In a recent blog post I skewered residential mortgage brokers who attempt to broker a commercial mortgage loan. They are the first of four types of mortgage broker to avoid like the plague.
- The Unqualified – Simply put, residential mortgage brokers are totally unqualified to perform the duties necessary to represent a borrower’s best interest for financing an income producing property. They don’t know:
- Which lenders have the best rates and terms
- How to identify issues that will potentially cause lenders to decline quoting on this deal
- How to identify the mitigating factors that will help overcome these issues
- How to put together a preliminary loan package that would interest a lender in providing a letter of interest
They are completely out of their league!
That said, I must confess there are many commercial mortgage brokers that you should also avoid like the plague. They fall into these categories:
- The Lazy – The lazy commercial mortgage broker is the one who will not work hard to find financing for a deal that may be difficult to find financing for. You see he doesn’t want to put much effort into a deal that may require more time and effort than he is willing to exert. Instead he does a quick analysis of the loan request on the back of a napkin and then calls his favorite lender. If the lender says “yes” he gets a letter of interest from him and his job is done.
It doesn’t matter to him if his favorite lender doesn’t have the best rates and terms for this particular loan request. He certainly won’t go elsewhere because that would require more effort than he wants to put in. And he certainly won’t lift a finger to help the lender with loan processing. No, he will be totally passive waiting until the appropriate moment to get his demand into escrow so he gets paid. If the lender comes back with a “no” to the loan request he tells the borrower he’s done everything he can do for him even though he’s only gone to one lender.
- The Unprincipled – Some lenders, to encourage receiving more loan business from commercial mortgage brokers, will pay them a loan fee outside of loan closing. This fee from the lender to the broker will not show up on the closing statement. So instead of just receiving his customary fee from the borrower for services rendered the unprincipled commercial mortgage broker will also receive a fee from the lender as well. Or even worse, a lender will ask if a mortgage broker would like to “build a loan fee” into the loan spread. If he says “yes” the borrower is unknowingly paying for the mortgage broker’s fee with a higher interest rate.
It may be unethical but it’s not against the law for the commercial mortgage broker not to disclose to his client that he is also receiving a fee from the lender. So unprincipled commercial mortgage brokers leave this uncomfortable little tidbit of information out of any conversation they have with their clients.
- The Incompetent – Incompetency, in the commercial mortgage business, takes many forms. It begins by not interviewing the client to find out specifically he wants in a loan. In all honesty, the interview process is more an art form than a science as many borrowers really don’t understand what they are looking for in a loan until you provide them with several options to compare. An incompetent commercial broker doesn’t realize the importance of giving the borrower more than one or two lending alternatives.
Incompetency also rears its ugly head by not understanding the nuances of the transaction that can either kill the deal or the mitigating circumstances that will save it. On the other hand, an unprincipled commercial mortgage broker may be aware of the “killer issue” but will try to hide any adverse information from the lender hoping that he won’t discover it until it’s too late. A good commercial mortgage broker will disclose up front the “hair on the deal” that will cause lenders heartburn and then propose solutions to resolve these issues.
Another example of incompetency or being unprincipled (I’m not sure which) is when a commercial mortgage broker doesn’t disclose all of the shortcomings of a particular loan alternative. For example many borrowers have been blindsided by the consequences of having a loan with a yield maintenance prepayment penalty. The mortgage broker should have told him in no uncertain terms what he was getting himself into if he proceeded with this type of prepayment penalty.
Now for some borrowers a yield maintenance penalty is acceptable because they plan to keep the property forever. In their minds the lower interest rate and possibly a longer amortization that comes with yield maintenance is worth it to them. But I wish I had a dollar for every time I met a borrower who regretted the day he financed his property with a loan that had a yield maintenance prepayment penalty. The property owner wants to either sell or refinance his property but he can’t because the prepayment penalty on his existing loan is ginormous.
So now that I’ve scared you from ever using a mortgage broker let me assure you there are many hard working, principled and competent commercial mortgage brokers in the business. A good commercial mortgage broker will:
- Optimize the rate and loan terms for their client’s specific needs. They will shop the market and not focus on one or two of their favorite lending sources.
- Guide the client through the loan process, not just hand them off to the lender. They will proactively represent the client’s best interest to the lender.
- Disclose all fees received from the lender outside of loan closing.
- Communicate with the client on a regular basis throughout the loan process especially when adverse developments occur.
- Focus on the client’s agenda and not their own, even if it is to their own detriment. If they are not able to “add value” they will refer the client to someone who can.
In my next blog post I will discuss four very good reasons for employing the services of commercial mortgage broker and more importantly how you go about finding one that is hard working, principled and competent.