Why more real estate firms are now offering mortgages
More real estate brokerages are starting to offer mortgages, as traditional partnerships with lenders have been eroded by compliance strains and new incentives to control more of the homebuying transaction.
Realty firms' forays into mortgage finance have taken many shapes. The real estate franchisor Remax launched its Motto Mortgage last year as a franchise brand of mortgage brokerages. In early 2015, a group of Keller Williams executives acquired Fearon Financial, a Dublin, Ohio, nonbank lender that originated mortgages as Primero Home Loans and Smarter Mortgages.
Earlier this year, those brands were phased out and the business was renamed Keller Mortgage to leverage a deeper connection with the Austin, Texas-based real estate franchisor.
In addition, the online real estate brokerage Redfin started a mortgage banker at the beginning of 2017.
These affiliated mortgage businesses, whether through joint ventures or outright ownership of a mortgage company, are often replacing the marketing services agreements with lenders that have come under fire over the past few years.
There are several benefits to having a formal tie between a real estate company and a mortgage lender. "First and foremost, as you get scale, it is a natural extension and it's an adjacent growth opportunity in the mortgage business," said John Campbell, an analyst who follows publicly traded real estate companies for the investment bank Stephens Inc.
There is also a competitive advantage to owning a mortgage company outright or through a joint venture, such as being able to turn around transactions faster by creating a seamless process between the two entities, he said.
Keller Williams executives declined multiple interview requests. In an email, company spokesman Darryl Frost said getting loans closed on time is a key goal of the Keller Mortgage strategy. It is offering preapprovals through the Keller Williams mobile app, access to loan officers seven days a week and no payments until closing.
And to entice homebuyers to use the lender, Keller Mortgage won't charge Keller Williams customers lender fees and offers a $1,000 credit at closing. The deal applies to consumers Keller Williams serves as the buyer's agent, as well as those making an offer on a property listed by a Keller seller's agent.
In addition to controlling more of the process, real estate companies see mortgage lending as a way to add to their revenue streams.
"As in so many other businesses, margins [for real estate brokers] have been under pressure for 20-plus years, and since this related to the process of someone buying a home, why not offer the mortgage and title, property and casualty and escrow services?" said Steve Murray, the president of Real Trends, a real estate industry research and consulting firm.
MSAs came about as an alternative as the Department of Housing and Urban Development stepped up enforcement of what it considered to be sham joint ventures, Murray said.
In 2011, Prospect Mortgage was fined $3.1 million by HUD and forced to shut the joint ventures involved.
Wells Fargo Home Loans closed its remaining joint ventures in 2013 because changes in state and federal oversight had increased the complexity and difficulty of operating them.
MSAs starting falling out of favor after the Consumer Financial Protection Bureau took action against NewDay Financial and PHH as well as two title companies. While the CFPB has never specifically said MSAs were not permissible, lenders interpreted these enforcement actions as the regulator frowning upon them.
But such crossover activity has been going on for decades with mixed results, said Murray. Large homebuilders like Lennar and Pulte own mortgage companies. Others have joint ventures with lenders, like the partnership between KB Home and Stearns Lending.
Likewise, Nationstar Mortgage Holdings tried to create its own catch-all operation in Xome, which in 2015 had been marketed as a one-stop digital shop for consumers to search for a home, pick a real estate agent and get a loan along with related services like title insurance. But it is looking at selling Xome as its profitability declines.
Still, not every real estate company is rushing out and starting its own mortgage business. Realogy and PHH, which at one time had common ownership, are winding down their joint venture. Realogy will now partner with Guaranteed Rate.
To own a mortgage banker outright or in a joint venture takes plenty of capital, Murray pointed out.
The privately held Keller Williams has 752 market centers in the U.S. and Canada, which did $58.4 billion in sales volume in the first quarter.
By comparison, Realogy has 6,000 franchised offices in the U.S., plus its NRT subsidiary owns 780 offices. In the first quarter, NRT and the franchised offices combined did $96 billion in home sales.
Remax had 3,679 offices in the U.S. at the end of the first quarter. The company would not disclose sales volume, but in its first-quarter earnings presentation, it said it did over 1 million transactions during 2016. Motto is a mortgage brokerage, and that requires less capital for the Remax operators that purchase a franchise.
Keller Mortgage is a call center operation, similar to how Smarter operated. It will not have loan officers embedded in its franchisee's offices.
The mortgage company is licensed to do business in 26 states and will first concentrate on doing loans in Texas.
"Texas is the birthplace of Keller Williams and it commonly serves a test market where new initiatives are rolled out," Frost said.