Financing Focus

Loan Liaison

Mortgage bankers facilitate multiple financing options for borrowers.

By Todd Davis, CPA |

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 important points.

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.

Lending Scenarios
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 requested amount.

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 borrower.

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.