Redfin to fund mortgages for buyer customers
High-tech brokerage’s latest bid to streamline the homebuying process
- Redfin will launch a lending arm in Texas later this year.
- The brokerage hopes to integrate this mortgage shop into its existing brokerage and title businesses to a level that’s unmatched in the industry.
- Redfin will try to do this by employing a shared technology platform for the businesses, compensation based partly on customer satisfaction, and an exclusive focus on Redfin customers.
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No matter how talented a real estate agent might be, she sometimes may watch helplessly as a loan officer screws the pooch.
After years of research and development, Redfin will soon try to change that. In a major step for the hybrid brokerage, Redfin is launching a mortgage-banking arm to lend directly to homebuyers who work with Redfin agents — a move that highlights a strategy some brokerages are using to streamline the real estate transaction.
Redfin wants to stitch the new lending unit into its existing brokerage and title businesses to a level unmatched by other multi-service real estate companies. The goal is to provide a digital process with better service, faster closings and lower fees by employing a shared technology platform, compensation based partly on customer satisfaction and an exclusive focus on Redfin buyer clients.
“The reasoning behind it is we’ve really struggled to digitize the entire closing and deliver the service we’re proud of when we have to play a telephone game with so many third parties,” said CEO Glenn Kelman. “If you … build a platform where the lender, the real estate agent, and the title officer can all work together, you just get a much more efficient process that should allow us to offer lower fees to consumers [and] better service.”
Redfin Mortgage “took us a while to get the money and the time” to build, Kelman said. The brokerage has sunk a sizable large share of its funding, which has totaled $166 million, into the project.
Where will it operate, and how will it work?
Redfin will begin offering mortgages to Redfin customers in Austin, Dallas, Houston and San Antonio sometime in the first half of this year.
Led by Jason Bateman, former executive president of mortgage operations at U.S. banking franchise BBVA Compass, Redfin’s mortgage shop will act as a “correspondent lender” (not a mortgage brokerage), directly funding conventional loans with credit from financial institutions and then selling the loans to investors.
Less-than-stellar communication between borrowers, agents, loan officers, title officers and other parties can delay or imperil deals. If a home inspection uncovers a big property defect or an appraisal comes in too low to support an offer, parties must often coordinate a quick response to salvage a transaction.
Some large real estate brokerage companies try to provide an end-to-end service offering by operating mortgage, title services and other “affiliated businesses” in addition to a brokerage business.
But these firms have difficulty synchronizing these units, in part because they use disparate software and agents tend to build close referral relationships with non-affiliated vendors, according Ken Trepeta, president of Real Estate Services Providers Council, a trade association that offers regulatory guidance to real estate companies.
The best of the bunch capture 25 percent to 40 percent of their brokerage customers with their other affiliated businesses, he said.
How Redfin Mortgage is different from a standard affiliated model
Redfin innovates on the affiliated business model primarily in three ways.
First, as with Redfin’s brokerage business, Redfin Mortgage’s loan officers are salaried employees who are paid bonuses based, not only on production, but also customer satisfaction, Kelman said.
This allows Redfin to provide a more consistent level of service and aligns loan officers’ incentives with their customers, he said.
According to Kelman, loan officers will feel more pressure to put the customer first, and they won’t make mistakes in a rush to meet production bonuses.
Second, Redfin’s loan officers will always use the same proprietary transaction platform as Redfin’s real estate agents and title and escrow officers.
Baked into this platform are features that digitize and streamline the underwriting process.
“If you … build a platform where the lender, the real estate agent and the title officer can all work together, you just get a much more efficient process that should allow us to offer lower fees to consumers [and] better service,” Kelman said. “Almost every possible scenario in which a closing could be delayed is one where I think we can be more efficient.”
Third, Redfin Mortgage will focus exclusively on Redfin customers and — at least initially — will not lend to other homebuyers.
Like Redfin agents, Redfin loan officers won’t have to drum up business. They’ll receive all their customers from Redfin, which is able to generate many leads through its popular search site.
The MSA landscape
In recent years, brokerages have scaled back marketing services agreements (MSAs) — which involve collaborative advertising between a brokerage and a separately-owned mortgage lender. They’ve also tweaked or abandoned “joint ventures,” which involve the shared ownership of a mortgage lender by a bank and real estate brokerage.
Through various lawsuits, the Consumer Financial Protection Bureau (CFPB) has made clear its position that the two schemes can easily violate anti-kickback laws, even if they don’t involve direct kickbacks.
Amid this legal scrutiny, the “affiliated business” business model — where a single company or individual owns several real estate service providers — has emerged as the best way to provide coordinated real estate services with minimal legal risk, Trepeta said.
Toeing the line
To toe the line, Redfin’s mortgage division won’t offer any incentives to Redfin agents for referring customers to Redfin mortgages. Redfin Corporation, Redfin’s brokerage business, will own Redfin Mortgage, but Redfin Mortgage will operate as a separate company, with its own office and loan officers in a new Dallas-based office.
Although Redfin agents may pitch a Redfin mortgage as an affordable and efficient loan option, they’ll also disclose the relationship between Redfin’s brokerage and mortgage businesses upfront. And their compensation model will incentivize loan officers to guide customers away from a Redfin mortgage if better options are available, Kelman said.
“There’s so much pressure on the agent to make the customer happy above all else…that he’ll never stick his neck out to recommend Redfin Mortgage,” he said.
Kelman added that Redfin Mortgage won’t have the best mortgage product for many customers at launch. For example, it might not initially offer “jumbo” mortgages or mortgages insured by the Federal Housing Administration (FHA).
Competition in the air
Word of Redfin Mortgage comes shortly after Re/Max announced a new mortgage franchise, Motto Mortgage, that Re/Max real estate brokers can use to set up affiliated mortgage brokerages.
Motto Mortgage differs from Redfin Mortgage because the franchise is for mortgage brokerages, not direct lenders. Unlike direct lenders, such as Redfin Mortgage, mortgage brokerages don’t fund loans themselves; they only connect borrowers to loan options.
For this reason, mortgage brokerages cost much less money to set up, making them the ideal way for real estate brokers with limited capital to launch mortgage operations, argues Ward Morrison, president of Motto Mortgage.