Mortgage-related loss grows at Remax in 2Q

Remax Holdings reported higher mortgage revenue year-over-year in the second quarter but the non-GAAP loss for the segment also rose.

Adjusted EBITDA for the mortgage business during the second quarter was a loss of $1.68 million, versus $1.48 million one year earlier. Total mortgage revenue was $3.68 million, compared with $3.62 million. Continuing fees from existing Motto franchisees was slightly lower at $2.697 million, versus $2.714 million for the same period last year.

The company does not originate loans itself; rather it sells mortgage brokerage franchises and gets fee income. Those offices, which totaled 239 as of July 31, did nearly $2.3 billion in annual loan volume in 2023, the earnings presentation said. This is in comparison to 2019, when Motto had 111 offices that produced $1.1 billion in mortgage loans.

Management noted the Motto business is nearing the 400 mark in lifetime franchise sales and saw a net increase of six from one year prior.

It made nine franchise sales during the first half of this year, versus 18 during the same period in 2023.

"We continue to grow year-over-year despite some of the most challenging end market conditions the mortgage industry has ever faced," Remax Holdings CEO Erik Carlson said about the Motto unit on its earnings call. "Here too, we've zeroed in on what we can control. To date, franchise sales are approximately 50% to Remax affiliates, 20% to independent or other competitor real estate brokerages and teams, 20% to investors, and 10% to loan originators."

Motto franchise sales are down right now but trends are changing in a favorable fashion, Carlson said later in the call. But it also had an increase in terminations of existing franchises — losing two from June to July, for example — which was attributed to market dynamics as overall mortgage originations declined.

"Those terminations are for many different factors. One is, wherewithal — the broker owner's financial position, lack of deals, maybe not connected to real estate, so there are a lot of factors that may close somebody," Carlson said. "We've seen some of those terminations increase during this past year, but feel like when the macro economy changes, we'll be able to start re-growing that open office count."

The franchisees are not just benefitting from purchase business as they are reporting an increase in refinance activity as well, Carlson said.

"The nice thing is, most of them are connected, 75% are connected to real estate," he continued. "So they see the trend long before sometimes even a traditional mortgage broker would see it, because they're seeing that the homeowners come in, buying more homes."

Remax is looking to stay ahead of the curve, not just at Motto, but at its Wemlo mortgage loan processing business as well.

"We firmly know that refinances are increasing as rates go down and feel like the rest of the year we're going to have a good opportunity [if] the Fed cooperates," Carlson said.

Its real estate broker counts fell in the U.S. and Canada fell 4.4% year-over-year during the quarter to 78,559. Updated figures as of July 31 put a further drop to 78,440.

"Evidently, industry headwinds —  low home sale unit volumes due to the lock-in effect from high interest rates and industry-wide litigation — outweighed the typical positive seasonality around the spring home-selling season and company-specific initiatives to reinvigorate growth," according to a flash note from Thomas McJoynt, an analyst at Keefe, Bruyette & Woods.

Net income attributable to Remax Holdings was $3.7 million for the second quarter versus $2 million a year ago.

Remax was one of the franchisors that entered into a settlement with several of the broker fee class action plaintiffs.

Management was about the changed landscape for putting the real estate broker compensation into the multiple listing service.

"Interestingly enough, offers of compensation are still allowed to be displayed on the broker website," said Karri Callahan, chief financial officer, on the call. "That being said, we will not be displaying them on remax.com given our data fee is largely derived from the MLS, which would be a violation of the settlement terms."

Remax continues to hear about how its real estate brokers are navigating the situation, "given their freedom to display offers of compensation on their own websites," Callahan said, adding they are communication with one another in their own markets and making sure they understand if the seller is willing to offer compensation, most likely as a concession.

New rules regarding compensation offers, how they are made and will be communicated, go into effect on Aug. 17, so the situation is evolving, Callahan said.