Times are challenging for originators.

There are too few residential loans to go around, and the phones don’t ring like they used to during the refi boom. Residential mortgage brokers, however, don’t have to sit there and take it passively. They have an outstanding opportunity to open a new channel—and a significant new revenue source—commercial mortgages.

Adding that product, and the commissions they generate, requires knowing a few key ratios, and the information required to calculate them. The originator might not even have to do the calculations—but merely serve as a facilitator of the loan process.

Many originators don’t know the commercial side, so they’ve preferred to refer the business to someone else. Sacrificing a great source of revenue.

It’s not difficult—or at least it doesn’t have to be.

Doing commercial loans are straightforward—once they are explained to residential originators. “It’s foolish to pass on this revenue stream. How long do you think you’ll be in business, if you don’t stop doing that?” said Ed Ainbinder, SVP for national loan production at CherryWood Mortgage. “Mortgage brokers can generate an enormous revenue stream without the regulations that residential mortgages operate under.”

For brokers that are willing to take their residential cap off, Ainbinder likes to explain commercial loans in terms of residential loans. For instance, supposed there is a multifamily property in Jersey City, N.J., that a client wants a mortgage for. The focus is on the building, the brick and mortar, and the amount of cash flow it generates. Not the income or assets of the borrower.

In a commercial deal, the borrower’s financial picture is replaced with how much revenue a property generates. Ainbinder suggests thinking of the debt service ratio as being equivalent to the debt-to-income ratio that’s used on the residential side. And the W2 as being equivalent to the rent roll.

For instance, the borrower of the property in Jersey City might want an $8 million loan, but based on the revenue that’s generated, he can qualify for no more than a $4 million mortgage or a cash out.

“The debt service ratio tells us the affordability of the property. For that, we need the operating expenses, including taxes, rent roll, insurance, and within minutes, the broker will know the amount of a loan a property can qualify for,” said Ainbinder. Property data and some financial calculations can be entered on the Angel Oak app. In fact, he and his team will complete all the calculations for the broker, and the process is faster than a residential loan.

Even borrowers with poor credit, or lack of experience, with a sensible explanation can get “to the finish line.” In addition, it’s possible for a borrower to choose from among a full, part or no-documentation loan.

The percentage of closed purchase loans increased in September to 71 percent of total loans, according to the Origination Insight Report from Ellie Mae. Closed refinances represented 29 percent of total closed loans, returning to the July average.

In September, the average 30-year interest rate for all loans decreased for the first time in 2018 to 4.91 percent, down from the 2018 high of 4.92 percent in August. The percentage of Adjustable Rate Mortgages increased to 7.2 percent in September, up from 6.6 percent the month prior.

“We see refinances remain at a low percentage of aggregate closed loans and purchase inventory continues to be tight as we move into the fall,” said Jonathan Corr, president and CEO of Ellie Mae. “We did see the first reduction in interest rates this month and with that, the percentage of ARMs began to increase. However, we believe that the seasonal decline in home buying and continued affordability constraints will shape the purchase market.”

Other statistics of note in September included:

• Closing rates for all loans held steady at 71.1 percent for the second month, the highest percentage in 2018. Closing rates on purchase loans increased to 76.4 percent, up from 75.9 percent the month prior. Closing rates on refinances increased to 64.4 percent in September, up from 63.5 percent in August.
• The time to close all loans increased to 44 days in September, up from 43 days in August. Time to close a purchase loan held steady at 45 days, while time to close a refinance increased to 42 days in September, up from 38 the month prior.
• Overall FICO scores increased by 3 points to 727 in September. LTV held at 79 for the second month while DTI decreased to 25/39.

Ellie Mae reported that revenues in the third quarter were $123 million, up from $107 million in 2017.

“We grew revenue by 15% and increased revenue per loan 14% year-over-year,” said Jonathan Corr, president and CEO. Also, loan volume on the platform increased year-over-year despite industry mortgage volumes being down 9% on an absolute dollar basis and down around 13% on a unit basis.

Revenues for the third quarter of 2018 were $123 million, compared to $107 million for the third quarter of 2017. Net income for the third quarter of 2018 was $12.4 million, or $0.35 per diluted share, compared to $14.5 million, or $0.41 per diluted share, for the third quarter of 2017. Net income for the third quarter of 2018 includes the amortization of acquisition-related intangibles related to the Velocify acquisition.

On a non-GAAP basis, adjusted net income for the third quarter of 2018 was $24.2 million, or $0.67 per diluted share, compared to $19.9 million, or $0.56 per diluted share, for the third quarter of 2017. Adjusted EBITDA for the third quarter of 2018 was $40.9 million, compared to $38.7 million for the third quarter of 2017.

For the fourth quarter of 2018, revenues are expected to be in the range of $113 million to $116 million. Net income is expected to be in the range of $0.0 to $2 million, or $0.0 to $0.06 per diluted share.

On a non-GAAP basis, adjusted net income is expected to be in the range of $12.4 million to $14.2 million, or $0.34 to $0.39 per diluted share. Adjusted EBITDA is expected to be in the range of $28.8 million to $31.3 million.

“Rising rates, low housing inventory, and overall home affordability are serving as significant headwinds to the overall mortgage market. While we believe these headwinds are temporary, they are prompting us to reset our assumptions for the year,” said Corr.

For the full year 2018, revenues are now expected to be in the range of $477 million to $480 million, a decrease from the prior range of $495 million to $505 million.

Contracted revenues are now expected to be in the range of $347 million to $349 million, a decrease from the prior range of $353 million to $358. Net income is expected to be in the range of $22 million to $24 million, or $0.61 to $0.67 per diluted share, for a range of $19 million to 23 million, or $0.53 to $0.64 per diluted share previously provided.

On a non-GAAP basis, adjusted net income is expected to be in the range of $65.8 million to $67.6 million, or $1.84 to $1.88 per diluted share, a decrease from the range of $64.5 million to $69.5 million, or $1.79 to $1.92 per diluted share previously provided. Adjusted EBITDA is expected to be in the range of $125.3 million to $127.8 million, a decrease from the range of $129.5 million to $134.5 million previously provided.

“In the third quarter, we announced a new major release of Encompass and made continued progress on the rollout of our Encompass Connect solutions,” said Corr. “Over the long-term, we expect the mortgage industry to trend to a sustained purchase driven market and we believe we are well positioned to drive further market share gains and technology adoption across our large customer base."