Align the Broker and the Investor
SOLUTION #1 – An Invested Mortgage Broker
The solution to this pitfall is not complicated. You need to find a mortgage broker that is not only compensated through the origination fee, but the actual performance of the loan. Do your research and learn to distinguish between the ORIGNIATE, FUND and DONE and the mortgage broker that is not defined as only a “broker.” The definition of a broker is a person who buys and sells goods or assets for others. It does not further go on to say anything else, but that is not always the case. There are exceptions to the rule out there, so do your research.
Working with a mortgage broker that is invested in the loan performance defines the mortgage broker as not only an originator but also and loan servicer. This distinction is important as they are not just paid upfront. The mortgage broker has now taken on the role as loan servicer and will continue to work with the borrower and investors best interest. Just as a third-party loan servicer gets paid for the service, so too does the mortgage broker now in the capacity as loan servicer. This implies that if the loan is not performing the now loan servicer is not getting paid either. You now have a mortgage broker/loan servicer acting in your best interest past the point of funding the loan. Keep in mind no one knows the details of the property or borrower better than the mortgage broker who did the analysis of underwriting the loan.
There are a lot of services a mortgage broker can offer. An investor-minded mortgage broker will offer cradle to grave services. These services include, but are limited to; underwriting, origination, capital fund raising, loan servicing and collection/disposition of a property should the need arise. What a second… Are there mortgage brokers that provide these services under one roof? Yes!
“Are there mortgage brokers that provide these services under one roof? Yes!"
Why would they perform these duties? Because it is good business. If a mortgage broker is willing to perform all those duties it implies, they are staffed with diversely skilled professionals that believe in their investments they are offering to investors. They are not only in it for the origination fee. Mortgage brokers that handle a Trust Deed investment with the cradle to grave mentality also spread out their income earned from origination and loan servicing to create a reasonable, yet consistent stream of income from the services provided.
This mentality aligns the mortgage brokers interests to their investors. If the loan is not performing, they are not getting paid.
As with all investments there are inherent risks, and you must consider the “what if.” If the loan pays interest and pays off as most do, then great. Your concern should not be this scenario, your concern should be the scenario of a borrower not making the regularly scheduled interest payments, how is the situation handled?
Because the mortgage broker is aligned with the investor in this scenario the mortgage broker maintains contact with the borrower throughout the duration of the loan. Typically, the mortgage broker provides the borrower a payment schedule that includes a due date for interest payments and a grace period before action is taken to secure the property lent on. As the grace period nears the mortgage broker will be in contact with the borrower to determine if an issue is imminent or if the payment is in route. If the borrower for any reason is unable or unwilling to make the interest payment the mortgage broker that is cradle to grave will kick into action on behalf of the investors to communicate to the investors proposing the best course of action to secure the real estate asset.
This process is completed in a controlled environment unlike the alternative defined in the pitfall. Remember we are dealing with a mortgage broker that has the best interest of both the borrower and investor. The way this process is handle is that the mortgage broker acting in the capacity of loan servicer gathers all the intel from the borrower to present to the investors in a communication that also includes a ballot to allow the majority loan holders to determine the best course of action to proceed with the borrower and/or ultimately take back the property through foreclosure or Deed in Lieu.
Upon the majority consensus from the investors the mortgage broker turned loan servicer now takes on a third role which is a default loan resolution coordinator. In this capacity, the mortgage broker (a good one) stands behind the loan they underwrote and ultimately sold you to invest in. A mortgage broker that is a default loan resolution coordinator has a vested interest in making sure that the investor gets as much of their original invested amount returned as soon as possible. In some cases, the mortgage broker will pay for the expenses to take back the property on behalf of the investors, instead of an investor capital call as the mortgage broker works to resolve the default. It costs approximately 3% to 5% of the original loan amount to foreclose on a property. If the mortgage broker funds, the costs of the foreclosure process they are invested in the outcome. They are getting paid when the investor gets paid. When they sell the property the mortgage broker will recoup the funds outlaid to take back the property on the investor’s behalf. This is a really important point in that the mortgage broker as a company has taken the proper steps to prepare for the “what if” because it is not a matter of if a loan will go into foreclosure it is when. You are fooling yourself if you think that you will not experience a real estate investment being subject to the possibility of default or market correction. If will happen in your investment lifetime. It is how you or the mortgage broker reacts to the situation that matters. When it does happen a mortgage broker that acts in the capacity described above is the type of mortgage broker you want to be investing with. Make sure you ask the mortgage broker what their default rate has historically been and their history of their ability to recoup investor capital. Not all mortgage brokers are the same. It is up to you to identify the mortgage broker that is set apart and different from the others. Do your research and find a mortgage broker that underwrites, originates, funds, services, collects, and sells a property should the need arise. This is a mortgage broker that does not have a conflict of interest. They are working for both the borrower and the investor. They want the loan to perform for all parties involved and have a stake in making sure that it does. That is the solution and how you can avoid this pitfall. Ignite Funding is one of those mortgage brokers. At Ignite Funding we do not limit ourselves to just being a mortgage broker. We service the loans we underwrite and sell to our investors getting paid right alongside our investors. And if needed, we roll up our sleeves and take on the role as default loan resolution coordinator. We are proud of the fact that we have built a financially sound company that has never had to do a capital call to our investors to take back a property. We are also proud that we have returned close to 100% of our investors capital when we have had to foreclose on a property. This is a testament to the quality of our underwriting standards on the investments we put in front of our investors. We have the expertise that goes beyond ORIGNATE, FUND and DONE.