Mortgage bankers facilitate multiple financing options for borrowers.
Appraisers and underwriters are involved in the commercial
real estate financing process as objective sources to ensure that buyers and
lenders do not let optimism for projects result in unfavorable transactions.
However, sometimes these professionals base their assessments on data such as
historical property information and third-party market fundamentals that may
not be complete or accurate. As a result, a property’s true, ongoing
performance is not always reflected. In these cases, utilizing a mortgage
banker can facilitate the financing process.
Working With Mortgage Bankers
Preparing a loan application not only requires a significant
amount of time but also a thorough understanding of the underwriting process.
Specifically, a stack of tax returns and property financials can result in
approval or rejection of a loan, largely depending on how the underwriter
perceives the borrower and the property. A qualified mortgage banker can
manage the multiple parties and documents involved in the loan application
process to keep the deal moving forward or to rescue the transaction if it
begins to go south.
Mortgage bankers can provide financing options through their
own lending institutions as well as their relationships with other lenders. A
direct lender’s balance sheet strength combined with the flexibility to offer a
diverse array of programs enables a mortgage banker to offer customers loan
options best suited to their particular needs.
Sometimes borrowers assume that when financial professionals
act as intermediaries between borrowers and lenders, the borrowers experience
increased transaction fees. However, this assumption fails to consider several
First, intermediaries usually receive wholesale pricing
based on high transaction volume with lenders, and in some cases, are able to
realize attractive negotiated rates based on strong lender relationships.
Second, many lenders work only through mortgage banking correspondents, and in
such cases mortgage bankers can expand the array of financing options available
to a borrower. Most significantly, experienced mortgage bankers possess a
thorough understanding of active lenders and their relative market positions,
enabling the banker to identify the right lender for a particular transaction.
Mortgage bankers typically charge a 1 percent origination
fee for their services. Generally the cost of working with the wrong lender on
a project far outweighs the fees associated with utilizing a mortgage banker.
The following three examples illustrate the value a mortgage
banker can bring to the underwriting process.
Market Rent Analysis. An out-of-state investor placed a
contract on a 95 percent occupied 77-unit multifamily property in Fort Worth,
Texas. The borrower’s request was for an 80 percent loan-to-value, 30-year
amortizing loan, with the balance of proceeds coming from tax-deferred exchange
funds. Initially the underwriter countered with 70 percent LTV. The
counteroffer was driven by an analysis using 90 percent average submarket
occupancy gleaned from an M/PF YieldStar report.
In response, BMC Capital prepared a market analysis report
based on original market research, familiarity with the area, and relevant
comparables to support the underwriting assumptions. The analysis revealed that
the comparable properties located within a three-mile radius actually were
operating at 96 percent occupancy on average. Within this area, multifamily
stock was limited and the primary rental stock was single-family housing, which
leased at a higher price point than the multifamily units. The limited supply
and relatively attractive pricing resulted in higher than average occupancy.
Nobody at the underwriting level had the local market knowledge or resources to
produce this report; the financing proposal was based on third-party research.
As a result of the alternative analysis, the underwriter
agreed to proceed with the requested loan amount. In the end, the appraiser’s
report supported the position, resulting in a closed loan of the originally
Property Expense Analysis.
In another scenario, a local
investor wanted to acquire a 78-unit multifamily property in Dallas and
requested 80 percent LTV and 30-year amortization financing. The property
operating income analysis demonstrated adequate cash flow to support the
requested loan amount. However, due to discrepancies between the mortgage
banker’s financial analysis and that of the appraiser, the underwriter
countered with a 15 percent reduction in loan proceeds.
The key differences between the analyses were related to
rent concessions, maintenance, and payroll. The seller recently had performed
renovation work on the property, and to offset tenant inconvenience during the
renovation period, it offered generous tenant concessions that were atypical of
the submarket. To provide evidence that the rent concessions were tied to the
renovation activity, the mortgage banker provided documentation supporting the
timing and extent of the seller’s renovation work. Another result of providing
this evidence was a reduction in forecast repairs and maintenance relative to
historical expenses. Additionally, the business plan and the buyer’s forecast
payroll were provided to support a reduced labor expense structure in relation
to the seller’s historical payroll. With the proper documentation to support
these requests, the investor achieved 100 percent of requested loan dollars.
Comparable Sales Analysis.
For a 56-unit multifamily
property in Shreveport, La., a borrower requested 80 percent LTV and 30-year
amortization financing to complete the acquisition. After the completion of
preliminary underwriting, a Houston-based appraiser traveled to Shreveport to
perform a site visit and location and site characteristic comparisons between
the property and its comparables.
For transactions involving small markets, valuation work
sometimes requires an appraiser to travel to an unfamiliar or out-of-state
location. This lack of familiarity creates a challenge for the appraiser in
identifying the best sources of information for relevant, reliable data on
market rents and sales comparables.
In this situation, the initial comps obtained by the appraiser
did not support the property’s contracted sales price. However, the buyer was
an experienced local investor who was familiar with the area’s property values,
rents, and expense levels. The mortgage banker requested input from the listing
agent in assessing the quality and relevance of the selected comparables. The
key factor in evaluating the comps was Hurricane Katrina’s impact on the
Shreveport apartment market, which experienced both a surge in tenant demand
and a significant increase in investor interest after the storm, resulting in a
more-robust investment market and lower capitalization rates. Incorporating
this information with local market knowledge, the agent identified several
other relevant comparable sales. The mortgage banker analyzed the comps and
presented them to the underwriter and appraiser, resulting in increased
appraised value and a loan funding at the full amount requested by the
A mortgage banker’s expertise goes beyond loan sourcing; it
literally can make or break transactions. Qualified mortgage bankers can help
to assess the risks associated with proposed transactions as well as the
accuracy of transaction pricing in relation to the market.