Course to become a mortgage broker

Leonard Wineburgh has been a commercial mortgage broker for some 40 years, although his work today hardly resembles those early days. Wineburgh played a critical role recently in a new $25 million condominium project in Chicago that required lining up an 80% loan-to-value mortgage, a 15% loan-to-value mezzanine deal and an equity partner. The borrowing developer put a mere $600,000 into the deal yet stands to reap millions if the project performs well. Without the mortgage broker's Rolodex of investors and backers, the condos wouldn't have made it to first base.

This is quite a contrast to the more courtly process to which Wineburgh, known as "Bud" to his friends and colleagues, was first introduced. "Thirty years ago the loans were all conventional mortgages at the same price and for the same term lengths," said Wineburgh, president of Chicago-based Dwinn Shaffer & Co. "Nobody worried about things like prepayment penalties because there were none. You only had a handful of lenders to work with, so the search for a loan was not very complicated.

"Today, loan offers come with all kinds of provisions that you have to sort through," Wineburgh added. "Bankers and brokers have to oversee appraisals and Environmental Protection Agency and engineering reports, and all kinds of other paperwork that didn't exist 30 years ago. It's a much more sophisticated business today."

So sophisticated, in fact, that the choice of the right mortgage broker or banker can make or break deals. With a wealth of lending contacts, brokers can find the lowest interest rates for their clients, negotiate away irksome provisions such as personal guarantees, locate stop-gap financing when a conventional loan comes up short and help ensure that closing arrives on schedule as promised.

For both the first-time borrower wading into the shoals of commercial mortgage lending and the most seasoned REIT executive, the mortgage broker navigates the loan process through the obstacles that inevitably crop up to threaten even the simplest applications.

Indeed, brokers have become such an accepted part of the lending landscape that only a minority of deals today get done with banks and other institutions without an intermediary running interference. Charles Krawitz, first vice president of Chicago-based LaSalle Bank's capital markets group, estimates that the bank places 90% of all its mortgages through originating brokers.

"Does a borrower need a broker?" Krawitz asked. "Most borrowers don't have the time or the inclination to stay abreast of the mortgage marketplace. A good mortgage broker knows every aspect of the market inside out and follows it as it changes week to week. Borrowers who think they can do it all themselves are doing themselves a real disservice in most cases."

A crucial component

Lenders themselves have come to view brokers as a valuable asset. The best brokers oversee an early-stage screening process, rejecting inquiries up front that they know don't have a chance of getting financed. In fact, some firms say they toss away half the ideas they see.

"We get calls every day from people looking to do transactions who don't fit our parameters. We turn down lots of business. We tell the applicants to move on, and I suspect many never get a loan at all," said Michael Melody, executive managing director of Houston-based L.J. Melody & Co, a mortgage brokerage firm.

"Five years ago, capital market sources were setting up direct-trading desks, and some people wondered whether there would be a place for brokers," Melody added. "But since then the capital market firms have found that trying to do their own origination and screening is not very efficient. They've discovered that brokers can even be a very good source of underwriting due diligence. Mortgage brokers have come to be regarded as the go-to guys in the transaction process."

A point of definition is in order. Plain old transaction-driven mortgage brokers were the norm in the industry at one time. Today most brokers have morphed into multifaceted roles that include servicing loans and providing ongoing consulting services. Many now prefer the more august title of mortgage banker to describe themselves, although for the purposes of this article the designation of broker -- still their central role -- is retained.

The passing of the old, one-dimensional model has not exactly been mourned. "We have fewer curbstone salesmen out hawking low interest rates now," Wineburgh said. "The business is becoming more professional all the time. I expect the pure brokers to continue disappearing."

Making the right choice

Where should a borrower start in selecting the right broker? Geography. There are thousands of mortgage originators, but not all are created equal. Many run solo or small local operations, while others are part of networks of offices that stretch across the country. As lenders merge and become larger and developers take the same approach, many brokers are finding benefits in consolidation.

For example, Chicago-based iCap Realty Advisors LLC was hatched out of 11 regional firms that combined in February. The company expects to close on nearly $2.5 billion of business in its first full year. In the aggregate, volume is running 25% ahead of pre-merger levels.

"Most of the major owners and developers of real estate are branching out beyond their backyards. We decided we needed a national platform to service them," said Ross A. Berman, president of iCap. "If a client of ours in Atlanta suddenly decides to do a deal in Boston, we can share information about the Boston market with our partnering office there. Lenders like that because they want to know that you aren't just doing a crash course in a city that you've never visited before. They like to deal with brokers who are entrenched in a market."

Of course, there still is a place for the small operation. New borrowers seeking modest loans often complain that they're given scant attention at big brokerage houses. Their business is likely to be shunted to a twentysomething junior account executive, with senior members of the transaction team exercising oversight from afar.

In a small firm, it's more likely that the broker you meet and like on the first interview will stay with you through thick and thin until closing. For many borrowers, that's a great comfort.

Still, even the most ingratiating broker may not be able to find money for would-be borrowers in tough sectors such as hospitality right now. The sagging economy has forced borrowers to become realistic. "Hospitality was weak before the Sept. 11 tragedies and it's completely gone now," said Michael Baucus, managing director of Chicago-based Cohen Financial. "You might need 50% or more equity to get a hotel deal done at this time. I'm advising hotel owners and developers to go to the sidelines for 90 to 180 days to see where occupancy rates stand. We may find out that this hospitality downturn is short-lived, and mortgages will become available again."

Hotels aren't the only tough deals to pursue. The capital pipeline for unanchored retail strips has been drying up, although anchored retail remains relatively financeable. New office construction is anathema in many urban markets now, while acquisitions and refinancings are being scrutinized closely for tenant lease roll-overs and rent trends. Industrial has been more stable, while multifamily housing remains the favorite loan type for most institutions right now.

Borrowers should be sensitive to lenders' changing perceptions of markets, and even factor those perceptions into their own cash-flow calculations. In the face of low interest rates, Hines, a Houston-based office developer, has been encouraged recently to see lenders willing to make loans with a 65% loan-to-value ratio, up from 50% a year ago. But cash-flow assumptions by both lenders and buyers are turning dour.

"It used to be that a buyer of a property could count on holding onto 75% of office tenants during lease rollovers," said Hastings Johnson, CFO of Hines. "Now, the assumption is that you will lose as many as 50% of your tenants. Lenders are concerned about this trend."

Let's talk

One of the first questions a broker should ask a client centers on an exit strategy: Do you intend to turn this property around and flip it in short order, or hold it for retirement income? Likewise, an alert borrower should not only be attentive to the answers he receives when interviewing a potential broker, but the borrower should also take stock of the questions the broker asks.

No broker can find the right loan match unless he has a firm understanding of the borrower's short-and long-term strategies. More and more brokerages are appending "advisory" to their corporate titles. For that to mean anything, there has to be effective two-way conversations.