A successful first-hand experience between a real estate brokerage and an in-house originator was what Remax CEO Dave Liniger relied on when he decided to bring the Motto Mortgage concept to fruition.
Prior to becoming a publicly traded company in 2012, Remax was a co-owner of a Portland, Ore., real estate franchisee with 20 offices that participated in a mortgage joint venture.
That joint venture "proved the [concept of] one-stop shopping; it provided convenience for the consumer; and it offered a great deal of choice. So it worked out extremely well for us," Liniger said.
However at company conferences he would hear from small franchisees that saw his point about being a competitive advantage, but could not afford to put up several hundred thousand dollars in bond money and create their own mortgage operation.
Franchisors bring brand and market share, a unique product or service, training and technology, and the power of group purchasing.
The franchisee gets "a proven concept [in this case Remax's experience as a franchisor], the learning curve has been taken out of it, and so the opportunity for success is much greater than an entrepreneur just trying to venture by themselves," Liniger said.
The CFPB won't have any issues with properly set-up affiliated business arrangements, said Marx Sterbcow, an attorney who specializes in compliance issues.
"Where the bureau has issues is with sham business arrangements, where they are nothing more than shell games, or where you have [real estate] agents or brokers that are requiring consumers to use the mortgage company they have an ownership interest in. Those sorts of things the bureau definitely does not like and will come down on," he said.
With the franchise model, requirements like having the proper state licensing fall on the individual operator. But that doesn't mean there could be some blowback for the franchisor.
Violations would theoretically fall on the franchise owner. But it doesn't alleviate Remax corporate or other franchisor from any responsibility, he explained.
"The problem is, [the franchisor] can have the greatest rules in the world, but it depends on execution. So if a partner does not execute or executes in a manner that would be unfair, deceptive or abusive, it may violate RESPA or some other state or federal law," and that could make the franchisor liable, Sterbcow said.
For example, if the parent company provides marketing materials for the franchisees and those were not in compliance with the applicable laws, then the franchisor could be held accountable.
The mortgage broker sector is ambivalent about Motto. A successful launch will drive up the market share for this channel, but its presence creates a competitive hurdle.
"The National Association of Mortgage Brokers looks to any company to help the origination channel and understands the challenges of compliance. NAMB embraces any channel that expands credit to borrowers in an ethical and responsible way. We continue to stress the need to protect the consumer in all channels of origination," Fred Kreger, the branch manager of American Family Funding in Santa Clarita, Calif., and president of NAMB, said in a statement.
NAMB is promoting its own effort to grow the industry, through providing seed capital to open new broker shops through its KickStart program. Qualified originators can receive up to $10,000 to secure office space and purchase software.
Remax is not participating in this program, Liniger said.
The mortgage broker model is one that gives Motto the best chance for success, said John Campbell, an analyst for Stephens Inc., a financial services firm headquartered in Little Rock, Ark.
"The mortgage broker comes with a wide selection of various mortgage companies that the home buyer can work with."
"The reason it makes sense for the consumer, is instead of going into Remax and buying or selling a property and having to work with their in-house or homegrown [mortgage banker], Remax is taking a completely third-party view and saying, 'Hey we're going to help you with your mortgage but we're going to give you a very wide selection where you can take whatever is the best rate, whatever company you want to work with,'" Campbell said.
Indeed if Remax is successful, it could be the "blueprint for the future. That's the way to do it and they're going to be largely successful because of that," he said. The company "can get very aggressive with the long-term growth path…there's plenty of growth opportunities and a beachhead you can establish just with the existing Remax franchises."
The Motto offices are not just expected to source business from Remax alone.
"Whether we sell to a Remax broker or whether we sell to an independent real broker, our expectations are that 100% [of the loan production] just does not come from that real estate broker, that they're out there marketing, trying to get consumer refinance business, that they're out there marketing trying to get other agent's business.
"For me I want the loan officer sitting in a Motto [office] to get as much business as they legally can for their broker owner, whether it's from the Remax agents or whether it is from other agents," said Ward Morrison, Motto Mortgage's president.
It is one of the reasons why Motto was not named Remax Mortgage.
"We purposefully did not want to tie it too closely to the Remax brand. While we're initially looking to current Remax franchisees to purchase Motto Mortgage franchises, we eventually will be exploring options outside of the Remax network," said Abby Lee, Remax's vice president of marketing and media strategies.
While franchising is ubiquitous in the real estate business, it is not common in the mortgage industry. Over the past five years, the LenderCity franchise operation has attempted to get up and running with some starts and stops.
It's difficult to start a franchise business from scratch, said Gregg Harris, a St. Louis-area mortgage broker who is trying to bring his own franchise concept, LenderCity, to life. "It's an expensive undertaking. I spent a lot of money just on the [franchise disclosure] document itself," he said.
Then the franchisor has to create corporate manuals to tell the franchisee that these are the guidelines they are going to follow, the processes and procedures they're going to follow.
But the benefits to the operator to become part of a franchise are cost efficiencies. "It costs McDonalds' franchisors much less for buns, ground beef, paper products, all those things because there's power buying. And that is what I envisioned in my head. As a broker I operate lean and mean. Only through a group of franchisees will we get an even deeper discount" for services and supplies, Harris said.
Motto Mortgage is being rolled out in stages. As of Jan. 6, it was being marketed to Remax brokers in 39 states. Plans are to bring the program nationwide to its own franchisees, and then to real estate brokers from other franchisors and finally the company is likely to offer franchises to independent mortgage brokers, Morrison said.
In January, Motto is having its first training classes for franchisees, offering Mortgage Broker 101 and Loan Originator 101 classes over the course of five days in Denver, Morrison said.
Plans are to offer these classes once a month, he continued.
It is not odd to offer Motto Mortgage opportunities to real estate brokerages that are part of other franchisors. There is collaboration because of the multiple listing services, Liniger said. Thus the brokerages "compete for business but actually share each other's properties and transactions to the betterment of the customer," he said.
"To me the competition in the real estate business is not my fellow real estate brokers; the competition is the interlopers that are coming in, the technology companies that think they can do everything with nothing but a computer."
Motto Mortgage "helps the industry be stronger, it helps our competitors, it helps us, we'll still being making sales together," Liniger said.