This is part two of a two-part series on joint ventures in the housing industry. To read the first part of this series, go here.
On a sunny, serene fall afternoon, the Chicago neighborhood of Ravenswood featured quiet socializing on outdoor brewery patios, cyclists of all ages, and, hidden alongside the elevated train tracks, the headquarters of mortgage lender Guaranteed Rate.
Founded in 2000 by its current CEO, Victor Ciardelli, Guaranteed Rate has Chicago brand recognition after it paid $2 million a year to rename where the White Sox play baseball. The lender’s headquarters features a side entrance that headquarters three more companies: Guaranteed Rate Affinity, Proper Rate, which is the Guaranteed Rate/@properties joint venture, and OriginPoint, the forthcoming Guaranteed Rate/Compass JV.
Ciardelli has put together a literal side door of joint ventures, to the annoyance of his competitors.
“It’s not like we just announced a deal with Guaranteed Rate like everybody’s got to have a Guaranteed Rate kind of thing,” said eXp CEO Glenn Sanford during an August earnings call discussing the partnership with Kind Lending. “This is actually something much more strategic.”
A private company, Guaranteed Rate did not make executives available for comment. “Joint ventures are a key driver of our long-term strategy, and we are committed to their growth and long-term success,” a company spokesperson said in a written statement.
Besides sharing physical offices, Guaranteed Rate shares the public relations team that also fielded questions on Guaranteed Rate Affinity. Asked what else is shared, the spokesperson replied, “Guaranteed Rate provides certain services, including technology services, to our JVs and charges fair market value for these services.”
In addition to an array of services already in place, the mortgage company gets the requisite 50% or so real estate brokerage buy-in. “The brokerage invests anywhere from $500,000 to $2.5 million depending on the size of the opportunity,” Steve Murray, senior adviser at RealTrends, said.
So, with various services plus capital in place, a joint venture ramps up faster than a traditional mortgage company. The biggest start-up cost perhaps is hiring loan officers, a core position illegal to subcontract under RESPA.
At a joint venture, loan officers generally get paid a lower base salary than counterparts at traditional mortgage lenders, and may get a smaller commission.
The economic concept behind this, explained Jeffrey Naimon, who counsels on mortgage compliance issues at the Buckley law firm, is that the loan officer is doing less work finding customers, since there are greater real estate agent referrals.
But those referrals could mean a higher volume of business.
“You may do far more loans for slightly less,” said Brian Hale, the founder of consultancy DCMG and the former CEO of Stearns Lending.
Glenda Snyder is a joint venture loan officer for Sanctuary Home Mortgage in Atlanta. Sanctuary is a partnership of a Sotheby’s Realty franchise, and NewRez, the lending subsidiary of New Residential Investment Corp. Like Guaranteed Rate, Newrez partners on a growing list of joint ventures.
“We look for great partners that want to grow their business, not just leverage our infrastructure,” said Jeff Gravelle, chief production officer at Newrez LLC. These partners typically include regional brokerages that have been around for decades such as Schmidt Family of Companies, based in Traverse City, Michigan, and Russell Real Estate Services in Cleveland.
A loan officer for 25 years total, Snyder said her past year at Sanctuary Homes provided her extra access to real estate agents through “attending sales meetings, presentations, and stopping by the real estate partner’s office.”
A publicly traded company, New Residential Investment Corp. has an amalgam of divisions, and one of the most successful is the joint venture. The company’s joint ventures did $4 billion in loan origination volume in 2020 (6% of the company’s total originations) and posted $31 million in net income, of which it keeps half. Gravelle described the mortgage retail business as “higher touch” with “certainly good profit margins.”
Watching the detectives
“Many view a new home as the foundation of the American dream,” opens a 38-page administrative proceeding then-Consumer Finance Protection Bureau Director Richard Cordray wrote in 2015 that would crescendo with demanding $109 million in civil penalties from mortgage lender PHH for allegedly flouting RESPA. “Although most consumers actively shop for a home and some shop for a mortgage, very few actually shop for settlement services.”
Following the housing bubble’s calamitous burst, the federal rules regulating joint ventures did not change. However, the agency enforcing those rules did shift, from U.S. Housing and Urban Development to the newly formed Consumer Finance Protection Bureau, which began to announce RESPA enforcement actions.
Federal appeals courts pushed back against some actions, including the case against PHH (which Ocwen bought in 2018). Future U.S. Supreme Court Justice Brent Kavanaugh authored a 2018 D.C. Court of Appeals ruling that vacated the $109 million civil penalty, declaring CFPB’s executive authority “a grave threat to individual liberty.”
“When measured in terms of unilateral power, the Director of the CFPB is the single most powerful official in the entire U.S. government, other than the President,” Kavanaugh wrote.
But the PHH enforcement action, which concerned a mortgage insurance joint venture, indirectly cost PHH’s real estate joint venture with none other than Realogy.
A Newport Beach, California homeowner filed in 2015 a class action lawsuit in federal court saying Realogy and PHH routinely violate RESPA. Under the alleged scheme, corporate aliases of PHH referred clients to Realogy’s Title Resource Group for title insurance without disclosing the company’s partnership.
The defendants settled in 2018, admitting no wrongdoing but paying a $17 million settlement on behalf of 32,217 homeowners who utilized Realogy’s title division. By that point, Realogy was already in year two of its new mortgage joint venture with Guaranteed Rate.
Today, Realogy chalks up the lawsuit to the brokerage inheriting the joint venture from Cendant’s corporate breakup. The Guaranteed Rate Affinity joint venture, meanwhile, was built from scratch, “And has been carefully built for compliance,” said a Realogy spokesperson.
But the RESPA compliance of any company is untested in Washington in recent years. Under the Donald Trump presidency, CFPB did not execute a single enforcement action against a joint venture, said Bunting, the RESPA compliance lawyer.
Garris, the RESPA-focused attorney, says enforcement may change under recently confirmed CFPB head, Rohit Chopra, a former Obama administration official.
“I think there is concern about executive leaders who are viewed as hostile to the mortgage banking industry,” Garris said. “It can make companies more risk averse.”
There’s also a lack of clarity around the present standards for joint ventures, Garris said. For example, both Newrez and Guaranteed Rate say that they “strictly adhere” to a 10-factor test that HUD devised in 1996 to figure out whether a joint venture truly is independent from the founding companies. However, the 6th Circuit Court of Appeals said HUD exercised too much discretion in administering the test.
Not knowing the level of regulatory enforcement can be an expense in itself.
“I try to counsel people not to do a JV where you don’t expect to do at least $250 million to $300 million a year in volume,” Hale said. “Because setting one of these up correctly and being compliant is difficult.”
I Know a Guy
Perhaps housing’s future is a generation of homebuyers – 30-years-old now and 16 when the original iPhone came out – who enter their bank account number and remember their password on a single company portal.
“I truly think it’s the consumer who is making this push to one-stop shopping,” said Ward Morrison, president of RE/MAX’s Motto Mortgage.
“Creating a seamless all-inclusive shopping experience for a consumers real estate transaction – brokerage, mortgage, title & homeowners insurance is critical for both the best consumer experience and the best path to profitability,” said Gino Blefari, CEO of HomeServices of America.
But when does this conflict with a different reality – the autonomy of the real estate agent?
J.P. Montalvan was an early Compass recruit, jumping aboard in 2015. The Washington, D.C. broker remains a Compass believer, but Montalvan has no plans to use their upcoming joint venture, OriginPoint.
“We always recommend two very experienced lenders based on our client’s needs,” Montalvan said. The agent is not worried about the possibility of Compass nudging him to change lenders, saying, “Compass only asks how they can help, they won’t pressure.”
There are no studies on attach rates, or the broader question of how agents refer clients to a loan officer. But anecdotally, agents find trusted lenders through continual trial and error.
Take Judith Abbott, a Coldwell Banker agent in the Dallas area for several decades. “I now have a list of three-to-four lenders that I use,” Abbott said. “Each of them has demonstrated a capacity to close on time with no drama.”
“Currently,” Abbott added, “Guaranteed Rate Affinity is on my list of preferred lenders. The quality and efficacy of their personnel has varied widely over time. The people currently assigned to my office do a good job. Before that, I hadn’t set a single buyer in that direction.”
Brokerages look to mortgage partly because the highest producing agents is snaring an increasing share of commission splits. For instance, at Compass, which did not return messages for this article, an estimated 81% of the commission goes to the agent, 19% to the brokerage, with the agents paying no upfront fees.
“Margins in the brokerage business are really tight so you need to have other services,” said Mike Golden, co-founder and CEO of @properties, a private company that does not disclose its commission splits.
But the same dynamic that lets top agents get an increased commission also lets agents do their thing. Proper Rate, which is @properties joint venture with Guaranteed Rate, aspires to attain a 30% attach rate with @properties, but not at any price.
“Our agents are independent contractors, and they are our clients,” Golden said. “Putting pressure on them would be detrimental to our business. I know some companies have put pressure on their agents to use their JV, but then it backfires.”
The dynamics of the truly independent agent are felt by loan officers, told about seamless integrated platforms but ensconced in a word of mouth economy.
“You still have to work for it,” said Snyder of Sanctuary Home Mortgage. “It’s about building a relationship. You know that they are trusting you with their business.”