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CALIFORNIA LOAN CONNECTION: Why does your broker have an affiliated business arrangement?

By
Commercial Real Estate Agent with Matthews Capital Markets NMLS 2415712

I blogged earlier about the Realtor/LoanOfficer title so many agents have on their business cards.  In essence I asked:

What is so wrong about Realtors who originate loans (or vice-versa)?

Here is a summary of what you told me: 

1- It is a conflict of interest:  Realtors lose their objectivity if they perform both functions.  

2- Specialization:  Realtors need to specialize in selling homes, loan officers in financing them.

3- Some of you thought it violated RESPA (it hasn't since 1983 by an order of Congress)

4- The mortgage people didn't seem to care.

So why does your broker have an "in-house" mortgage company? 

In short, your broker has an in-house mortgage company because they just can't make any money on real estate brokerage?  No way?  Way!  Commission splits have been rising exponentially for the past 15 years.  The introduction of the 100% model combined with discounting pressures has had broker/owners scrambling for ways to increase the bottom line by offering a "one stop shop" for customers.

How much can the broker really make off of an ABA with a  loan company? 

Well, that depends.  If it's the Coldwell Banker/Century 21 model, not a lot.  the originating broker makes about $300/transaction.  Now if your office is a 30 agent office with 8-10 loan a month, that may pay the salary of a receptionist (whi is helpful)

I had an ABA with 3 Keller Williams' offices in Phoenix.  I paid "rent" to the office, had a separate entrance, and operated as my own business.  I still had to hustle and my rent was "all-inclusive" (phones, fax, copies, interne at $2,000/month per office.  When I operated by myself, it was a great deal.  When I hired loan officers, I didn't make any money.

I was proposed a "partnership" with the real estate brokerage because they were convinced that they were missing out on thousands of dollars in profit.  This was the greatest thing that ever happened to me.  We split "profits' aftet the loan originators, rent, and all of the incidentals were paid.  I made more and the brokerage made about what I was paying in rent.  the broker had more of an incetive to engourage the agents to utilize our services.

California's largest brokerage, Prudential California Realty (owned by Warren Buffet controlled HomeServices of America) owns a mortgage banking and brokerage firm called First Capital.  I have seen nothing that suggests that this common ownership is anything but a benefit to the consumer.

How about title or escrow services? 

In California, many brokerages have in-house "escrow" companies.  In fact, the term "virtual escrow" has popped from title companies to capture the title policies.  This platform transfers some basic escrow functions to the broker and allows them to be compensated for it. 

Does this violate RESPA? 

Absolutely not if it is done correctly.  Section 8 (c)(4) of RESPA provides for these ABAs if they meet a safe harbor test.  It is required to use the HUD disclosure for each customer diclosing compensation or ownership.

Summary: 

Real estate brokerage is a low margin business today.  Experienced, consistent producers are demanding (and getting) splits of 80-90% as well as increased services.  Big shops that have over 100 agents can afford to operate on brokerage alone.  Small shops where the broker produces are able to operate on brokerage alone.  It's the 10-60 agent shop that needs to find alternative revenue streams to make a profit.  ABAs are here to stay.  If done properly, they offer a tremendous resource for a consumer.

An article from your California Loan Connection. 

More good information on America's Most Opinionated Mortgage Broker.

 

Comments(12)

Lisa Simpson
Mortgage Options - Summerville, SC
Great content. I was interested in what people thought to that blog. Thanks for sharing
Sep 05, 2006 11:01 AM
Mitchell J Hall
Manhattan, NY
Lic Associate RE Broker - Manhattan & Brooklyn

Brian,

My broker has an ABA with Wells Fargo. I don't know what my company makes but as an agent I really like it. Before our partnership with Wells we had an affiliation with Manhattan Mortgage. They do open house packages, financial analysis of my listings, pre approve my properties and will cater open houses whatever I need. The mortgage broker attends our sales meetings and is easily available to do pre approvals. I can use any lender and there are many I like, but it's very convienent having an ABA.

Sep 05, 2006 11:31 AM
Eric Bouler
Gardner Realtors, Licensed in La. - New Orleans, LA
Listening to your Needs
We have an in house loan officer and rarely use her. I think I have found better people and deals for my clients. Are'nt we suppose to be helping our client. The client comes first in my business. I dont need everyone in the office knowing my business. Another profit center is not my goal. eric
Sep 05, 2006 11:38 AM
Brian Brady
Matthews Capital Markets - Tampa, FL
858-699-4590

OK.  I'm so glad that you both commented when you did.  Here are two examples of an ABA that works and an ABA that doesn't.  Mitchell has a good relationship because the broker when out of his way to find a good provider.  Eric doesn't have that.

Eric, your broker has to do one of three things to survive in the next two years:

1- Get the right in-house LO so ther earn the business

2- recruit more agents so he/she has more transactions

3- Adjust commission splits downward. (VERY HARD TO DO) 

Please tell him that you understand the economics of the ABA and higher splits; he should appreciate it and want your feedback. 

I had a similar arrangement at a past company with an in-house escrow compnay.  They were horrible and I refused to use them.  I was given an ultimatum, use them or accept a lower split.  I gave an ultimatum:  hire a new escrow officer or I'll elect to leave. I left.

 

 

Sep 05, 2006 12:00 PM
Ken Stampe
iBrandPlan.com - Grow your e-Profile & Brand - Dallas, TX
iBrandPlan

Great topic, Brian. There is one aspect that you didn't mention which I wanted to point out. A realtor who also operates as a loan officer is technically in violation of HUD's policies on employment of mortgage professionals. If the lender is not a HUD approved FHA lender, then it doesn't matter. You mentioned that the practice is protected by RESPA and it is, with appropriate disclosure of the dual role. However, I find it somewhat a conflict for some agents to operate as both Realtor and loan officer but NOT offer the FHA loan programs.

Just to clarify, an ABA would not be the same as I have described above. That is essentially a joint business venture and the loan officers are seperate from the Realtors.

Ken Stampe Home

Sep 05, 2006 01:21 PM
Brian Brady
Matthews Capital Markets - Tampa, FL
858-699-4590

Nonetheless, FHA market share has decreased to under 4% of loan volume. 

 In some markets, FHA loans are non-existenet due to loan limits.

Good point.  Realtors may not be able to originate loans if they are a HUD approved lender. 

Sep 05, 2006 03:02 PM
Ken Stampe
iBrandPlan.com - Grow your e-Profile & Brand - Dallas, TX
iBrandPlan

Well, Brian, call me biased towards FHA. I sit on the FHA advisory council here in Dallas and we certainly have more viability for FHA loans due to our property values. Median home price in Dallas is $176,000 which is well below the FHA loan limit. There is certainly a regionality to things and I forget you are San Diego with a median home value of what, $176,000 per square foot?

:P

Ken Stampe

Sep 05, 2006 03:28 PM
Brian Brady
Matthews Capital Markets - Tampa, FL
858-699-4590

Ken,

That was funny...sad but funny.  FHA is all but dead here. 

HUD could really do some good if thy indexed their loan limits to median home prices. We have a median home price of some $550K-$600K...that's MEDIAN.

If HUD allowed a $600,000 loan limit here, we wouldn't have 25,000 listings in our MLS. 

Sep 05, 2006 03:41 PM
Ken Stampe
iBrandPlan.com - Grow your e-Profile & Brand - Dallas, TX
iBrandPlan

Brian,

 They could simply move to the oh-so-affordable Dallas area!

Just a thought.....

Sep 05, 2006 03:43 PM
Brian Brady
Matthews Capital Markets - Tampa, FL
858-699-4590
Check my midnight blog, Ken.  I may have solved yet another problem in America tonight here on Active Rain
Sep 05, 2006 04:12 PM
Eddy Martinez
Nationwide Funding Group - Highland Park, CA
You are the man Brian." 3- Some of you thought it violated RESPA (it hasn't since 1983 by an order of Congress) " <----- i honestly didnt know that.
Sep 06, 2006 06:34 AM
FRANK LL0SA Esq.- Northern Virginia Broker .:. FranklyRealty.com
Northern Virginia Homes - FRANKLY REAL ESTATE Inc - Arlington, VA
Can you help me understand how it is not a RESPA violation for an agent to own a part of a Title company and receive indirect kickbacks. I discuss it in my most recent blog:

Ethical "Affiliated Businesses"? Or Bilking & Kickbacks. Title Companies Watch Out!

Love to get your take on it. 

Frank Borges LL0SA- Virginia Broker/ Owner FranklyRealty.com

Blog.FranklyRealty.com Featured in BusinessWeek, CNBC, WSJ etc.

                      

 

Jan 29, 2007 07:21 AM