"All of our mortgage advisors and underwriters will be employees, and we will close and fund the loan prior to selling them to an investor, so we will be the lender," said Jason Bateman, head of mortgage operations at Redfin. "We wanted to own the experience."
"All of our mortgage advisors and underwriters will be employees, and we will close and fund the loan prior to selling them to an investor, so we will be the lender," said Jason Bateman, head of mortgage operations at Redfin. "We wanted to own the experience."

Redfin is launching a mortgage banking subsidiary that will lend to the company's real estate customers, as part of an effort to provide end-to-end home-buying services.

Redfin Mortgage will begin issuing loans in the first half of 2017 and will initially serve consumers in the Austin, Dallas, Houston and San Antonio markets, the Seattle-based real estate brokerage said Thursday. The company has hired Jason Bateman, the former BBVA Compass executive vice president of mortgage operations, to run Redfin's mortgage operation from a Dallas-based office.

The company will use warehouse lines to fund its loans and will initially sell them to a correspondent investor. Further down the road, the company plans on selling its loans directly to Fannie Mae.

"All of our mortgage advisors and underwriters will be employees, and we will close and fund the loan prior to selling them to an investor, so we will be the lender," Bateman said. "We wanted to own the experience."

Redfin plans to go one step further in owning its mortgage experience. The company is building its own loan origination system from scratch, and the platform will also serve the company's real estate brokerage business and integrate with its title and escrow business through its Title Forward subsidiary. For certain ancillary services, including document preparation and product and pricing engines, Redfin will partner with outside vendors.

"Redfin's overall mission is to redefine real estate in the customer's favor," said Adam Wiener, Redfin's chief growth officer. "We felt to really reinvent real estate…we needed to become a banker to control that experience form application all the way to closing."

Wiener added that Redfin expects the integration will also "build efficiency" into the company's system and allow them to close loans more quickly.

The company chose to focus initially on Texas and base its mortgage operations in Dallas because of the strength of the housing markets and the large number of mortgage professionals there, Bateman said. Lenders who currently operate in the markets Redfin is targeting echoed Bateman's sentiments, suggesting that the market is primed for new entrants.

"I'm not surprised that another lender is coming in," Bill Dawley, executive vice president and divisional manager at Amegy Bank, said. "The state of Texas has been extremely consistent in the appreciation of home values…We have numerous successful mortgage companies in these markets. I don't see why they wouldn't be successful."

Redfin also chose Texas, Bateman said, because of its central location, which will make later expansion easier. (The company's software engineers and technology staff will remain in Seattle.)

"The vision is that Redfin Mortgage will serve all of the markets that Redfin does," Bateman said. Currently, Redfin's real estate brokerage business operates in 80 metropolitan areas.

Redfin picked the mortgage banking route, in contrast with real estate competitors. Remax's Motto Mortgage follows a franchise model, and Realogy operates its mortgage business through a joint venture with PHH Corp.

The company also formed its compensation structure with the Real Estate Settlement Procedures Act's Section 8 provision in mind, which bans kickbacks for referrals between mortgage and real estate companies. Regulators have put lenders and real estate companies, including Realogy and PHH, in the hot seat over compliance with this rule in recent years.

"There will be no compensation for any of the three parties referring business," Bateman said. "Our Realtors are paid on customer experience. So if Redfin Mortgage does not do a good job, they will not do business with us."

In other words, Redfin's real estate agents are paid in part based on customer feedback regarding the home-buying process, and a lender's performance reflects on that. Similarly, the company's "mortgage advisors" will be paid based on customer service. As such, real estate agents' willingness to work with Redfin Mortgage will be contingent on the subsidiary's performance, and the company will not prevent them from passing business along to existing preferred lenders.

That approach is a comfort to lenders in the Texas markets where Redfin will initially enter.

"It's going to be a learning experience for all us," said Jay Abeya, a loan originator with K&G Capital Mortgage, who Redfin lists as a recommended lender in the Houston area.

"You can't tailor too much" to the new competition, Abeya said. "What I've been doing up to this point is working. I'm going to keep on doing my darnedest to get their business."