Starting a Mortgage Finance Company

[John Jacobus]

One of the aspects of the real estate industry that interests me is the abundance of niches. I'm excited by the different ways in which entrepreneurs can pursue opportunities in this industry. I'm interested in exploring the mechanics of starting a mortgage finance operation to originate, underwrite and fund loans to investors to purchase, refinance and/or rehab non-owner occupied SFR's and small multi-family property (<20 units) in California.

While I've participated exclusively as a borrower of capital to purchase investment property to date, I like the idea of using my capital to make loans secured by real estate. The real estate finance market for small scale investors seems less efficient and I wonder if it may offer better opportunities for competitive returns than traditional real estate investment avenues such as purchasing SFR's or small/medium multi-family property to rent. Additionally, my experience with banks and other traditional mortgage lenders has been frustrating. I've found their lending standards unreasonable and experienced an unwillingness to explore (or inability to comprehend) creative financing options, especially when investment property is concerned.

For some time I've wondered if the market for non-conforming real estate finance and investor loans is underserved. Since I seldom encounter discussions along the lines of "how do I become the bank?", I've struggled to gather adequate insight into the mechanics of starting a mortgage finance business and becoming a lender. I'm curious to hear from the private lenders, nonbank finance professionals and mortgage originators:

• What moved you to pursue this side of the real estate industry? What appeals to you about this aspect of the real estate industry?
• In mortgage lending, how is growth of a lending operation constrained? Is the scale of lending operations limited to personal capital and capital pooled from other private investors or are bank lines of credit a viable source of funds to use to originate new mortgages? What is the typical size of these lines of credit and what factors determine access to and volume of revolving funds that can be used to originate mortgages?
• What are the key challenges to starting out as a lender?
• What are the key challenges in growing a mortgage finance operation beyond finding credit worthy borrowers, complying with state and federal regulations and evaluating the quality of collateral to lend against?
• What resources do you recommend to those looking to start a mortgage finance operation?
• Are there legal firms specializing in helping entrepreneurs start mortgage finance businesses?

I don't seek trade secrets or sensitive competitive insight. Consider this as an honest inquiry into the basic dynamics of mortgage lending. I'm interested in getting started as a mortgage lender as I suspect there may be an opportunity to build a small/medium business in serving small time investors. Before jumping in blind, I want to qualify whether it's worth pursuing or if it's plagued by complexity, constrained by red tape and/or has unreasonable capital requirements that constrain growth. Any advice to a newbie looking to qualify this as a worthwhile endeavor would be greatly appreciated.