What is so wrong about Realtors who originate loans (or vice-versa)?
Here is a summary of what you told me:
1- It is a conflict of interest: Realtors lose their objectivity if they perform both functions.
2- Specialization: Realtors need to specialize in selling homes, loan officers in financing them.
3- Some of you thought it violated RESPA (it hasn't since 1983 by an order of Congress)
4- The mortgage people didn't seem to care.
So why does your broker have an "in-house" mortgage company?
In short, your broker has an in-house mortgage company because they just can't make any money on real estate brokerage? Commission splits have been rising exponentially for the past 15 years. The introduction of the 100% model combined with discounting pressures has had broker/owners scrambling for ways to increase the bottom line by offering a "one stop shop" for customers.
How much can the broker really make off of an ABA with a loan company?
Well, that depends. If it's the Coldwell Banker/Century 21 model, not a lot. The originating broker makes about $300/transaction. Now if your office is a 30 agent office with 8-10 loan a month, that may pay the salary of a receptionist.
I had an ABA with 3 Keller Williams' offices in Phoenix. I paid "rent" to the office, had a separate entrance, and operated as my own business. I still had to hustle and my rent was "all-inclusive" (phones, fax, copies, internet at $2,000/month). When I operated by myself, it was a great deal. When I hired loan officers, I didn't make any money.
I was proposed a "partnership" with the real estate brokerage because they were convinced that they were missing out on thousands of dollars in profit. This was the greatest thing that ever happened to me. We split "profits' after the loan originators, rent, and all of the incidentals were paid. I made more and the brokerage made about what I was paying in rent. The broker had more of an incentive to encourage the agents to utilize our services.
California's largest
brokerage, Prudential California Realty (owned by Warren Buffet-controlled HomeServices of America) owns a mortgage brokerage firm called First Capital. Medium margin, high risk. I see how the real estate brokers in California might want a little "taste" of the mortgage business but the consumer usually loses out. Realtors just can't effectively originate loans and provide relevant financial advice without that conflict of interest staring them in the face.
How about title or escrow services?
In California, many brokerages have in-house "escrow" companies. In fact, the term "virtual escrow" has popped from title companies to capture the title policies. This platform transfers some basic escrow functions to the broker and allows them to be compensated for it. Low margin, high risk. I have no idea why real estate brokers would perform this function.
Does this violate RESPA?
Absolutely not if it is done correctly. Section 8 (c)(4) of RESPA provides for these ABAs if they meet a safe harbor test. It is required to use the HUD disclosure for each customer disclosing compensation or ownership.
Summary:
Real estate brokerage is a low margin business today. Experienced, consistent producers are demanding (and getting) splits of 80-90% as well as increased services. Big shops that have over 100 agents can afford to operate on brokerage alone. Small shops where the broker produces are able to operate on brokerage alone. It's the 10-60 agent shop that needs to find alternative revenue streams to make a profit. ABAs are here to stay, regardless of the poor advice they dispense to the consumer.
