Commercial Loans and Fun Blog

Whenever a mortgage company boasts to you that they are a correspondent lender for so-and-so bank, alarm bells should go off in your head.  Warning, Will Robinson, Warning!  We have a probable liar here!  Ninety percent (90%) of the mortgage companies that boast that they are correspondent lenders are full of beans. 

Here's another example of a common lie in the commercial mortgage finance industry: "We are merchant bankers."  Sure you are.  Ninety-nine percent (99%) of the mortgage companies that boast that they are merchant bankers are also full of beans.  A real merchant bank is usually a subsidiary of a life insurance holding company or a bank holding company that is funneled money by the profitable holding company to make go-go investments, like mezzanine loans or equity investments.

Going back to the subject of correspondent lenders, here's what a real corespondent lender is:  A correspondent lender is the eyes and ears for a long-standing lender in a particular market; say, Boston, New York City, or the Los Angeles area.

Correspondents get paid by being awarded the loan servicing rights, typically around 12.5 basis points (1/8th of a point) per year.  Therefore, the fastest way to bust a blowhard is to ask him if his commercial mortgage company services these loans for so-and-so bank.  Almost invariably these blowhards do NOT service any loans.  They are just garden variety mortgage brokers, and dishonest ones to boot. 

A lot of life insurance companies use correspondents because it is economically infeasible for a small-to-medium-sized life insurance company to have boots on the ground in every desirable commercial lending market in the country.  I have never run across any other type of commercial mortgage lender, other than life insurance companies, that uses correspondents.

It's becoming increasingly likely that the economy is headed for a double-dip recession.  If you are a commercial mortgage broker, you will have to be wise, efficient, and energetic to survive.

Here are ten tips that may help you to close more commercial mortgage loans and to survive a double-dip recession:

1. Close your office and retreat back to the house. You do not need a fancy office to impress borrowers. During the Great Recession, your borrowers will definitely understand your need to keep costs down.
2. Fire your staff and do the work yourself. You probably cannot afford a loan processor right now.
3. Don't waste time training loan agents. As soon as they start making you money, they'll leave you for the broker down the street who is offering a 5% better commission split.
4. The most important asset you own is your time. Learn to say, No," to deals that are difficult.
5. Use your time to market for that one deal that is actually do-able.
6. Use maps.yahoo.com to plot every bank near your office. Call on the bank using the sales pitch, "I'll help you get unwanted commercial loans off your books. I have a commercial lender that loves to do discounted pay-off (DPO) deals (Blackburne & Sons)."
7. Try to personally visit at least one or two local bankers every day.
8. Build a small list of referral sources - guys who, because of their jobs, see lots of commercial loan requests. This includes bankers, commercial real estate brokers, property managers, other commercial lenders, residential mortgage brokers, insurance agents, attorneys, and CPA's.
9. Touch these referral sources - either in person, by using snail mail, or by using email - at least once every three weeks.
10. Plan on eventually - after your borrower has been softened up by three or four bank turndowns - on closing most of your commercial loans with hard money lenders, like Blackburne & Sons. Banks simply are not closing many (any?) conventional commercial mortgage loans these days.
    

My second son, Tommy, is taking his beautiful fiancee and our first grandchild away from Indiana and is moving them to Sacramento, California.  He will be soon be working from the Sacramento office of Blackburne & Sons.  (My heart is breaking.)

Needing an apartment in Sacramento and living currently in Indiana, he found some wonderful free tools on the internet that helped him judge the safety and desirability of his potential neighborhoods.  He shared them with me.

The first free internet tool is NeighborhoodScout.com.  This tool ranks neighborhoods into four shades of blue, with dark blue being the safest.

He used another tool called SpotCrime.com.  This tool describes each of the crimes committed in a neighborhood - shootings, assaults, robbery, thefts, vandalism, etc.  He actually chose to rent a different apartment based on what he discovered in SpotCrime.com.

A favorite underwriting tool of Blackburne & Sons is the free demographics site, City-Data.com.  Our commercial hard money lending company never makes a commercial loan without first obtaining a City-Data report on the area.  These reports include population, income levels, demographic trends (are people moving out), and the crime rate.

The most important internet tool of all, when you are ready to try to place your commercial loan, is the free website, C-Loans.com.  C-Loans is the largest of the commercial mortgage portals, and it enjoys 750 different participating commercial lenders. 

The user merely inputs his commercial real estate loan request and then chooses six of the suggested thirty commercial lenders.  If none of the first six commercial lenders wants to make his commercial real estate loan, the user merely comes back and checks the next six commercial lenders.  And best of all?  C-Loans.com is free!

The stock market is down another 600 points today, after being down more than 500 points last Thursday.  What will the future look like?

It's time to wake up, folks. The recession of 2007 to 2009 wasn't just a deep recession.  The approaching follow-up recession probably won't just be a double-dip of the same magnitude.  It will probably be much, much worse.  Historians may someday write that the Second Great Depression started in 2007, and, like the Great Depression that started in 1929, it consisted of at least three consecutive recessions.

Here's what you can expect:

The stock market will probably suffer a long, painful bear market that may last for more than a decade.  Japan's bear market has lasted for 22 years so far.  The Dow Jones Industrial Average may fall below 6,000.

Interest rates will probably stay low.  After all, a great many corporations and credit-worthy borrowers are too frightened now to borrow.  Prices of many goods and services will, by necessity, decline.  Yields on 30-year Treasury bonds may someday fall below 2.0%.  They aren't far off that number already.

Deflation, not inflation, will be the default trend.  Doubt this?  Oil has already dropped below $86 per barrel.  I wouldn't fall off my chair if oil dropped to less than $40 per barrel within a few years.  Remember, cars are becoming MUCH more fuel efficient, and it has been suggested that the world has already reached peak oil CONSUMPTION.  (Note: I did not say production.  I said consumption.)

Residential real estate is toast.  I expect home prices to fall another 40% to 50% from here.  Real wages are declining, and millions of qualified workers cannot find jobs.  Even worse, tens of millions of homeowners are drowning in mortgage debt, and they are upside down on their homes.  What incentive do they have to keep making their payments?

But what about commercial real estate?  Fully-leased commercial real estate will probably NOT plunge in value, if only because competing interest rates are so low.  As John Mauldin, the widely-read economics author, recently wrote, "I am am bullish on income."

That being said, however, the banks are already stuck with several trillion dollars in legacy commercial real estate loans.  They are under intense pressure from the regulators to get these troubled commercial mortgages off their books.  With commercial real estate values likely to deteriorate by at least 3% per year for the forseeable future, it is hard to see many banks making many new commercial real estate loans.

The only commercial lenders making commercial real estate loans for the next seven to ten years will probably be the private money (hard money) lenders.  Therefore, if you are a commercial property owner and you simply must borrow, you should steel yourself to paying 10% to 12% rates. 

If you are a commercial mortgage broker, you should find yourself a reliable hard money commercial lender, like Blackburne & Sons, and start rushing packages to them.  After today, those commercial loans that you had working at the bank are pretty much dead.

Bloomberg just came out with an interesting article listing the 20 healthiest major metropolitan areas in the country.  These metropolitan statistical areas (MSA's) had the lowest rates of unemployment, the highest job growth, and the least troubled housing markets.

Many of these markets included two or three large cities located close together that futurists now call mega-cities.  The presence of one or two large universities in these areas often serves as a floor to the level of economic activity. 

Some of the cities will surprise you, being located in the Rust Belt.  The reason why is because homes in these cities never really appreciated, like those of coastal cities, so the locals are not saddled with immense mortgage debt.

1. Washington, D.C. - Arlington, VA - Alexandria, VA
2. San Antonio, TX
3. Rochester, NY  (Really?  Yup.)
4. Pittsburgh, PA
5. Omaha, NE - Council Bluffs, IA
6. Oklahoma City, OK
7. Nashville-Davidson-Murfeesboro-Franklin, TN
8. McAllen-Edinburg-Mission, TX
9. Madison, WI
10. Little Rock, AR
11. Knoxville, TN
12. Jackson, MS
13. Honolulu, HI
14. El Paso, TX
15. Dallas-Ft. Worth-Arlington, TX
16. Columbus, OH
17. Buffalo-Niagra Falls, NY
18. Boston-Cambridge-Quincy, MA
19. Austin-Round Rock, TX
20. Augusta, GA

Anyone seeking a commercial mortgage located in one of these areas would be wise to point out the area's relative strength to their commercial lender.

A smart commercial lender should arguably never foreclose on a commercial property without first entering into a forbearance agreement with his borrower.  I'll explain why in a second.

I just returned from Las Vegas, where I spoke at Leonard Rosen's 26th National Hard Money Lending Conference.  Leonard always brings in top attorneys to speak on how to become a hard money lender.  Even though I have personally owned a hard money lending company, Blackburne & Sons, for more than three decades, I find that I always learn important new things at these conferences.  The wise technique that I will now describe was suggested by one of Leonard's veteran attorney-speakers.

Suppose a commercial borrower falls behind in his payments.  He has personally guaranteed the commercial real estate loan, and his wife is terrified that they may soon lose the family home.  Husband and wife are losing sleep.

The borrower contacts his commercial lender and begs for help.  The unwise lender brushes him off and files a lawsuit to foreclose.  The borrower countersues!  He claims that the bank's loan officer promised to increase the borrower's loan from $1 million to $1.2 million.  The borrower, the lawsuit claims, detrimentally relied on the loan officer's promise, and he just spent $100,000 - the last of his cash reserves - ordering new raw materials for his widget-manufacturing business.

Now the bank has a problem.  The countersuit will drag out the foreclosure for at least another 2.5 years, during which time the building is being neglected.  After all, why should a borrower keep the building in good repair when he is poised to lose it in foreclosure?  The roof starts to leak.  The mold starts to grow ...

This was a huge mistake that could easily cost the bank hundreds of thousands of dollars, assuming the building does not have to be completely demolished after the bank completes the foreclosure.

Here is what the bank should have done:  The bank should have executed a Forbearance Agreement with the borrower, offering the borrower lower payments for, say, six months, in return for ... a waiver of all prior claims against the bank!

This would almost certainly have cut off any effective countersuit by the borrower and allowed the bank to complete its foreclosure, if necessary, without opposition.  What a terrific technique!

Our hard money commercial mortgage company, Blackburne & Sons, has continuously been in the market to make new commercial mortgage loans for more than 25 straight years.  In other words, we're always in the mood to make commercial loans.  This is not just some advertising plug.  I have an important point to make in just a moment, and my point will be made in red.  It will surprise you.

In contrast to the "always ready" hard money brokers, a great many banks are constantly in and out of the commercial mortgage market every few years.  For two years a bank might be hot-to-trot to make commercial real estate loans.  Then, for the next three years, the bank might turn down all but the most perfect commercial mortgage loans (about as common as unicorns).  It's fair to say that 99% of the banks in the country today are only making commercial real estate loans to unicorns asking for perfect commercial loans.

So why are hard money brokers always in the market to make commercial real estate loans?  Hard money brokers are just market-makers.  They just have to lower the loan-to-value ratio and raise the rate until they reach a point where some private investor will invest in the loan. 

For example, let's suppose the stock market is tumbling 500 points a day.  Unemployed Americans are marching in the streets, and the demonstrations are becoming more and more violent every day.  Already dozens of cars have been burned, and the police have been forced to fire over the heads of the protestors in order to quell the violence and vandalism.  (I actually foresee this for America within two to three years.)

Now suppose a retired real estate investor owns a very nice office building in one of the more desirable areas of town.  He owns it free and clear.  Suddenly the retired investor gets nervous.  He wants to have more cash in hand, so he applies to a hard money broker for a quick commercial loan.  At the first the broker offers his private investors a loan of 70% loan-to-value at 12%.  No one invests in the mortgage loan.  The investors are too frightened to invest in a first mortgage.  The true unemployment rate is over 20%, and there is far too much violence in the streets.

Therefore, the broker might cut the loan to 60% loan-to-value and re-offer the loan at 14%.  If there are still no takers, he might eventually cut the commercial loan all of the way down to 45% LTV and offer the loan at a whopping 18% interest.  Finally, the investors will probably start buying, and the loan will finally sell out.  You could say that the loan has finally cleared the market.  The hard money broker finally found that combination of low loan-to-value ratio and high yield that would prove irresistable to wealthy mortgage investors.

Therefore, for most modern and desirable commercial properties, there is some combination of loan-to-value ratio and yield that will allow a hard money mortgage broker to arrange a commercial loan.

Ah, but here's the rub!  Here is the whole point of this article.  Sometimes, because private mortgage investors are nervous, the interest rate on a hard money commercial loan has to be so high that the borrower cannot afford the monthly payments!  And everyone loses if a hard money mortgage broker is ever forced to foreclose.

This is why Blackburne & Sons has recently developed the participation mortgage.  A participation mortgage has a very low interest rate - say, 7.9% in a market where most hard money investors are demanding a yield of at least 14%.  The missing yield is recaptured as an income kicker and and an equity kicker.  In other words, the hard money mortgage investor takes a piece of any future increases in the property's gross monthly income and in the property's fair market value.  In effect, the current owner of a commercial property gives up future income and appreciation, in return for a much lower monthly payment today.

Blackburne & Sons is rolling out a revolutionary new product for commercial loans called a participation mortgage.  Rather than make a new hard money commercial mortgage at 13.9%, we might now make the same loan at just 7.9%.  The loan, however, would have an income kicker and an equity kicker.

An income kicker is a share of any increase in the gross monthly income of the property.  For example, let’s suppose the gross scheduled income at the time the loan was originated was $10,000 per month.  If the gross monthly income goes to $16,000; then Blackburne & Sons would take a percentage of that $6,000 per month increase.  The typical income kicker would be between 15% and 50%.

An equity kicker is a share of any increase in the value of the property.  For example, let’s suppose a commercial building is worth $1 million at the time we originate a loan.  The borrower renovates the property and then leases it out.  Suddenly the property is worth $1.8 million.  Blackburne & Sons would take a certain percentage of that $800,000 increase in the value of the property, but only when the property eventually sells or our loan is either refinanced or paid off.  A typical equity kicker would be between 15% and 50%.

Why not just make the loan at 13.9% and forget all of this nonsense about income kickers and equity kickers?  The problem is that the monthly payments on a $1 million loan at 13.9% will break the financial back of many borrowers.  Hard money investors want their big yields, so it’s simply not possible to make a hard money loan at 7.9%, absent some sort of additional financial incentive, like these two kickers.

Very few commercial construction loans are being made these days.  I always figured that it was because the banks were just too darned scared to make new commercial construction loans.  After all, commercial real estate has fallen by 40%, and many commercial banks have suffered immense losses on commercial construction lending.

But not every company in America is losing money.  There are a great many companies tied to agriculture here in the Midwest that are making money hand over fist.  Why aren't they expanding their manufacturing facilities?

A developer buddy explained the problem to me.  A great many companies have enough dough to cover 20% of the construction cost of their new buildings.  Since these companies are also making money, the bank even tentatively approves their commercial construction loan - subject to the appraisal and other third party reports.

The vast majority of new commercial construction loan applications are falling out at the appraisal stage.  Many, if not most, commercial real estate appraisals are coming in at less than 75% of the actual construction cost. 

In order to be financially feasible, a new project should be worth 15% to 20% more than the cost of construction.  That difference is the developer's profit.

The Profit Ratio is the anticipated profit divided by the total cost to build the new building.  Bankers typically require this ratio to be at least 15% to 20%.  If the potential profit is too small, the developer will have little incentive to complete the project if he runs into any sort of cost overrun.  The last thing a bank needs is another half-completed project.

Modernly, not only are banks finding that the deals have no profit in them, but - even worse - the projects are worth, upon completion,  less than 75% of their construction cost.  Not surprisingly, you will see very few commercial construction loans getting funded.

There are still a few commercial banks willing to make new commercial construction loans.  You can submit your commercial loan to 750 hungry commercial lenders using C-Loans.com.

Four months ago I accepted an invitation from Leonard Rosen to be a panelist at his hard money lender seminar in Las Vegas. Folks, I was immensely impressed. Leonard Rosen is a warm, generous man; and more importantly, his Become a Hard Money Lender training course is the real deal. If you have ever dreamed of becoming a hard money lender yourself, you simply must attend.

You should come and meet me personally on July 28th at the Monte Carlo Resort and Casino at Leonard Rosen's next 8-hour seminar. At this conference, you'll learn how to become a hard money lender and earn residual income, in addition to just loan orrigination fees. You'll learn how to become the banker and to finally have control over your deals. You'll learn the hidden secrets of the hard money industry.

For more information, please click here.