Could Remax Hasten the Resurgence of the Wholesale Channel?

Remax is making a play for homebuyers' mortgage business.

The home sales heavyweight pioneered the franchising concept for real estate brokerages in the 1970s. Now it's applying that same business model to mortgage brokering with its new brand, Motto Mortgage.

Motto, which launched in October, is a departure from the informal referral relationships between real estate agents and loan officers, as well as the official — and highly scrutinized — marketing services agreements and joint ventures that traditionally bridge the gap between a consumer's desire to buy a home and the requisite need to pay for it.

Remax is leveraging its existing network of real estate franchisees to get Motto off the ground, offering homebuyers a one-stop shop for their real estate and mortgage needs. By operating as mortgage brokers, the newly minted Motto franchises won't have to raise the level of capital mortgage bankers need to fund their originations. As a franchisor, Remax has the opportunity to build Motto into a national brand while avoiding the complexity of securing nondepository mortgage licenses in all 50 states.

Motto's addressable market is significant. Remax has more than 3,500 franchisees in the U.S. whose agents represent nearly 1 million buyer and seller sides of transactions per year. Capturing the mortgage transactions on just 5% of that volume, about 48,000 loans, would be on par with the annual loan count of a top-20 mortgage lender.

It's a level of scale large enough to upend the symbiotic relationship between the real estate and mortgage industries. If successful, Motto would be a boon for the mortgage broker channel and the wholesale lenders that fund their loans. But it could also siphon away business from mortgage brokers and bankers alike that rely on loan referrals from Remax agents.

The timing of Remax's move may ultimately determine Motto's success. Purchase mortgage origination volume totaled an estimated $990 billion in 2016 and is expected to grow 26%, to $1.25 trillion, by 2019, according to the Mortgage Bankers Association. Meanwhile, refinance volume is expected to drop 56%, to $395 billion, during the same time.

What's more, a recent resurgence among mortgage brokers' ranks may also bolster Motto's prospects. Employment at loan brokerage firms is at its highest level since 2007, according to the Bureau of Labor Statistics. A successful franchise model for mortgage brokering would replace the hodgepodge network of independent brokers that thrived in the fast-and-loose lending environment during the housing bubble with a more organized and structured business model that can effectively manage the compliance requirements of today's mortgage industry.

Real estate companies and homebuilders employ a number of different strategies to help homebuyers finance their purchases.

Realogy Holdings Corp., the parent company of seven residential real estate brands including Coldwell Banker, Century 21 and Better Homes and Gardens, has 13,650 offices worldwide. Combined, the Realogy brands make it the industry's largest real estate franchise company and Remax's biggest competitor.

Realogy operates a mortgage lending joint venture with PHH Corp. While the two companies are now independent publicly traded entities, they share a history dating back to when they were both subsidiaries of Cendant Corp. Realogy owns 49.9% of the joint venture, PHH Home Loans, which contributed $7 million to Realogy's earnings in the first nine months of 2016, according to regulatory filings.

But big changes could be coming, as PHH Corp. is shutting down its private-label origination business that represented 78% of its third quarter total volume of $10 billion. The bulk of its remaining originations, 20%, came from PHH Home Loans. The company is evaluating "the best course of action" for its future, PHH CEO Glen Messina said in the company's third-quarter 2016 earnings release.

HomeServices of America, a unit of Berkshire Hathaway, has approximately 1,500 franchised offices and 500 company-owned offices. It owns a mortgage banker, HomeServices Mortgage, which did 2015 volume of $4.1 billion with over 16,500 closed loans, the company's website claims. Until 2014, HomeServices Lending, now a part of HomeServices Mortgage, had been a joint venture between HomeServices of America and Wells Fargo.

Prosperity Home Mortgage also started life as a Wells Fargo joint venture, this one with Long & Foster that ended on Jan. 1, 2014. (Wells Fargo announced it was exiting the remaining mortgage joint ventures it had in July 2013.) It did $2.9 billion in originations in 2015.

Then there are the homebuilders that also have their own mortgage banking businesses, some of which have been very successful in keeping their customers in-house. For example, PulteGroup's lending subsidiary, Pulte Mortgage, had an 81% capture rate in the third quarter, with total volume by units of 3,417 loans and dollar volume of $946 million.

All of these ventures are subject to the Real Estate Settlement Procedures Act's Section 8, which prohibits kickbacks for referrals between mortgage and real estate companies.

The rule states that a person shall not give or accept any fee, kickback or thing of value for referring business among service providers, but there is an exception for affiliated business arrangements. But since Motto is not a licensed mortgage banker or broker, it falls outside of that exception.

Unlike those companies, Remax will not be able to share in any upside from a mortgage transaction. That is because Motto is not licensed as a mortgage banker or a mortgage broker; it is merely the franchisor.

Having a mortgage business "makes a lot of sense and it's a very natural cross-sell for a real estate company," John Campbell, an analyst for Stephens Inc., a financial services firm headquartered in Little Rock, Ark., said.

The real estate brokerage is able to "close the transaction and place the mortgage at the same time. The problem is that it is a tricky venture, there are a lot of rules and regulations in the industry right now that try to reduce the risk of forcing consumers into transactions," he said.

Because a franchise is an independent business, it avoids the type of compliance issues that made regulators look askance at MSAs and joint ventures. "Any negativity or anything they do [in terms of] poor business practices, regulation-wise they are their own stand-alone business," said Gregg Harris, a St. Louis area mortgage broker who has been trying to bring the LenderCity franchise concept to market.

A franchise structure could mitigate any concerns about possible RESPA violations that a joint venture or an MSA had, said Campbell, who follows both Realogy and Remax. Realogy and PHH are currently dealing with a lawsuit filed in the U.S. District for the Central District of California, Strader v. PHH Corp., alleging the venture violates RESPA as a result of the parties referring business to one another under agreements or arrangements, Realogy said in a regulatory filing.

Ultimately, the lawsuit should not be an issue for PHH and Realogy, "but it's one of those things that has a created an overhang on those stocks," Campbell continued.

Motto was created to replace the MSAs that many small and midsized (and even a few larger ones) Remax franchises had up until the CFPB crackdown in the summer of 2015. There were approximately 1,700 of the 3,500 Remax franchises with an MSA of some sort, said Motto Mortgage President Ward Morrison.

Motto's units will be operated as mortgage brokerages. Mortgage brokers bring clarity and loan product options to the consumer, said Dave Liniger, CEO of Denver-based Remax Holdings Inc.

"What's happened is the big banks have consolidated their power [in mortgage lending] but in doing so they have taken away choice and transparency to the consumer. So we just think the time is perfectly right" to bring Motto to market, Liniger said.

If a real estate broker wanted to get into mortgage banking, "they had to put in a large amount of capital, they had to go out and get a warehouse line, and they had to be a correspondent lender with somebody.

"And we felt that the mortgage brokerage business was the one with the least amount of capital upfront that they needed to put in, it is still regulated but there is not as much risk for them. That was the key," Morrison said.

Profits from PHH Home Loans benefit the corporations that own it. The franchise model means the operators get the profits from the mortgage loan. "We wanted to come up with a concept that would support the individual real estate broker," said Morrison.

With affiliated business arrangements, any payments must be based on the equity ownership stake that each party holds in the venture. Similarly, any payments made under an MSA needed to reflect the market value of the services rendered.

PHH Corp. was fined $109 million in June 2015, after Consumer Financial Protection Bureau Director Richard Cordray overruled an administrative law judge's findings regarding payments on reinsurance agreements. PHH and the CFPB remain entangled in a lawsuit contesting the bureau's finding, as well as PHH's legal challenge that the single-director structure of the agency represents an unconstitutional concentration of executive power.

While the ongoing appeals in the PHH case continue to complicate questions about the CFPB's RESPA enforcement powers, the agency has issued warnings about the use of MSAs, stating that in some cases, payments made to lenders for advertising settlement services were in reality disguised compensation for referrals.

MSAs on their face remain legal. However, the agency has refused to supply specific guidance on what constitutes an illegal MSA. "Any analysis of whether an MSA is legal or not is highly fact specific and not conductive to a simple yes or no answer," CFPB spokesman Sam Gilford said in response to an April 2016 query.

The initial court rulings and CFPB ambiguity has prompted Wells Fargo, Prospect Mortgage and PHH to cancel their existing MSAs, although the PHH Home Loans joint venture with Realogy remains in place.

Remax has had its own MSA-related struggles, too.

In November 2015, Remax and Quicken Loans entered into an MSA that ended abruptly in September when the two companies filed separate law suits against each other.

The agreement was on the franchisor level, not the franchisee level, Morrison said.

"It was never meant for the franchisees at all. Just like any marketing agreement, we had them as part of our website, as part of our conferences. It was a traditional sort of sponsorship agreement where we were providing access and marketing services, joint marketing services to them, across our network. There was no guarantee of business; there was no guarantee of anything. It was just an agreement to market together.

"It was a pretty simple deal. I think they just wanted out of all their MSAs" based on what was happening with the CFPB and its enforcement of RESPA, he said.

When asked if the collapse of the arrangement influenced Remax to create Motto Mortgage, "No, not at all. We had gone the path with Motto separately," said Morrison.

"Motto Mortgage was going to be something that we could provide to our franchisees to get them into the mortgage industry. So they were completely separate," he said.

Remax "breached its contractual obligations to Quicken Loans," the lender said in a statement.

"We repeatedly attempted to restructure the agreement to more accurately reflect the significantly lower level of commitment Remax was capable of delivering. Remax insisted on receiving full payment despite their failure to perform their obligations in the contract," the statement said, adding that that failure violated the RESPA requirement that marketing fees to third parties to be commensurate with the services provided.

"Our decisions and actions are always guided by a philosophy of 'doing the right thing.' We naturally expect our partners and the counter-parties of contracts we enter into to share the same principles. Clearly, honoring contractual commitments and following regulatory guidelines, including RESPA, are fundamental to our business philosophy," the Quicken Loans statement said.

Mortgage franchise businesses are common in Canada, Australia and New Zealand, Liniger added. "Franchising has succeeded in virtually every industry in the United States, and so it is an ideal way to expand the concept," he said.

Like any other mortgage brokerage, the franchisee can collect the yield-spread premium that the wholesaler pays for the loan. But because Motto will not be a licensed mortgage originator, the YSP cannot be passed back to the company. Instead, Motto Mortgage will collect a set monthly fee from the franchisees for use of the name and the marketing support it provides, Morrison said. It will also charge an initial fee of $20,000 per franchise.