By Douglas Katz – 02/13/2023
I have been in lending for over two decades in anywhere from originating to managing and one truism seems to manifest itself. New programs that offer solutions to a small number of loans opportunities gain traction and become the new thing. Sometimes, when it augments a strategy it works, adoption of new programs have a good ROI and even sometimes lead to a long-term revenue opportunity, but often they become an anchor, a drag on the an originators business.
There are several reasons why a loan officer might choose to outsource unconventional loans:
Better Client Experience
Unconventional loans are typically more complex and require specialized knowledge and expertise. If a loan officer doesn’t have experience in these types of loans, they may struggle to complete them efficiently or effectively. Outsourcing to a specialist in unconventional loans can ensure that the loan is completed correctly and on time. More importantly it can ensure the client and referral source stay happy.
This does not mean that a lender cannot cultivate the expertise needed but it is a process and it is not instantaneous. The further the new program is from the established core business for the originator, the longer it will take to become proficient and confident that everything will go well. In these cases, outsourcing to a lender who provides opportunities to learn the program and grow their business with the opportunity to earn more an broker more robustly instead of just referring. Some brokers will even allow you to start out referring and to become a broker over time as you learn the programs.
More Options for Placing Deals
Unless you are working for or with an entity who works with multiple sources, options will be limited. I bring this up because many large lenders jump into markets that offer replacement for lost revenue in times of decreased production. This is an example of one of those points in the real estate cycle and vanilla conventional and government loan production has suffered with double digit drops. So, to seek other options makes sense in theory, but practice is something completely different.
A large part of the non-QM, unconventional business does not need to adhere to the regulatory requirements of the residential lending industry and, as a result. do not follow the disclosure, documentation and other requirements. This would seem awesome in the face of the regulatory nightmare that the lending industry has become, but it is not. In fact, it creates massive issues and concerns for these companies as mistakes can cause issues and audit failures, especially if a client starts down one path and switches.
To keep things simple, if they offer any non-QM programs at all it is typically a single product with a huge amount of headaches. Under these circumstances, you have a single tool in your toolbox to engage a highly complex market filled with everything from new inexperienced investors to savvy veteran investors with sizable portfolios. If you cannot meet more of their needs than less, they will move on and by outsourcing to a broker, you get the benefit of access to multiple products that fill multiple needs,
More Time and Resources for Your Core Business
This is a big one. For every originator that I have ever known, resource management is a top, if not the top, challenge to manage. Additional requirements and regulations have made deals tougher and more cumbersome exacerbating an already tough business. Add to that the full plate of marketing, sales, deal management and referral partner engagement there is not enough time in the day or money in the bank to do everything. This limitation is for a lot of the lending industry the limitation that inhibits reaching max revenue potential and it makes no sense to make it worse.
Unconventional loans can take more time and resources to process, and loan officers may not have the bandwidth to handle them in-house. Addition of these programs makes an already constrained situation worse by cannibalizing precious time and resources from other activities like keeping your deals on track and speaking to stakeholders to build new business. By outsourcing the loans, loan officers can free up their time to focus on other aspects of their job, such as building relationships with clients or generating new business.
The Real Reason – Higher Earnings
I am ending with this as this is the overarching why of any decision for a lender. If whatever you are doing is NOT making you money than you need to evaluate whether it is a wise activity. Outsourcing the difficult, complex and challenging non-QM investment deals reach your desk puts commission in your pocket without you having to take your eye off of your core business and without having to add anything to your time, money and other resource plans. It ends in a win-win-win. You make money without cost and retain the client and referral source for future residential deals. The lender with whom you work gets deal flow and revenue. The client gets a great experience financing a property with a program selected from the best options in the market place.