Summary:

A daisy-chain loan brokerage transaction works as follows:

A mortgage broker is referred to a real estate developer and obtains pertinent information about a real estate loan request.

Broker-A then contacts Broker-B.

Broker-B contactsBroker-C.

Broker C has a relationship with Broker D, who works with private investors to fund real estate loan transactions.

After reviewing the loan transaction, Broker-D quotes a second lien position with 12% interest-only monthly payments and a 2-point origination fee for a 24-month loan.

But each broker wants to get paid. Each demands 2 points. In the context of mortgage brokerage, a 'point' is a fee equal to 1% of the loan amount. In this case, each broker is demanding a fee of 2% of the loan amount. This practice of demanding multiple points is a significant issue in the industry, as it can lead to excessive costs and render transactions unviable.

Brokers A, B, and C may have only spent half an hour of actual time on this transaction. 2 points 3 = 6 points would be a ridiculous payout for 1.5 hours of work.

The issue of breach of fiduciary and constructive fraud may be applied in this situation.

Their combined expected payday are unrealistic in the open market and will render almost all transactions unviable.

Article:

Here is a classic real-life example:

The developer had almost completed his mini-storage construction project, a venture that involved building a storage facility for public use. However, he was about $500,000 short of reaching his goal. The developer had a $4,000,000 first-lien construction loan that was nearly fully funded. Upon completion, the developer planned to rent units to the public until rent stabilization, or approximately 95% occupancy. Then, the developer planned to refinance with a long-term permanent loan with an institutional lender.

The loan terms quote appears reasonable given the risk/reward for making a $500,000 loan subordinate or junior to a $4,000,000 first lien. Then comes the emotional rallying cry from each "Daisy-Chain" broker for a piece of the action, each demanding 2 points for their fee. The end resulted in presenting an offer to the borrower to pay 8 points plus appraisal and closing costs. The excessive demand from the participating daisy chain brokers led the borrower to reject the offer. This cautionary tale serves as a stark warning, highlighting the negative consequences of the "Daisy-Chain" issue and reminding you to be vigilant in your transactions.

Let's distinguish between a mortgage broker who receives a relatively small finder's fee for passing a lead to another broker and a mortgage broker who works with private party investors to fund the loans. The latter has the task of procuring loan transactions, completing processing, underwriting, funding, and closing, as well as managing private party investors, including the servicing process for the life of the outstanding loan until payoff. This role is complex and involves a range of responsibilities, which can make the issue of excessive fees particularly problematic.

Many prominent mortgage brokers who fund loans with private party beneficiaries have indicated that they have solved the "Daisy-Chain" issue by capping the aggregate fees of all mortgage brokers, ensuring they do not exceed their origination fees.

Understanding that state-by-state lending laws and securities regulations will differ regarding what is acceptable for a broker's compensation or a finder's fee can be financially beneficial. This knowledge empowers you to navigate the complexities of loan transactions with confidence and expertise. As with all loan transactions, interest rates, terms, and payments are negotiable between the parties. This flexibility empowers the trust deed investor to tailor the deal to their specific needs and circumstances, ensuring they have control over the process and feel confident in their decisions. They have the power to negotiate terms that work best for them, and the borrower must accept them.