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Faster Than A Speeding Brokerage?
For decades, the real estate brokerage was the domain of the local agent – Hometown Realty, or Jack Jones Real Estate, for example. They implied local folks advising local buyers, one-on-one advisors and friendly service. They were the mark of friendliness for a transaction often fraught with uncertainty.
Then came Century 21. And Better Homes & Gardens. And Re/Max.
The franchise companies saw change coming in real estate. They saw more complexity, greater mobility among buyers, a need to raise standards. They saw that small-town real estate agents needed help keeping up with new technology and marketing. And so they brought all this to community after community.
Now, buyers and sellers seek out the chain affiliations because they want national expertise. Real estate brokers rely on the benefits of consistent tech and multi-state marketing. And agents expect the kind of back-end support that only regional or national organizations can provide.
That’s a history lesson that isn’t lost on Brian Kent, general manager and co-founder of C2 Financial, the largest regional mortgage brokerage in the U.S. In fact, it’s a proven strategy that his company and a growing number of others are looking to bring to home financing the same way the real estate franchises evolved home sales.
And since the foundation of evolution is the survival of the fittest, that means it’s time for the era of the Superbrokerage to finally take flight.
Independent mortgage brokers have been capturing an increasing share of
the mortgage market, according to Home Mortgage Disclosure Act data, now accounting for about 17% of originations, up from 14% just a year ago and 11% just three years ago. But all that extra business brings with it operational challenges. It means more processors are needed to get originations moving, more oversight is needed to keep up with
changing lender and regulatory rules, more marketing is needed is to sway borrowers. And all of that involves more time, effort and strategy on the part of each individual brokerage.
Brett Weiss, manager of NEXA Mortgage’s Glendale, Arizona branch and nationwide team lead, says that there’s a Catch-22 that prevents mortgage brokers from getting big: You can’t get big without volume, but you can’t produce enough volume to become profitable unless you’re big. That’s a conundrum that stymies many aspiring brokerages trying to grow.
The typical mortgage brokerage in the U.S. is a small operation, with three or four loan officers and some support staff. Putting on more staff in either sales or support also means taxing the resources of management, which is often in the trenches originating, too. But attracting highpowered originators is the only way to get substantial growth. And those sales stars are reluctant to move without seeing an advantage.
LOs Not For Sale
“You can’t just go out and buy a bunch of originators,” says C2’s Kent. “We had to build up slowly over time in order to be able to get the volume in order to get preferred rates with our lenders. It’s just something that takes more time to develop.”
C2 Financial in San Diego is generally considered to be the largest mortgage brokerage in the country based on origination volume, totaling $5.2 billion in 2019, according to company data. The firm boasts about 800 originators licensed in 11 states, mostly on the West Coast, but also in Texas, Florida and a few others.
Nexa Mortgage, based in Chandler, Arizona, has only been around since 2017 but already has 600 loan officers, second only to C2, licensed in 39 states. Last year, it originated almost $1 billion in loans, more than half of it coming in the last four months of the year.
“There is this belief that [mortgage brokerage] is just not the type of business that is scalable to the level of being a superbrokerage and be successful,” Weiss says. “Nexa and C2 are showing that that isn’t the case. But it’s not easy, and it really has to revolve around volume. The volume just has to be there.”
Easy To Be Small?
Mat Ishbia, president and CEO of United Wholesale Mortgage in Pontiac, Michigan, the nation’s largest wholesale lender with $107.7 billion in loan volume last year, says the reason there are so many small brokerage firms is because “it’s very easy to become a mortgage broker.”
“The barrier to entry to become a mortgage broker is not very high,” he notes. “There’s not a branding thing you need as a mortgage broker. It’s about being independent and having options, which is why the broker channel is exploding right now and it’s going to continue.
“Being a mortgage broker is the best place for a loan officer to work. In the broker world right now, there are plenty of options, whether it’s working for a large broker or a small shop or starting your own. All these options are viable.”
But hanging out a sign as a broker and being able to scale the operation are dramatically different. That’s why wholesalers like UWM and Quicken Loans Mortgage Services offer originators complete backend offerings, from branded marketing to online application portals to in-person training. But it’s also why more big brokerages are trying to expand their footprint by offering a unified back office and sales support to originators flooding into a hot market.
While real estate and mortgage brokers operate in the same basic space – residential real estate – there are significant differences between the two.
Primarily, there are a lot more Realtors than there are mortgage brokers. While the National Association of Realtors, one of the largest and most powerful trade groups in the country, has 1.4 million members, there are fewer than half a million originators licensed by the Nationwide Mortgage License System, and many of those licenses aren’t for individuals.
A big issue, Nexa’s Weiss says, is support. “One of the biggest drawbacks you hear in the mortgage broker business is that loan officers do not get the support they are used to in the retail environment,” he says. “The training and daily support of a scalable large brokerage is a hindrance and why people are not attempting to do it. That’s a cost at the corporate level that plays into the profitability. How do you support that many loan officers?”
At the same time, “at the smaller brokerages, the owners are originating themselves, so they have to take care of their own business to make sure the bills get paid. Do they have the time and the financial resources to train and support a growing number of loan officers they are bringing in? Those are the two main reasons we do not see many brokerages of our size.”
A Hybrid Alternative
Motto Mortgage, which calls itself the “only mortgage brokerage franchise network in the U.S.,” is somewhat of a hybrid between the superbrokerages like C2 and Nexa and the typical “mom and pop” offices that dot the landscape. Based in Denver, Motto launched in October 2016 and has sold 200 franchises since then, with more than 300 loan officers in more than 30 states, although it’s licensed in all 50. Last year it originated more than $1 billion in mortgage volume.
Motto, a wholly owned subsidiary of RE/MAX Holdings, calls its concept “a mortgage brokerage in a box.”
“For the small and medium-sized real estate company that may not have the capital, our solution of becoming a mortgage broker is a great one for them and allows them to open up with less capital and somewhat less risk because they’re a broker, not a banker,” president Ward Morrison says.
Motto generally attracts less experienced mortgage officers, Morrison says, “people who have been around the mortgage industry but not necessarily in it. We get them set up, compliant, legal, connect them with a good product, technology, marketing tools, all from the get-go. We level them up and get them up to speed. They’re in business for themselves but not by themselves.”
It’s a tack that seems to be working. Motto Mortgage was named by Entrepreneur magazine to its “2020 Fastest-Growing Franchise” list, along with several other accolades. And other mortgage entrepreneurs are also trying to get into the game. California-based Arcus Lending, for example, is quickly adding locations stretching to the Midwest.
But even when such companies are on a roll, success isn’t a certainty. Motto Mortgage notes that it has “sold 200 franchises” in just four years. But only 125 of them are still active.
It took a while for C2 to achieve its current size. The firm started in 2009 with 50 loan officers but then “ramped up pretty quickly,” Kent says. “Our volume increased, and with increased volume comes better negotiating ability with our lenders for lower interest rates and better service. It’s sort of a cycle: You get bigger, you are able to negotiate better rates, and because you get those rates, more originators want to be with you.”
“There’s more risk involved,” he added, “and there are fewer people [in the mortgage business] willing to take that risk. For a big real estate broker, what’s the liability on those deals? On the mortgage side, if we have a loan go bad, or there’s fraud on a loan, we may have to buy that loan back. And it doesn’t take a lot of buybacks to put a company out of business. I don’t think there’s a lot of people who have the risk tolerance to have 800 originators conducting business under their license, because things could potentially change pretty quickly.”
Not surprisingly, then, controlling risk is “the core issue for us,” Kent says, and that requires quality control.
As a wholesale lender, Ishbia says it doesn’t really affect his business whether it deals with lots of small mortgage brokers or superbrokerages like C2 and Nexa.
“It doesn’t matter to us at all,” he says. “Every originator is independent. Even if you work at a big broker shop, each loan officer is independent and they make the choice which lenders they work with. What matters is whatever is best for the originator. We’re on the same team.”
“When a new originator joins us, we do heavy screening and due diligence in terms of background and reference checks,” said Nexa’s Weiss. “And most of our originators are referred to us, so we already have an advantage, there’s some trust there already.”
“Then from the loan file standpoint, for every file that comes in, we do pre-quality control, where all the key elements of the file are re-verified by us. And we do a post-QC on the back end. We also work closely with our lenders on QC. Our originators know that if we see something, our lenders are going to call us right away. So, before that loan funds, if we have more than two issues on a loan, depending on the severity, we are going to pull the plug on that loan.”
“The smaller brokerages hit a point where they just don’t see that it’s possible to get any bigger,” he says. “Nexa gives the lion’s share of the commission to the loan officer, and that drives the volume, but that’s probably the scary part to most broker owners, because of the small margin they operate on at the corporate level. If that volume goes away that becomes a problem, and explains the hesitancy why more broker owners don’t try to increase their scale.”
But in the same way many real estate agencies didn’t want to align with the national chains but eventually did, more originators will likely be looking for more structured help. If existing brokerages don’t try to scale up to provide that kind of support, the real estate franchises – who have experience in exactly this kind of business model – likely will.
“It does not come as a surprise that traditional national real estate firms, which have experience in the franchise model, are pressing forward into the mortgage industry. It is a natural extension, especially as real estate firms are seeking to or needing to expand revenue opportunities,” says Brian Marks, an adjunct professor at the University of New Haven. “These national firms will need to move fast, however, as the window of this opportunity will not remain open forever.”
Motto’s Morrison says it hopes to continue its pace of adding an average 50-plus franchises a year over the next five to 10 years. “We believe in the power of the franchise network,” he says. “We have seen it done on the RE/MAX side, so we do it on the mortgage side as well.”