Q/A With Michael Boggiano of Small-Balance Lender Silver Hill Funding

With small-balance commercial lending setting a record last year, MBA NewsLink posed questions to Silver Hill Funding national sales manager Michael Boggiano to get a lender’s perspective on this business.

Silver Hill Funding, Coral Gables, Fla., specializes in providing small-balance commercial loans. The impact these loans are having on the mortgage industry led to the creation of the Mortgage Bankers Association’s inaugural Small Balance Lending Summit in Chicago this week.   

Boggiano said small-balance commercial mortgages represent an opportunity not only for experienced commercial loan brokers but also for residential mortgage professionals interested in diversifying with a product that acts as a natural extension of their existing business.

MBA NEWSLINK: Why is now a good time for brokers to move into small-balance commercial lending?

MIKE BOGGIANO: It’s clear that small-balance commercial mortgages are a popular product for commercial brokers. Last year, sub-$1 million transactions accounted for 70 percent of all commercial loan transactions.  Brokers who previously focused exclusively on large-scale commercial deals now see the small-balance mortgage as a product that helps them close more deals in a shorter period.  

With the level of uncertainty surrounding home mortgage interest rates these days, residential brokers would be wise to take their cue from their commercial counterparts and diversify their business with small-balance commercial loans. The residential brokers who have already made the transition see small-balance commercial as a smart way to guard their bottom line in times of uncertainty. 

NEWSLINK: What is the learning curve in originating and underwriting small-balance commercial loans for residential underwriters and originators?

BOGGIANO: First-time commercial brokers would certainly have trouble closing large-scale mixed-use deals. However, most small-balance commercial loans largely resemble the residential deals these brokers are used to handling. Take commercial/multifamily deals: they account for around 70 percent of all small-balance commercial loans, and the only factor separating them from residential multifamily deals is the number of units in the property.

One thing residential brokers should keep in mind is that the majority of lenders recognize that small-balance commercial mortgages are a niche product and are willing to help novices throughout the process. Lenders often fashion their application process after the residential model. Some offer tools and courses designed to teach brokers how to determine a property’s debt service coverage ratio, read a rent roll and perform other tasks unique to the commercial mortgage arena.

NEWSLINK: Do originators have a higher compensation for small-balance commercial real estate loans as opposed to residential mortgages?

BOGGIANO: One of the biggest mistakes residential brokers make is to assume that they won’t earn enough from small-balance commercial deals to justify abandoning their residential business. My advice for these brokers is to treat small commercial loans as a supplement to their existing portfolio, not a full-on replacement. That way small-balance commercial becomes an additional revenue stream, giving them the freedom to take on a commercial deal when the right opportunity presents itself or when they notice a dip in their residential business.

NEWSLINK: Is the time from origination to closing similar to residential mortgages, or does it take significantly longer?

BOGGIANO: Large-scale commercial mortgages can take many months to close, whereas small-balance commercial transactions typically close within 30 to 45 days. This is one of the main draws for residential brokers: they can take on a small commercial deal without interrupting their usual workflow. 

While much of the small-balance commercial transaction should feel familiar to residential brokers, the commercial process does involve a few additional steps for lenders during the underwriting stage.  This is because they must evaluate not only the borrower but also the property’s financials before they can move forward with a deal. Brokers can prevent delays during this period by providing all requested documentation in a timely manner and staying in constant contact with their lender.

NEWSLINK: Do small-balance commercial real estate lenders have the same compliance issues as residential mortgage lenders?

BOGGIANO: Commercial real estate lenders are not regulated as heavily as their residential counterparts. This is good news for brokers, especially those who have recently seen TRID [the TILA/RESPA Integrated Disclosure rule] requirements keep their residential deals from closing on time.

Compliance issues will always be a factor in mortgage lending, but lighter regulation helps small-balance commercial lenders move quickly and create a painless transaction experience for brokers and their clients.

Another regulatory difference between commercial and residential mortgage lending is the fact that not all states require brokers to obtain a license before they can broker commercial loans. I would encourage interested residential brokers to either consult with their attorney or check the NMLS database to determine whether or not a license is needed to broker commercial loans in those states where they do business.

NEWSLINK: What can residential brokers do to get started with small-balance commercial loans?

BOGGIANO: The first step for residential brokers should be to learn as much as they can about commercial mortgages. I recommend joining the local chapter of mortgage associations and attending conferences to get a feel for the industry and grow their commercial network. As I mentioned before, small-balance commercial lenders typically offer free educational tools to residential brokers as well.

Brokers will need to connect with new potential clients through referral networks or social media vehicles like Twitter and LinkedIn, but they will likely find their first deals through borrowers who already trusted them with their home mortgage. I suggest taking a look at the Real Estate Owned section of closed 1003 loan applications to identify clients who own commercial properties and small-business owners who might be interested in purchasing or refinancing their building.

All that said, I believe the most important thing for novices to do is to partner with a lender that strongly believes in the value of small-balance commercial mortgages and provides the tools they need to begin brokering small-balance commercial deals.

(Views expressed in this article do not necessarily reflect policy of the Mortgage Bankers Association, nor does it connote an endorsement of a specific company, product or service. MBA NewsLink welcomes your submissions; articles and/or Q/A inquiries should be sent to Mike Sorohan, editor, at msorohan@mba.org.)