Mortgage applications dropped by roughly 20% this past April following the COVID-19 lockdown, according to CNBC. By the summer, home loan credit availability had tightened by 30% compared to February 2020, the Mortgage Bankers Association reported. Reductions in credit availability are usually carried out by lenders through higher credit scores and downpayment minimums, as well as stricter debt-to-income and loan-to-value ratios.
Americans rallied and the economic reopening offered a silver lining as pent-up demand boosted mortgage applications this past summer. The market showed great elasticity during the shutdown, in large part due to stimulus and forbearance initiatives.
Despite an increase in mortgage originations in the second half of 2020, industry researchers remain unsure about future sales forecasts. In a market update this past June, Freddie Mac stated that “there are still great unknowns about the evolution of the recovery and future policy response, so our outlook for the housing market is cautiously optimistic.”
Moving forward, the burden falls on every residential mortgage originator to evaluate what changes, if any, the pandemic caused to the industry in their local area. Originators battling a slowdown in loan applications now — and uncertainty about the future — should consider venturing into the commercial mortgage market.
The idea of expanding into new lead sources can cause hesitation since expansions are often risky and expensive. Education and training are the most proven ways to offset these concerns.
Placing commercial loan knowledge at the top of the priority list is an efficient action for earning more commissions in the long run. There are no shortcuts to being well-informed about the commercial mortgage ecosystem and an effort to learn could gain applicant trust when the opportunity arises.
Commercial mortgages are used to finance income-producing properties, guiding the qualification process when a new lead hits the inbox. Search out industry resources such as trade publications that offer lender search tools to divide commercial lenders into categories. Some of the more popular commercial asset classes include multifamily housing, office, industrial, hospitality, farms, construction and mixed-use. An easy way to find out which mortgages are in demand is by searching listings on Loopnet or similar websites.
In the beginning, it’s easy to make the mistake of wrongly categorizing a property, so gathering as much property detail as possible can help reduce inaccurate 1003 commercial applications. These mistakes are easy due to the high number of properties covered under the commercial umbrella.
The length of the loan is where residential and commercial mortgages differentiate significantly. Residential loans typically offer 15- to 30-year financing but commercial is more complex. Common terms for commercial mortgages can range from 12 months with hard money, or asset-backed loans, to 30 years for high-net multifamily. The loan term is important because it ultimately determines how long the borrower has until they must sell or refinance into a new loan.
Qualifying income for a commercial mortgage is challenging due to the mix of risk-assessment tools used by wholesale lending underwriters. The more popular income qualifiers are debt-service-coverage ratio (DSCR), capitalization rate (or cap rate) and gross rent multiplier.
DSCR is one measure of a property owner’s cash flow to pay for debt obligations. The cap rate is based on the net operating income (NOI) generated by a commercial property and is calculated by dividing the NOI by the asset value. The gross rent multiplier, sometimes called a gross income multiplier, is calculated by dividing the property’s sale price by its gross annual rental income.
The wide variety of properties under the commercial umbrella is the reason for using different methods to determine real estate profitability. Similar to residential, the end goal for commercial underwriters is to determine a property owner’s ability to repay their monthly mortgage debt and other expenses.
Appraisal differences is a worthy topic to consider when expanding into commercial mortgage qualifications. Commercial appraisals are more expensive, take more time and often require more participation from the applicant than a residential appraisal. The 1007 market rent report, an appraisal tool that lists average rents of nearby comparable properties, is used by underwriters as an additional risk-assessment tool to gauge the true monthly gross income.
Sales managers learn to seek out cost-effective leads during market shifts or slowdowns. Implementing a business-to-business strategy with commercial real estate agents is an option since they already have working relationships with commercial mortgage applicants. Proving an ability to qualify a client for an office-building purchase or a Federal Housing Administration apartment loan demonstrates the originator’s value, which could help earn business from these agents.
“Commercial loans can be difficult. I would like it if a commercial lender could make it an easier process that flows smoothly,” said Aaron Gardin, a Realtor and business manager with Tecton Corp., a property-management company in the Seattle area.
Gardin crafted his business by continuously expanding into new areas of real estate while picking up strategies at each stop. Currently, he utilizes his expertise in rent rolls, vacancy expectations, maintenance budgets and vendor relations to sell to multifamily clients. Originators could earn new business by listening to agent needs, such as streamlining the escrow process.
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The pressures of the pandemic are still causing mass health concerns and economic hardships for millions of Americans. The full impact of COVID-19 may not be recognized for a few years. During that time, experts expect peaks, valleys and shifts in the overall health of the mortgage industry.
CoreLogic predicts a 6.6% decline in U.S. home prices from May 2020 to May 2021. The company expects this to be the first annual decrease in home prices in nine years. These drops in value and ongoing shifts in the market are motivation for originators to adapt strategies and assure that they are sustaining a competitive advantage. ●