Chuck Hershson, President of Fidelity Mortgage Lenders is one of the most widely respected and knowledgeable mortgage brokers in California.

With all the news about California’s climate being bad for business it is easy to forget that the Golden State is the seventh largest economy in the world. Even factoring in Sacramento’s budget troubles and the stalled credit situation in the financial market, economic indicators are leaning more toward vibrant rather than dormant – particularly in commercial real estate.

It is true that banks and traditional institutional lenders have all but shut off the flow of money to borrowers, regardless of their qualifications or credit rating. The independent mortgage companies however, the hard money lenders, are busier than ever closing deals.
Unlike the banks, independents have money to lend. The money is provided by pension funds, high net worth individuals and individual retirement accounts. While some companies specialize in commercial real estate, there are independent mortgage companies that focus on the residential side of the market.

Apples and Oranges
Though both lend money, banks and independents differ in many aspects. These include the following:

• Independents take a kinder and gentler approach, lending on the credibility of the real estate and not solely on the credit worthiness of the borrower.

• Independents require less paperwork which often allows the turnaround for funding a loan to happen in seven to 10 business days.

• Conversely, if for some reason a loan isn’t possible, prospective borrowers can be told immediately as there is no two- to three-month waiting period for the bank loan committee to make a decision on whether to offer funding or reject an application.

The Strategy
In order to execute this type of streamlined loan process, independents currently may limit the loan amount, derived from an equation tied to the value on the property. The loan sum amount figures to be roughly between 40 and 50 percent (at maximum) of the property’s worth. This conservative approach has kept this financial independent niche in business. It also limits exposure to investors in down markets – like in today’s present environment.

Banks got into trouble by over-leveraging the values of the properties they were encumbering. When the value of the property is less than the loan balance and the borrower can no longer service the debt, defaults and foreclosures are the natural result. It happened in the sub-prime meltdown and soon the commercial area will be hit, too.

Secrets of Success
The key to success in the lending business is evaluating the property to be secured.  While the mantra used to be “location, location, location” and sales comparables, the independent’s, or hard money mantra is “equity, equity, equity” and income stream.  Additionally, and perhaps more importantly, determining whether or not a debt can be serviced in a down market is a major factor in the decision making process.

Real Estate not Stocks
Investors who have pulled out of the stock market and have seen their portfolios and retirement income funds greatly diminish are now looking to real estate to recoup and rebuild wealth. It is certainly a good time for it.

This adage still holds true: Money is made in real estate on the purchase, not on the sale. With independent lenders still lending and sellers often willing to give a loan in second position to help close the sale, opportunities are out there for the knowledgeable investor.

Uglier before Better
Two years ago I predicted there would be “blood on the streets” in the residential lending area because of the overly aggressive re-financing frenzy in single-family homes. Nostradamus I am not, but I and many other professionals in my field can read the economic signs. And let me tell you a little secret—I am not optimistic for the immediate future.

I do not think we will have stability in the commercial market until the last quarter of 2010. In the meantime, banks will be forced to change their traditional business models and independent mortgage lenders will continue to grow and prosper.

The media needs to take a wider look at the lending industry. There’s a lot of good news to share.

A licensed real estate broker since 1965, Charles Hershson is founder and president of southern California-based Fidelity Mortgage Lenders, Inc., which has been funding real estate loans since 1971.