans because they are secured by a home’s equity. If the second mortgage funds are used to erase high- interest debt, this can result in significant savings to the borrower.

The interest paid on a second mortgage is deductible, albeit only under certain terms. The type of loan and the amount of debt, as well as the loan origination date, are factors that can determine whether a second mortgage qualifies for a tax deduction. Investing the funds from a second mortgage into home improvements can increase the value of a property, potentially providing a return on investment when the house is sold.

But there are drawbacks. Since a second mortgage is secured by a borrower’s home, failure to make payments could lead to foreclosure. Acquiring a second mortgage means the assumption of more debt. It is crucial for borrowers to ensure they can afford the additional payment without straining their budget.

Obtaining a second mortgage may involve the payment of various expenses, including application fees, appraisal costs and closing costs. These additional fees can increase the overall cost of the loan. A second mortgage also reduces the equity in a home. Economic changes or a decline in the housing market can affect the value of a home, potentially leaving a borrower with less equity than they might have expected.

Another option

For some borrowers who wish to access the equity in their homes, a home equity line of credit (HELOC) might be a more suitable option than a second mortgage. Both types of loans allow homeowners to access money from accrued equity.

A HELOC, however, is substantially different in terms of how funds are accessed, the repayment obligations and other key aspects. A borrower’s home serves as collateral for the loan.

The lender will typically determine the maximum amount that can be borrowed based on a percentage of the home’s appraised value and the remaining first mortgage balance.

The lender will establish a set credit limit, and the borrower can access and repay money as needed within that limit. HELOCs usually have a draw period of five to 10 years. During this time, the borrower is only required to make interest payments on the amount that has been withdrawn.

After the draw period ends, the borrower enters the repayment period. During this phase, no more money can be taken out, and the borrower begins to repay the loan principal and interest. Repayment periods typically last 10 to 20 years. HELOCs are generally offered with variable interest rates, which means that the rate can change over time based on fluctuations in a specified benchmark, such as the prime rate.

Individual situations

Whether a second mortgage or a HELOC is a better option for a homeowner depends on individual financial situations, goals and preferences. There’s no one-size-fits-all answer, as both options have their own advantages and disadvantages.

Second mortgages often come with fixed interest rates, which means that the borrower’s monthly payments remain consistent over time. This can provide more stability and predictability compared to HELOCs, which usually have variable rates.

If your client needs a significant amount of money upfront for a specific purpose, a second mortgage might be more suitable as it typically provides a lump sum. Since second mortgages come with a fixed repayment schedule, it can be easier to budget for these regular payments over the life of the loan. This can be especially beneficial for homeowners who prefer the discipline of consistent payments.

If current interest rates are favorable, a second mortgage with a fixed interest rate can help you lock in the same rate for the entire loan term, protecting the borrower from any future rate hikes. Second mortgages often have longer repayment terms compared to HELOCs. This can result in lower monthly payments, which might be advantageous for homeowners with tighter budgets.

When a borrower takes out a second mortgage, they make a one-time decision regarding the loan amount and terms. This can be appealing if they prefer to secure a specific amount of money without ongoing access to credit like a HELOC.

Greater flexibilty

The introduction of non-QM second mortgages are blazing a new trail for even greater flexibility to tap into home equity. Non-QM second-lien mortgages stand out in the world of lending due to their unique characteristics and flexibility.

Unlike traditional mortgages, these loans do not conform to the stringent guidelines set by Fannie Mae and Freddie Mac. This nonconformity allows lenders to tailor loan terms to individual borrowers, making them an attractive option for those with unique financial situations or nontraditional income sources.

Non-QM second-lien mortgages also offer greater creativity in underwriting, making it possible for borrowers with less-than-perfect credit histories or irregular income streams to access equity. While they may come with slightly higher interest rates to mitigate risk, these loans provide an invaluable alternative for those who wouldn’t otherwise qualify for traditional financing, highlighting their distinctive place within the mortgage market.

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Whether it’s a second mortgage or a home equity line of credit, these loans provide homeowners with access to additional funds, allowing them to finance major expenses or pursue financial goals. Before they choose to go this route, it’s essential to carefully assess your client’s financial situation, compare interest rates and terms from different lenders, and consider the potential risks and benefits. ●

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These complex commercial property changes are having significant impacts on various stakeholders, especially those involved with finance. It is important to seek clarity and perspective on these emerging trends, their implications for all involved and ways for finance professionals to effectively navigate this evolving terrain.

“Recent trends in the commercial real estate market, particularly in renowned technology hubs like San Francisco, have included sharp downward movements in property valuations.”

At the forefront of the massive change are mortgage brokers who in the past had standardized models to assess the risks associated with properties. With fluctuating values, especially in major markets such as San Francisco, Chicago and New York City, these models now need a fresh lens.

Properties that were traditionally perceived as lucrative and virtually recession-proof are now enveloped in layers of uncertainty. This newfound unpredictability calls for a more meticulous and nuanced approach to risk assessment, ensuring that every potential pitfall is accounted for.

Recent trends in the commercial real estate market, particularly in renowned technology hubs like San Francisco, have included sharp downward movements in property valuations. As the backbone of the U.S. tech industry, cities like San Francisco have traditionally commanded premium prices. But current data paints a different picture and indicates a directional shift in macroeconomics.

Office-space dilemma

The commercial real estate market in San Francisco includes a few recent sales of office buildings at shocking discounts. Some properties are being discounted by 60% to 70% or more compared to what they were valued at just a few years ago.

Historically, office spaces in business hubs have been in high demand, driven by a thriving tech community, startups and ancillary businesses. But a combination of factors, including the broader acceptance of remote work following the COVID-19 pandemic and the high operational costs associated with maintaining offices in prime locations, has led to reduced demand and has subsequently pushed down valuations.

“As always, relationships are the bedrock of the mortgage industry. In these times, a network that includes both quality lenders and borrowers is an invaluable asset.”

JLL reported that San Francisco’s office vacancy rate increased to more than 30% in third-quarter 2023. It was the 15th consecutive quarter in which the vacancy rate increased. The dip in the city’s office valuations has had a cascading effect, leading to a deluge of tax appeals. Among the major players, Brookfield Properties requested a 75% reduction in the value of an office tower on Market Street, while Columbia Property Trust sought a 50% cut on three of its office holdings.

Blackstone wasn’t far behind, appealing for reductions of 20% to 25% for three of its waterfront properties. In the fiscal year ending this past June, tax filers in the city appealed for an average reduction of 48% on property assessed at more than $60 billion.

For cities, this wave of appeals spells fiscal strain. San Francisco, which was already grappling with a projected budget deficit of $780 million through 2025, anticipates refunding $167 million due to these property tax appeals.

Cook County troubles

While San Francisco’s declining values and increasing tax appeals create a challenging landscape, property owners thousands of miles away in Cook County, Illinois, are grappling with an entirely different kind of shock: skyrocketing property tax bills. About 40,000 residents in Cook County are filing appeals.

Amid a backdrop of rising inflation that negatively affects consumers, some commercial real estate owners have seen their tax bills double or triple in a single year. Data obtained from the Cook County Treasurer’s Office indicated that tax bills for some 20,000 properties increased by 100% or more between 2021 and 2022. A majority of these properties are residential but some are commercial.

One particularly jarring case came from the Roseland neighborhood on Chicago’s South Side, where a homeowner was served with a property tax bill that jumped 1,000% year over year. Meanwhile, in the Chicago Lawn neighborhood, a senior citizen received an 884% hike in her tax bill.

Cook County Assessor Fritz Kaegi’s office attributed these sharp increases to neighborhoods that have “undergone significant change” and that many properties were “most likely previously undervalued.” But these explanations tend to provide little consolation. Some business owners told local news services that they might not be able to keep their doors open.

Future implications

The underlying sentiment in Cook County reflects a growing sense of alarm and uncertainty that is being felt in many major cities. While property owners understand the need for periodic tax hikes to finance county services and pensions, they feel cornered by the extremity of these increases, especially given the limited time they have to arrange for payments after receiving their bills.

This may be part of the new normal as real estate markets change and fluctuate, sometimes in extreme ways. This evolving landscape is going to be difficult to navigate, especially for those in the realm of mortgage finance.

Mortgage brokers will need to develop a nuanced approach to risk assessment to find their way through this new environment. And many lending standards will need a fresh look. This includes the loan-to-value (LTV) ratio. A cornerstone in the mortgage domain, LTV ratios are greatly influenced by property valuations.

With declining prices, these ratios are bound to witness significant shifts, which could impact the capacities for potential borrowers. A property that might have fetched a substantially high loan amount a year ago might now merit considerably less, reshaping the lending landscape.

Interest rate impacts

The changes in property valuations don’t stop at risk assessments and LTV ratios. They extend their reach into the very core of property financing — interest rates and loan terms.

Many lenders, in their bid to shield themselves from potential defaults, have adopted a more conservative stance. This could manifest in the form of adjustable interest rates or more stringent loan terms, particularly for commercial mortgages in areas that are experiencing sharp valuation declines.

The age-old adage of not putting all your eggs in one basket seems more relevant than ever. The unpredictability of certain markets underscores the importance of diversification. Instead of heavy investments in a single market or property type, spreading one’s portfolio across different regions and diverse property segments might emerge as the wise strategy. This approach hedges against potential losses in one sector and also offers avenues for gains in others.

The path ahead

In the intricate landscape of today’s real estate market, commercial mortgage brokers are presented with a unique blend of challenges and opportunities. To navigate these waters, a holistic approach that combines traditional expertise with adaptive strategies is essential.

Central to this is an emphasis on a data-driven strategy. As professionals deeply entrenched in the commercial mortgage ecosystem, the ability to harness and interpret current market data is indispensable. Beyond the standard metrics, diving into granular data points can offer pivotal insights, allowing for timely and strategic decisionmaking. In a volatile market, data-informed strategies will set brokers apart.

Data cannot exist in isolation, no matter how comprehensive it is. A deep understanding of local market dynamics is more crucial than ever. Each commercial district holds unique challenges and potential. Leaning into expertise to better discern microtrends can provide a leg up, ensuring that every deal is optimized for success.

As always, relationships are the bedrock of the mortgage industry. In these times, a network that includes both quality lenders and borrowers is an invaluable asset. It ensures seamless transactions, fosters trust and positions you as the go-to expert amid market uncertainties.

It’s crucial to stay attuned to the broader policy landscape as well. Decisionmakers, including city officials, are actively working on frameworks to steady the commercial real estate market. One example is San Francisco Mayor London Breed’s proposal to offer tax incentives that would encourage companies to set up offices in the city. Keeping a finger on the pulse of such policy shifts can offer you and your clients a strategic advantage, ensuring that you’re capitalizing on every available opportunity.

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The path forward for commercial mortgage brokers, while laden with complexities, is also ripe with potential. A combination of data-centric strategies, deep local-market insights, solid relationships and a grasp of evolving policy directions serve as a compass to guide brokers through these times. Their expertise, paired with these tools, will ensure not only survival but success in the evolving commercial real estate landscape.

The intersection of declining valuations and soaring tax appeals has caused uncertainty for commercial real estate owners. By understanding these shifts and their implications, mortgage brokers can chart a course that not only navigates through such challenges but also identifies potential opportunities for future growth and innovation. ●

The post Feeling the Squeeze appeared first on Scotsman Guide.

There are limits to how much mortgage lenders can do to change this picture. But they owe it to their clients to leave no stone unturned when it comes to conquering today’s affordability challenges. And one of the biggest stones to look under is the U.S. Department of Agriculture’s single-family home loan program, one of the few agency options for 100% financed home purchases.

“Rural housing markets have not been immune to the challenges of today’s difficult climate. In fact, the challenges have been more severe in some ways.”

For many potential homeowners who have been pushed to the periphery of urban and suburban areas, the USDA program serves as a critical lifeline for achieving homeownership. And for lenders, USDA loans represent an opportunity that can catalyze growth in a difficult market. But because they were often overlooked when interest rates were low, many lenders may not appreciate just how valuable USDA loans are right now. The program can be leveraged to successfully expand business in rural areas while helping more borrowers bridge the affordability gap.

Eroded confidence

The dual sting of escalating mortgage rates and a scarcity of inventory are two of the biggest reasons why housing affordability is so low. Despite some promising signs in the homebuilder market, new homes aren’t coming to market fast enough to ease a U.S. housing shortage that’s at its highest level since World War II.

Meanwhile, interest rates remain higher than they’ve been in two decades. New homebuyers have found themselves committing hundreds of dollars more per month to their mortgage payments — and tens of thousands of dollars more over the life of their loan — compared to those who entered the market only a year prior.

While the overall U.S. economy remains healthy, these factors are severely undermining confidence in the housing market. For example, a recent Gallup poll revealed that a mere 21% of U.S. adults believe now is the best time to purchase a home — the lowest share since Gallup began tracking this data in 1978.

Rural housing markets have not been immune to the challenges of today’s difficult climate. In fact, the challenges have been more severe in some ways. Over the past few years, the COVID-19 pandemic and the resulting increase in remote work pushed many urban and suburban families to rural communities, causing home prices to rise. In January 2021, Redfin reported that housing inventory in rural areas fell by a record 44% year over year while the median sales price in these areas rose by 16% to reach more than $290,000.

In such an environment, it’s critical for mortgage lenders to harness every potential sales opportunity. This means using new tools to engage with a broader demographic of borrowers and more effectively serving the needs of low- and moderate-income homebuyers. And there are few tools that are better to use than USDA loans.

Extensive eligibility

By providing 100% financing, USDA loans have been used since 1991 to open the doors to homeownership for rural Americans who might otherwise be deterred by the higher costs and downpayment requirements of traditional mortgages. Still, many people believe USDA loans are primarily aimed at farmers, when the reality is that they’re most often used for single-family homes in smaller towns and communities that aren’t within immediate reach of larger metropolitan areas.

Even more attractive is the USDA’s generous definition of “moderate income” as qualifying criteria. Under the agency’s guidelines, a borrower can earn up to 115% of their area’s median income and still qualify for a loan. This is great news for borrowers who live in smaller communities and have found their wages have not kept pace with housing prices.

USDA loans aren’t for everybody. The idea behind the loan program is to encourage the development of rural and semirural communities that are typically underserved by traditional financing options. To be eligible for financing, a borrower must buy a home within a USDA-designated area. These areas are located outside major cities and have 35,000 residents or less. But collectively, this is a huge area.

The USDA also requires all first mortgages to meet specific standards of quality, and the home being purchased must be used as a primary residence. There’s no property size limit. The home must be structurally sound, fully functional and meet specific safety requirements, such as a strong foundation, adequate roofing, and working systems like heating, cooling, plumbing and electricity.

“The goal is not just to ensure that loans are originated and underwritten to meet USDA standards but also to create a path to homeownership that’s specifically tailored to a rural borrower’s unique needs.”

The agency also offers a renovation loan option, which allows consumers to borrow 100% of the purchase price plus an additional 2% of the home’s value for repairs. This option is specifically for low-income families, or people who earn less than 50% of the area’s median income.

Assuming that a lender can meet these requirements, USDA loans are a prime opportunity for originators to broaden their borrower base and serve a more diverse range of clients who are struggling with today’s affordability challenges. But for lenders and originators to build a successful USDA loan program, they need the right resources and partnerships.

Valuable partnerships

Like any other government lending program, the USDA requires lenders to adhere to specific guidelines, ensuring that every loan is originated and underwritten responsibly. Lenders must be approved to originate USDA loans but may choose to collaborate with a secondary market partner to broaden their reach. Partnering with community housing organizations is also ideal.

The best partner is one that provides the necessary expertise, support and understanding of USDA loans to help lenders navigate the process effectively on behalf of their clients. The goal is not just to ensure that loans are originated and underwritten to meet USDA standards but also to create a path to homeownership that’s specifically tailored to a rural borrower’s unique needs and circumstances.

When it comes to working with underserved borrowers in rural areas, it’s important to build relationships with correspondent lenders. This will ultimately enable clients to create generational wealth through home equity while driving sustainable economic growth in rural communities.

To be sure, housing affordability is not likely to get easier in the months and years ahead. This is why it’s critical for correspondent lenders to find more creative ways to help consumers overcome homeownership hurdles. The USDA loan program presents a significant, untapped market that many lenders can leverage to offset some of the market instability while delivering a meaningful and positive impact on rural communities across the country.

In short, USDA loans represent a golden opportunity for lenders to make a difference during today’s housing affordability crisis. And there’s no better time to start than now. ●

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