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Rare Eclipse In Economy Increases Home Buying Opportunities

Nov 18, 2001

Entrepreneurialism With a Safety Net (aka Net Branching)Jack DalyEntrepreneur, Housing and Urban Development, HUD, net branching, branches Here's the opener--how would you like to make more money with less work? Speaking from 25 years experience in the mortgage industry, I believe that the net branch structure offers street-smart, loan-originating entrepreneurs the best opportunity to increase loan production, revenues and personal income. In its simplest form, net branching is traditional retail mortgage banking with a more robust compensation plan for net branch managers. Responsible and performing mortgage producers owe it to themselves to explore this new structure. Prior to May of 2000, many companies had built national call centers with a specific focus on mortgages and sub-prime niches. As these niches fell out of favor with the market, these companies were forced to reassess their alternatives. In order to support the national call center, all of the necessary licensing and infrastructure had to be put in place. These companies had to search for a viable alternative to leverage their "in-place expertise." For many, this was found in the net branch opportunity, and the net branch structure is recognized as one of significant growth and lasting value for competent mortgage professionals. In May of 2000, the Department of Housing and Urban Development (HUD) issued a statement restating what constitutes an acceptable and legal net branch structure. The timing of this statement allowed net branch managers the opportunity to establish the net branch structure in full compliance. While the statement specifies in detail the net branch guidelines mandated by HUD, strict supervisory control over all employees is at the heart of its position. HUD does not have a problem with lenders paying their branch managers based on the net profit of the branch. Problems occur when the branch is a separate entity from the approved mortgagee. All operating expenses, leases and employees must be paid by the FHA-approved mortgagee. HUD compliance means that if you are going to originate FHA loans, you must be employed and paid by an FHA-approved mortgagee. Doing otherwise would subject violating originators to termination and penalties by HUD. The net branch concept facilitates Mortgage Bankers to expand their presence while enabling smaller, local market originators a greater share in revenue and a broader array of loan products to offer. Having operated in both the traditional lender structure and the smaller entrepreneurial origination environment, I consider one of the key differences to be in the compensation plans and commensurate opportunities. A constant frustration is the difficulty of luring and landing the local "street fighter." The biggest stumbling block was always compensation! Traditional branch managers are generally paid a salary and small incentives tied to production of the branch. The local "street fighter" works without the safety net of a base salary, yet reaps the profits generated by the branch efforts. The net branch compensation plan mirrors that of the "street fighter" with the direct distribution of profits after expenses are paid. Beyond such compensation, the net branch enjoys expanded product offerings, expanded geographic markets and support services. When compared to the traditional structure, net branch managers double and triple their incomes while enjoying the opportunities of a more entrepreneurial culture within the safety net of the parent company. Net branch owners receive the opportunity to leverage the solid foundation already in place at the larger lender. This provides a head start for aspiring entrepreneurs, with an established support system, as opposed to starting on their own with the matter of administrivia. The net branch structure is truly a "win-win" situation. Operating within the net branch structure, the entrepreneur "street fighter" retains those attributes that translate to local market success, while adopting significant back-office support. Support services provided by parent companies differ from one organization to the next. The list can appear similar to the more traditional lender. These support services include: ++nationwide state licensing; ++extensive investor approvals, including FHA, FNMA, FHLMC and hundreds of others; ++agency net-worth requirements; ++mortgage banking and secondary marketing capabilities; ++warehouse bank lines; ++underwriting, funding, document preparation, including DU/LP and localized capabilities; ++technology support and help desk; ++employee benefits, including health insurance and 401(k); ++general accounting, accounts payable, payroll and tax reporting; ++audit administration, including agencies, investors and states; ++quality control compliance; ++sales and marketing assistance; ++training in both technical and sales; and ++recognition and rewards programs. Characteristically, small- to mid-sized local originators are either shut out from such benefits and services, or are frustrated and distracted by their administrations. Operating within the net branch structure, the local "street fighter" enjoys such large company support, yet operates in a more local, entrepreneurial fashion, creating another "win-win" situation. So, who can be candidates for this innovative net branch structure? They are categorized in four groups: ++Existing net branch managers who are not satisfied with their current relationships, but still recognize the benefits of such a structure. ++Branch managers of large traditional national lenders who sense a readiness to undertake a more entrepreneurial initiative. ++Local Mortgage Brokers who can benefit from the expanded markets, expanded products, enhanced support services and increased revenue and profit opportunities. ++Top-performing loan officers who are ready to undertake the next step of branch management, while retaining the opportunity for higher income within the safety net of a large lender. Basically, the parent lender provides the foundation and support while the individual net branch operators bring local entrepreneurialism focused on originating and processing loans profitably, paid accordingly for such efforts. As for the ideal size, the number of candidates attracted to net branching continues to grow. The initial profile was a branch producing 10 or more loans per month while now, many mid-sized originators producing 50 to 100 loans per month recognize the genuine P&L benefits of focusing on what they do best and like best--originating new business. Once again, this is a "win-win" situation. To summarize the benefits of net branching for the local originators, we see: ++increased revenues through 100 percent origination fees, overage, premiums, and back-end and miscellaneous fees, in addition to participation in servicing release premiums on FHA loans; ++nationwide state licensing/origination; and ++various support infrastructure. All of these translate into increased loan production, revenues and profits for net branch operators. The net branch structure is a winner for the parent lender, the street-smart local originator and, ultimately, for the consumer in terms of broader choice and enhanced service. Hesitation to the concept by the originator typically results from a resistance to change or a sense of a loss of ownership. The "street fighter" originator would be well-advised to seriously research this relatively new structure. While still in its infancy, opportunities for all are compelling and opportunistic. In summary--"win-win." Jack Daly is CEO of professional sales at Coach Inc. and Chief Opportunity Officer of Platinum Capital Group. He may be reached at (800) 523-5363 or e-mail [email protected].
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