Robert Freedman is the former director of multimedia communications at NAR.
Pump up your mortgage muscle.
May 1, 2007
On the day Henry Pham opened his WonderAgents real estate brokerage in Silicon Valley six years ago, the CEO gave equal billing to his mortgage services, which are structured as a separately owned mortgage brokerage. Sales associates at his company (called The Clientor Group since 2006) double as mortgage brokers, filling out loan applications and shopping around from wholesale lender to wholesale lender in search of the best loan products for their clients.
That’s not an approach that’s right for everyone, and indeed some brokers argue that the complexities of the two sides of the business make it difficult for real estate professionals to wear both hats. What’s more, having associates double as loan officers can be more difficult if you’re not in a state like California, where real estate and mortgage professionals hold the same license and are regulated by the same agency.
But Pham’s approach is just one way to structure your mortgage operation as you strive to increase the attractiveness of your brokerage to home buyers looking for one-stop shopping.
There are others.
For example, your company can take an equity position in a mortgage bank and compete against those big wholesale lenders. You might not be able to beat those lenders on rates because of their scale. But because you exercise control over the loan process, you can compete well on the basis of customer service.
“Timing and accuracy are more important to consumers than getting the best rate,” says Jim Rose, CRB, CRS®, CEO of Rose & Womble Realty Co. LLC in Virginia Beach, Va., and co-owner of the brokerage’s separately owned mortgage company.
In the next few pages, we look at three ways you can structure your mortgage operations, and how you can keep those services in tune with consumers and your associates.
In all these cases, you must be sure to comply with the affiliated business arrangement and antikickback rules under the federal Real Estate Settlement Procedures Act, which prohibits the exchange of anything of value between your associates and the lending arm for referral of loan business. RESPA also requires up-front disclosure about the relationship between the brokerage and the mortgage operation.
The Mortgage Broker-Sales Associate Approach
Having his associates take the mortgage application creates such a high level of convenience that consumers rarely decide to look outside the company for a mortgage broker, says Pham. “Pretty much in every case our associates write the loan.”
On the rare occasions when customers look around, it’s to get a better rate, and in those cases, “we try to match what they find,” says Pham.
There are pros and cons to having your associates double as loan officers. On the plus side, it creates a huge secondary source of income for them. At Clientor, associates’ origination fee varies, based in part on the wholesale lender to which they bring a customer. But generally they receive from the lender an origination fee of about 1 percent of the loan amount. That fee they split with Pham’s brokerage at the same rate as their commission split, so if they’re on a 70-30 split, they keep 70 percent of the fee.
Pham believes the income opportunity has helped drive interest in his company among licensees. From just a handful of associates in 2001 when launched, his company now has more than 450 associates in 15 offices.
On the negative side, it’s a challenge keeping associates up-to-date on the latest products and underwriting criteria. To address that issue, Pham holds weekly training sessions typically with representatives from wholesale lenders to talk about their product changes.
It’s that challenge in part that keeps some brokers from going this route. “It’s just too complex for associates to be good at both sides of the deal,” says Joan Eaton, CRB, broker-owner of Guarantee Real Estate, a 500-associate brokerage in Fresno, Calif. “To really service your customers, you need to concentrate on just one thing and do that better than everyone else.”
Also, from a purely logistical point of view, if your state requires separate real estate and mortgage broker licenses, the double licensing requirements can pose a hurdle. Earning and maintaining separate licenses can be burdensome for time-strapped practitioners.
The Mortgage Broker Approach
Guarantee Real Estate in Fresno takes the same mortgage broker approach as Clientor in its mortgage operation but keeps its sales associates focused on the brokerage part. Loan officers from wholesale lenders handle origination.
“We like having 40 different lenders for our associates to work with,” says J. Scott Leonard, CRB, Guarantee’s president and CEO. “Whatever our clients need financially, we can take them to the lender that has the best product for them.”
Guarantee’s mortgage affiliate maintains offices and loan officers in three of the brokerage’s largest branches, but it also encourages all of its officers to become familiar faces throughout the company. That way, sales associates can develop relationships with more than one loan officer and work with the one with whom they’re most comfortable. “Everyone has a different comfort level with different people,” says Leonard.
This decentralized approach has aided the growth in the company’s mortgage capture rate—the percentage of transactions in which buyers use the in-house mortgage company, Leonard believes. That rate grew to 37 percent in 2006 from 8 percent in the mid-1990s, when the affiliate launched.
“In the past we had sales associates who didn’t have the best fit with the loan officer assigned to their branch. Once we changed that to give officers flexibility to float around, our capture rate improved,” says Leonard.
Good chemistry between the loan officers and the associates is crucial, because that—along with competitive products and service—is the only incentive associates have for referring business to the in-house shop. RESPA rules prohibit lenders from offering things of value in exchange for business referrals. States have their own settlement rules, too.
The Mortgage Banker Approach
Opening your own lending company rather than sending business to wholesale lenders for a fee gives you the opportunity to make mortgage financing a profit center for your company.
That’s the upside. The downsides are that you must contribute equity to the company, putting your own capital at risk, and that you face head-to-head competition from other lenders.
It helps to find a competitive partner in the mortgage banking world to make this approach work. The Hasson Co., REALTORS®, in Portland, Ore., launched its mortgage operation in 1999 as a 50-50 joint venture with Chase Manhattan. That’s a fairly typical approach, with Chase providing the loan officers and underwriting expertise and Hasson providing the customers.
Hasson’s capture rate is about 20 percent, which Dan Scott, vice president of the mortgage services division, thinks is pretty strong given the extent to which the company’s associates already have well-established relationships with lenders. Average tenure for the 300 associates is 14 years. A company with mostly rookie associates can expect a higher capture rate, at least at the start, probably something close to 40 percent, Scott says.
“Our main competitive advantages are convenience—we have loan officers in five of our eight offices—and peace of mind: We’ve never missed a closing date, period,” thanks to constant communication between the associate and the loan officer, says Scott.
Getting the Tweaks Right
However you structure your operation, you need to keep your procedures flexible and your eyes open for refinements if you’re to stay competitive, brokers say.
Guarantee Real Estate has created a tight feedback loop for finding out how satisfied its associates and customers are with its services. It requires loan officers to stay in daily contact with sales associates and attend sales meetings. At the same time, executives from the two operations talk daily and meet weekly.
Among the changes that have resulted from the interaction are:
- A new product mix. Starting a couple of years ago, associates made it clear to the mortgage arm that consumers, faced with escalating California home prices, needed more options in 100 percent financing and various exotic loans like option ARMs. In response, says Leonard, “we sought out lenders who had the best-quality products in those new areas and positioned ourselves as experts in the best subprime products.”
- Loan officers at open houses. Increasingly, both an associate and a loan officer staff open houses, the latter to answer questions about financing.
- Shared marketing. Loan officers are now hooking signs onto associates’ yard signs promoting special financing deals on certain properties.
How’d We Do?
At Rose & Womble, which has a joint venture relationship with Wells Fargo Home Mortgage, the two companies host a joint operating committee to sift through feedback that Wells Fargo collects through surveys given at closings.
The in-house loan operation of large Midwestern brokerage F.C. Tucker, based in Indianapolis, takes a similar quality-control approach, relying on surveys taken at closing and on associate feedback to spot friction points. “We can pull in an officer pretty quickly to get things resolved” when surveys reveal a problem, says Fred C. Tucker III, president.
If there’s a problem, the officer, agent, and others meet to find out why the customer was unhappy, and once they determine what went wrong, they contact the customer to explain and to say what steps they’ve taken to ensure that it won’t happen again.
For both companies, the No. 1 complaint is timing—the transaction didn’t close when it was originally intended—a problem that’s more often than not outside the mortgage company’s control. Indeed, it’s not unusual for consumers to delay their own deals by failing to get certain information to the lender in a timely manner.
But what F.C. Tucker and Rose & Womble’s feedback mechanisms make clear is that consumers aren’t interested in assigning blame; they’re interested in how the company responds to their concerns. In essentially every case, loan officers who keep their clients abreast of snags during the process get high marks; those who don’t get low marks.
“Virtually every problem comes down to inadequate communication,” says Tucker. “Even if closing is delayed, if the loan officer keeps them informed about what’s going on, consumers will show a lot of understanding.”
Thus, the bottom line for consumers is customer service. How you structure your operation should depend on whether it makes sense to put up your own money or leave that risk to others. Once you decide that, build in a feedback mechanism, and you’re ready to compete.