Could Remax Hasten the Resurgence of the Wholesale Channel?
Ed. Note: This is the first of two parts. Read part two here.
Remax is making a play for homebuyers' mortgage business.
The home sales heavyweight pioneered the franchising concept for real estate brokerages in the 1970s. Now it's applying that same business model to mortgage brokering with its new brand, Motto Mortgage.
Motto, which launched in October, is a departure from the informal referral relationships between real estate agents and loan officers, as well as the official — and highly scrutinized — marketing services agreements and joint ventures that traditionally bridge the gap between a consumer's desire to buy a home and the requisite need to pay for it.
Remax is leveraging its existing network of real estate franchisees to get Motto off the ground, offering homebuyers a one-stop shop for their real estate and mortgage needs. By operating as mortgage brokers, the newly minted Motto franchises won't have to raise the level of capital mortgage bankers need to fund their originations. As a franchisor, Remax has the opportunity to build Motto into a national brand while avoiding the complexity of securing nondepository mortgage licenses in all 50 states.
Motto's addressable market is significant. Remax has more than 3,500 franchisees in the U.S. whose agents represent nearly 1 million buyer and seller sides of transactions per year. Capturing the mortgage transactions on just 5% of that volume, about 48,000 loans, would be on par with the annual loan count of a top-20 mortgage lender.
It's a level of scale large enough to upend the symbiotic relationship between the real estate and mortgage industries. If successful, Motto would be a boon for the mortgage broker channel and the wholesale lenders that fund their loans. But it could also siphon away business from mortgage brokers and bankers alike that rely on loan referrals from Remax agents.
The timing of Remax's move may ultimately determine Motto's success. Purchase mortgage origination volume totaled an estimated $990 billion in 2016 and is expected to grow 26%, to $1.25 trillion, by 2019, according to the Mortgage Bankers Association. Meanwhile, refinance volume is expected to drop 56%, to $395 billion, during the same time.
What's more, a recent resurgence among mortgage brokers' ranks may also bolster Motto's prospects. Employment at loan brokerage firms is at its highest level since 2007, according to the Bureau of Labor Statistics. A successful franchise model for mortgage brokering would replace the hodgepodge network of independent brokers that thrived in the fast-and-loose lending environment during the housing bubble with a more organized and structured business model that can effectively manage the compliance requirements of today's mortgage industry.
Real estate companies and homebuilders employ a number of different strategies to help homebuyers finance their purchases.
Realogy Holdings Corp., the parent company of seven residential real estate brands including Coldwell Banker, Century 21 and Better Homes and Gardens, has 13,650 offices worldwide. Combined, the Realogy brands make it the industry's largest real estate franchise company and Remax's biggest competitor.
Realogy operates a mortgage lending joint venture with PHH Corp. While the two companies are now independent publicly traded entities, they share a history dating back to when they were both subsidiaries of Cendant Corp. Realogy owns 49.9% of the joint venture, PHH Home Loans, which contributed $7 million to Realogy's earnings in the first nine months of 2016, according to regulatory filings.
But big changes could be coming, as PHH Corp. is shutting down its private-label origination business that represented 78% of its third quarter total volume of $10 billion. The bulk of its remaining originations, 20%, came from PHH Home Loans. The company is evaluating "the best course of action" for its future, PHH CEO Glen Messina said in the company's third-quarter 2016 earnings release.
HomeServices of America, a unit of Berkshire Hathaway, has approximately 1,500 franchised offices and 500 company-owned offices. It owns a mortgage banker, HomeServices Mortgage, which did 2015 volume of $4.1 billion with over 16,500 closed loans, the company's website claims. Until 2014, HomeServices Lending, now a part of HomeServices Mortgage, had been a joint venture between HomeServices of America and Wells Fargo.
Prosperity Home Mortgage also started life as a Wells Fargo joint venture, this one with Long & Foster that ended on Jan. 1, 2014. (Wells Fargo announced it was exiting the remaining mortgage joint ventures it had in July 2013.) It did $2.9 billion in originations in 2015.
Then there are the homebuilders that also have their own mortgage banking businesses, some of which have been very successful in keeping their customers in-house. For example, PulteGroup's lending subsidiary, Pulte Mortgage, had an 81% capture rate in the third quarter, with total volume by units of 3,417 loans and dollar volume of $946 million.
All of these ventures are subject to the Real Estate Settlement Procedures Act's Section 8, which prohibits kickbacks for referrals between mortgage and real estate companies.
The rule states that a person shall not give or accept any fee, kickback or thing of value for referring business among service providers, but there is an exception for affiliated business arrangements. But since Motto is not a licensed mortgage banker or broker, it falls outside of that exception.
Unlike those companies, Remax will not be able to share in any upside from a mortgage transaction. That is because Motto is not licensed as a mortgage banker or a mortgage broker; it is merely the franchisor.
Having a mortgage business "makes a lot of sense and it's a very natural cross-sell for a real estate company," John Campbell, an analyst for Stephens Inc., a financial services firm headquartered in Little Rock, Ark., said.
The real estate brokerage is able to "close the transaction and place the mortgage at the same time. The problem is that it is a tricky venture, there are a lot of rules and regulations in the industry right now that try to reduce the risk of forcing consumers into transactions," he said.