The excited and at times nervous first-time homebuyers that James Dunn often represents ask him how that whole process of taking out a mortgage works, and Dunn, a Los Angeles-based real estate agent with eXp, replies with a few trusted names. “There are probably three or four people that I work with,” Dunn said. “Anyone that’s a great communicator will get my attention.”
Two hours south in San Diego, clients ask eXp agent Alanna Strei for a mortgage reference. And, after years “looking for the right mortgage partner,” Strei now confidently directs clients to mortgage broker Tim Joy at the Joy of Lending.
In July, Dunn and Strei’s real estate brokerage eXp declared that it had formed a mortgage partnership, or joint venture, with the mortgage lender, Kind Lending. Under the business marriage, eXp and Kind Lending each own half of a mortgage company scheduled to launch by the end of the year, titled “Success Lending.”
Dunn and Strei are not obliged to refer clients to their employer’s joint venture — such a requirement would be a violation of federal law.
Strei is aware of the joint venture but sees “no reason to stray” from Joy, “Who I truly feel gets the best for my clients.”
Dunn, meanwhile, is only vaguely familiar with the fledging joint venture, whose formation was the talk of eXp’s most recent earnings call. “It has not been discussed among my network,” Dunn said.
Joint ventures are suddenly stitched into the fabric of national brokerages eXp, Realogy, and Compass plus several regional outfits. Meanwhile, national mortgage lenders – most prolifically Guaranteed Rate and NewRez – are methodically trying to capture market share one joint venture at a time.
“Everybody in this industry either has or should have a mortgage business,” said Ryan Schneider, CEO, and president of Realogy during his companies’ latest earnings call.
But the idea of the joint venture collides with the loose, informal networks that color the American housing economy.
The new playbook
It was in October of 1992, the month George H.W. Bush, Bill Clinton and Ross Perot convened in the first ever three-person presidential debate, that Congress passed, and Bush signed, an amendment to the 1974 Real Estate Settlement Procedures Act, or RESPA.
A vestige of the business reforms that swept Washington in the late 1960s and early 1970s, RESPA banned referral kickbacks between real estate agents, mortgage lenders, title insurers, appraisers and mortgage insurers.
“There had been very abusive practices where a lender might say, ‘Hey, Realtor, send me all your business, and if you do, I’ll let you use my car for a year,’” said Troy Garris, a law partner at Garris Horn in Dallas who advises companies on RESPA compliance.
By the early 1990s, banks – still licking various savings & loan crisis wounds – trekked down new alleyways to invigorate their revenue. This included lobbying to let a real estate brokerage shuttle clients to a joint venture partly owned by the agent’s brokerage, and partly owned by a bank, explained Holly Spencer Bunting, a lawyer at Mayer Brown who counsels on RESPA issues.
Under the relaxed rules that have continued to today, the broker cannot receive a quid pro quo kickback. But they can snare a cut of the joint venture’s total profits, Spencer Bunting said.
About 1,100 miles northwest of the D.C. beltway, Richard Kovacevich had in 1993 ascended to CEO of Norwest, a regional, Minneapolis-based bank.
“The beginning of mortgage joint ventures was primarily driven out of Minneapolis by Norwest,” recalled Stephen Baird, longtime CEO of Chicago-based brokerage Baird & Warner. Norwest later merged with San Francisco-based Wells Fargo, and the consolidated bank, “easily formed over a 100 JVs across the country,” Baird said.
But, as with many other matters, banks rethought joint ventures after the 2008 economic freefall, which prompted additional disclosure requirements under RESPA and the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act. In 2011, Wells Fargo began withdrawing from its joint ventures with brokerages. By 2013, Wells Fargo hammered a few final nails in its joint venture coffin, disbanding eight of its largest JV partnerships. New government oversight, the company bemoaned in a press release, “increased the complexity and difficulty of joint ventures.”
What would happen next with mortgage joint ventures had little to do with the interests of bank lenders and a lot to do with the pressure points on real estate brokerages locked in arms races to cut overhead and woo top producing agents.
“There is a clear move by brokerage firms of all sizes and brands to enter into mortgage,” said Steve Murray, senior adviser of RealTrends.
Ownership at Keller Williams acquired Ohio-based lender Fearon Financial in 2015, which they later renamed Keller Mortgage , and is now part of the KwX holding company. (Last week, Keller Mortgage laid off 150 people of its approximately 1,000-person workforce, according to Inman News.)
A year after that, RE/MAX launched Motto Mortgage, a franchise network of mortgage brokers. The Warren Buffett-owned HomeServices of America bought Prosperity Mortgage, a deal that was finalized in 2018 as part of its Long and Foster purchase.
Along came the JVs. Realogy and Guaranteed Rate partnered in 2017. Guaranteed Rate and @properties combined forces three years later. Then, Guaranteed Rate and Compass. Two days after that, eXp and Kind Lending. Meanwhile, Newrez was quietly incorporating 19 joint ventures, 14 of them with regional brokerages.
“It is definitely becoming a common playbook for brokerages and lenders to formalize a partnership to the benefit of both parties,” said Thomas McJoynt-Griffith, equity finance researcher at Keefe Bruyette & Woods.
One company responsible for writing – and then furiously rewriting – the joint venture playbook is Madison, New Jersey-headquartered brokerage conglomerate Realogy.
The pandemic damaged Realogy, the company behind Coldwell Banker, Century 21, Sotheby’s and Better Homes and Gardens. In March 2020, Realogy CEO Ryan Schneider stated that the majority of his employees would see their pay cut. Despite the housing market’s resurgence in the second half of 2020, Realogy posted a $356 million loss in annual net income.
But along the way something good transpired, the maturation of the Realogy/Guaranteed Rate JV. “I think we’ve all been impressed with the outperformance of mortgage,” Jack Micenko, an analyst then at Susquehanna, told Schneider on the company’s annual earnings call in February.
Realogy owns 49.9% of its joint venture with Guaranteed Rate, called Guaranteed Rate Affinity. In 2018, in the first full year of formation, Realogy lost $8 million equity in earnings from Guaranteed Rate Affinity. That changed in 2019 when the brokerage posted $15 million equity in earnings, and it changed dramatically in 2020 when Realogy reported $126 million in JV equity in earnings thanks to $13.4 billion in mortgage loan volume.
Were it not for Guaranteed Rate Affinity, Realogy’s 2020 would have been much worse.
By late July, Realogy was a profitable company again, new-fangled Compass and eXp were copying old-timey Realogy’s strategy, and CEO Schneider trumpeted his success.
“The $126 million we made last year, I think kind of speaks for itself,” Schneider said on an earnings call this July, when asked about Compass and eXp entering the joint venture fray, adding, “I’ll be more interested in your question when there’s other people making $100 million plus in mortgage.”
How Realogy made that $126 million may surprise you.
The guiding principle of the JV is that the brokerage’s agents refer clients to the joint venture. This is good for the brokerage because it gets half the JV’s eventual profits, while relying on their mortgage partner for myriad logistics.
And it’s good for the mortgage company because they are intertwined with a brokerage generating referrals toward purchase business, a more lucrative source than refinancings. “A lot of companies are racing into the JV space because it provides you access to the customer,” said Brian Hale, the founder of consultancy DCMG and the former CEO of Stearns Lending.
The holy grail of a strong joint venture is a high “attach rate,” meaning the rate of homebuyers utilizing both the brokerage and mortgage partner. Attach rates vary wildly in the mortgage industry – many homebuilders sport attach rates in the 80% range, while the mortgage arms of iBuyers are typically below 10%.
In discussing its joint venture during an August earnings call, Compass CEO Robert Reffkin said the JV, “Aims for an attach rate at or above industry averages of eligible transactions in the next three to five years.”
So, with all that in mind, Guaranteed Rate Affinity must have made money from loaning to the homebuyers who used a Realogy agent, correct?
In the words of the late John McLaughlin, “Wrong!”
Just 30% of all of Guaranteed Rate Affinity loans in 2020 were to homeowners who worked with a Realogy agent, a Realogy spokesperson confirmed.
In fact, Guaranteed Rate Affinity in 2020 made its money like virtually every other mortgage company in America: refinancing a homeowner’s existing mortgage.
“Interestingly, I had previously assumed the Guaranteed Rate Affinity joint venture was 100% purchase transactions,” said McJoynt-Griffith, the investor analyst at the investment bank KBW. “But it actually had a similar refi-to-purchase mix as the rest of the industry – 70% refi, 30% purchase – in 2020.”
Instead of being uniquely situated to cash in on Realogy’s real estate deals, Guaranteed Rate Affinity was positioned as another mortgage company riding the refinance wave. By 2020, Guaranteed Rate Affinity had over 500 loan officers and a 24-hour call center.
“2020 was unprecedented,” said a Realogy spokesperson. “We were very fortunate that we had built and scaled the JV to seize the moment.”
Now back to those coveted attach rates.
“We estimate that the Realogy-owned brokerages have a roughly 10% attach rate of mortgage through its Guaranteed Rate Affinity,” said McJoynt-Griffith. “We’ve heard industry figures saying closer to 20% but have never seen the math or disclosures supporting that.”
For all the talk of attach rates, McJoynt-Griffith and other analysts, as well as companies, were uncertain as to what an industry average rate was, though the consensus for real estate/mortgage joint ventures specifically is less than 20%.
With perhaps just 10% of Realogy’s buy-side business coming their way, a figure that Realogy would not comment on, the access even profitable JVs have to a distinctive referral pool appears limited.
“People are focused on the margins within the mortgage industry from 2020,” said Gino Blefari, CEO of HomeServices of America. “However, as refinancing continues to subside and margins compress, you could see growth in the JV market slow, with some people exiting JVs all together.”
So, what do the lenders get out of this?
For the second part of this two-part series, go here.