Builder joint ventures: several lenders are hot on the trend of setting up joint ventures with...

LAST YEAR SAW DEMAND FOR NEW homes continue to soar. Mortgage lenders today are fully realizing what a boon partnerships with home builders can be to their business. Joining forces with home builders has become a popular way to obtain quality purchase-origination business, and lenders are hooking

Most of the top lenders in the country now have affiliations with multiple home builders. And smaller and medium-sized lenders are looking at teaming with builders as one way of replacing the record volumes seen over the past few years.

Partnerships with home builders typically guarantee a higher percentage of customer business than similar arrangements with Realtors, those interviewed for this article say. Realtor joint ventures (JVs) typically show capture rates of 20 percent to 25 percent; builder joint ventures often yield capture rates of 60 percent to 70 percent or even higher, executives say.

That's because individual real estate agents operate as independent contractors, and many already have established relationships with a lender. "Individual real estate agents largely drive the decision as to whom they may refer a loan," says John Stewart, managing director of strategic business development for Countrywide Home Loans Inc., Calabasas, California. "If you do a JV with a real estate company that has 100 real estate agents, you would in essence need to convince 100 individuals of the value of the joint venture. With the home builder, you don't have that same hurdle," Stewart says.

"On the builder side, it's typically more of a captured book of business," agrees Dave Robinson, senior vice president with SunTrust Mortgage Inc., Richmond, Virginia. "A big part of it is real estate agents may already have established relationships," Robinson adds.

The trend to partner with home builders will accelerate going forward, in part because those ventures meet the consumer desire for one-stop shopping when purchasing a home, executives interviewed say. "We will definitely be seeing more affiliated business arrangements with builders in the future," says Desmond Smith, senior vice president for business development with Chase Home Finance, Edison, New Jersey.

In addition to providing homebuyers one-stop shopping, affiliated arrangements also give home builders more control over their business, Smith adds. "When someone walks into a builder center and is a qualified buyer, the builder wants to get them approved and lock them in as soon as possible. The builder has control if they have a marketing agreement or joint venture with a lender. They know that the customer is qualified, so they can feel comfortable building that house," Smith says.

Experience counts

There are a number of new players trying to enter into joint ventures or other arrangements with builders, notes Randy Stewart, senior vice president for secondary marketing with RBC Mortgage Co., Chicago. Stewart is based in Houston, the location of RBC Builder Finance, RBC's arm that targets builder business.

"There are many companies that were living on 60 [percent] to 75 percent refinances, and are now trying to retool themselves and reposition. When you have a good builder partner, you get a good consistent volume [of loans]," Stewart says.

Lenders without experience in builder joint ventures will have a hard time competing, Stewart adds. "It's like anything else--you can't just come in and be a qualified expert in a short period of time. Doing builder business is a very specified book of business. [Newcomers] are going to have to compete against companies like RBC, who always understood who their customer was and never left that segment of the market," he says.

The increased competition will likely mean tighter margins going forward, Stewart predicts. "Just like in a normal retail book, your margins will get compressed as competition increases. It would not surprise me to see more of that in 2005, as more people try to get into business or offer programs that might not be conducive to lasting long term. Some of these companies get desperate to replace their volume," he says.

The emerging-market segment of the population will become even more important to both home builders and mortgage lenders, virtually every executive interviewed for this article agrees. Ethnic and minority borrowers "are projected to be the fastest-growing segment of the home-buying population," says Joe Jackson, senior vice president for retail business development for Wells Fargo Home Mortgage, Des Moines, Iowa.

New-home builders that target emerging-markets buyers, as well as first-time homebuyers, are particularly appealing candidates for a joint venture with a lender.

CHASE HOME FINANCE

Chase Home Finance sees great opportunities to work with home builders, according to Chase's Smith.

Smith was hired last October to lead a team focused on developing strategic alliances with Realtors and builders. Previously he worked for Wells Fargo Home Mortgage and at the Department of Housing and Urban Development (HUD).

Chase has a total of 30 joint ventures, four of which are with builders. The company has 375 affiliated business arrangements; 50 of those are with home builders, Smith says. "There are three levels to our partnerships: a desk rental, a marketing agreement and a joint venture," he says.

While today Chase has a relatively small number of builder partnerships, that is about to change, according to Smith. "We don't have a lot of builder JVs right now. But I came from a competitor where we did a lot of builder JVs, and that's one reason they brought me over here," he says.

Currently Chase's largest builder joint venture is with Neumann Homes Inc., Warrenville, Illinois. NeuWay Mortgage Services, Naperville, Illinois, has loan officers on-site in the builder's offices, Smith says. "It's truly that one-stop shopping approach, and we've seen a large capture rate," he says. The Neumann Homes venture will do more than $100 million in builder volume in 2004, he says.

Chase Home Finance's joint ventures are typically 50-50 partnerships, Smith says. "Chase currently operates under a broker model. The loan would close under Chase Home Finance," he says.

When processing and underwriting loans that come through builder joint ventures, Chase adapts to the builder's needs, Smith says. "We're a decentralized lender. We process in our local branches. In our joint ventures, we have the ability to create whatever model we believe is best to serve our client," he says.

"Some builders are very concerned with where things are done. Other builders may just feel that they expect a certain level of service, and will trust Chase to determine how we choose to process, underwrite and close loans," he says.

The Chase name and brand are appealing to builders seeking to affiliate with a large, well-known lender, Smith says. And the company's technology allows borrowers to receive approval within minutes, he adds. "It's very much a streamlined process--not only for the customer, but for the builder, too. They know they have a real, live customer who is approved, and that's very important to a builder," he says.

Builder joint ventures have access to Chase's wide array of mortgage products, as well as a long-term rate lock program, Smith says. "Chase can also give builders the ability to offer a forward commitment," he says.

The rate locks Chase offers depend on the market and the type of homebuilder, Smith says. "On a builder, most locks are six months. Some of the condo developments take you out nine months to a year. We've had a request recently from a condo developer to see if we could offer an 18-month lock, which we'll do," he says.

Chase is open to partnering with both small and large builders, Smith says. "Mainly, I'm looking for someone to make a commitment to Chase, as obviously Chase is looking to make a commitment to them," he adds.

For very small builders, Chase may offer a marketing agreement that could ultimately lead to a joint venture. "Typically, we're looking for a builder who does at least $35 million in annual sales to do a joint venture. That's kind of our guidepost, but we're certainly willing to talk to other builders who may be smaller but are growing," Smith says.

Emerging markets are key

Smith believes there will be a shift in the industry toward builder joint ventures targeted to lower-cost homes and emerging-market buyers. "A lot of the builder joint ventures in the industry have been targeted to moderate to large-scale homes. Now you're starting to see that focus change as emerging markets are very key. First-time homebuyers are extremely important," he says.

Chase has launched a significant initiative around emerging markets and how it targets builders who build for the first-time homebuyer and emerging-markets segment. This includes builders that focus on Federal Housing Administration (FHA) loans, Smith says.

As part of that effort, Chase is concentrating on big cities and metropolitan statistical areas (MSAs), Smith adds. "A rental base is probably where you'd start. When you branch out of the cities, you see a lot of first-time homebuyers and people in condos. The apartment condos are being converted, and they're offering people who are renting the chance to buy their unit. That's real big right now," he says.

In particular, Smith sees Chicago, Washington, D.C., the New York metropolitan region and several areas in both Florida and California as regions where there is a big population base of potential first-time homebuyers and emerging-market buyers.

Partnering with Chase Commercial Real Estate

The access to the large commercial real estate group of JP Morgan Chase, New York, gives Chase Home Finance an edge on competitors, Smith says. "It's something that not a lot of other--even large--lenders provide. I see a big opportunity there," he says.

Chase Commercial Real Estate Banking Group lends to many builders around the country, Smith says. Clients of Chase Commercial Real Estate Banking Group report they built a total of 64,000 homes last year, he adds. Partnerships where Chase Home Finance would offer the builders' clients the end mortgage are a logical scenario, Smith says.

"Chase offers the home builder a huge opportunity through Chase's ability to lend the commercial money to buy land, build actual homes or develop condominiums, as well as to take out the mortgage. I commit that you will see quite a few of those types of partnerships from Chase Commercial Real Estate Banking and Chase Home Finance in 2005," Smith says.

Smith sees a 70 percent capture rate as a base target for builder joint ventures, but believes capture rates of up to 90 percent are possible. "If we're sitting on-site with the builder, we should be able to capture 85 [percent] to 90 percent of those customers, because it's truly one-stop shopping," he says.

Chase will "absolutely" be entering into more builder joint ventures, Smith says. "We are making substantial strides into this market. I have a goal to sign at least 10 builder or condo joint ventures in 2005, and numerous marketing agreements on top of that," he says.

"I'd like to get us to a point where we're doing at least $1 billion in builder mortgage volume. I'm not sure we'll get there in 2005, but we'll definitely get there in 2006," Smith adds.

COUNTRYWIDE HOME LOANS

Countrywide Home Loans has inked a number of joint ventures with both Realtors and builders recently. As of late last year, its joint ventures totaled 37-18 of which were builder joint ventures, Stewart says. Several more builder joint ventures were close to being signed, according to Stewart.

Countrywide has more than 300 formal strategic alliances with real estate agencies, builders and other financial service companies, including joint ventures, desk-rental agreements and marketing agreements.

In October 2004, Countrywide signed its largest joint venture agreement to date with Taylor Woodrow Inc., Bradenton, Florida. The newly created TWH Mortgage will offer homebuyers in Northern and Southern California Countrywide's wide array of products, Stewart says.

Taylor Woodrow is developing and constructing planned communities in 15 locations in Southern California and eight locations in Northern California, in addition to 42 other communities the builder already has under way in the state. "It has a very active pipeline in California," Stewart says.

Countrywide follows HUD guidance carefully when creating its joint ventures, Stewart says. "We partner with a builder, and each of us makes an investment into the joint venture. If we make a 50 percent investment, then we have a 50 percent equity in the JV," he says.

The new entity is branded on a private-label basis and has its own loan originators who work specifically with the home builder or buyers, Stewart says. The processing, underwriting and closing of those loans is outsourced to a local Countrywide branch, he adds.

Local service, operational efficiencies

The local model is one that builders like, according to Countrywide's Stewart. "One of the things that's unique about our program is our sales and fulfillment model allows us to take applications, process, underwrite and close from any one of our branch locations. We have hundreds across the country. It's one of the things that differentiates us from our competitors," he says.

"There's a great benefit to being a big national brand with a local presence and a deep understanding of that particular market in which the builder operates," Stewart adds. Countrywide's operational efficiencies also appeal to builders, he says.

"When we created this program, we thought hard about the things that really differentiate Countrywide," says Stewart. "And then [we thought], how can we ensure that, to the fullest extent possible, they exist within the joint venture program?" he says. "It's Countrywide's market position, our broad product offering, our technology and our customer service that builders like," Stewart says.

What does Countrywide look for in a builder partner? "We want to make sure first and foremost that we're philosophically aligned," Stewart says. "Countrywide has a long history of working on behalf of the consumer, and of lowering barriers to homeownership. We want to make sure that the builder views the mortgage business the same way we do," he says.

It's imperative that the builder and Countrywide go into a joint venture with the same expectations, both financially and from a service-level perspective, Stewart says. "We both need to agree how the consumer will be dealt with and what reasonable service-level standards are. Financially, we need to make sure we're creating a JV that will make sense for both entities. We do that through fairly sophisticated modeling, using data both the builder provides and information that Countrywide has, to determine what the results will be for the venture," he says.

The types of home builders Countrywide partners with "run the gamut," according to Stewart. "Because Countrywide has one of the broadest product offerings in the industry, it means we can do business equally as well with a luxury home builder as we can with an entry-level home builder," he says.

Countrywide's Fast & Easy[SM] program is one of the more popular mortgage products in builder joint ventures, Stewart says. The program offers qualified borrowers reduced documentation and streamlined loan processing, he says. "It means a sped-up process with less hassles," he says.

When setting up a builder partnership, Countrywide has a team of project leaders who deploy joint ventures. "They work off of a project plan that's in excess of 200 points. They literally take the thing from concept to reality in a very short time frame," Stewart says.

In terms of hiring loan officers for the new entity, Countrywide works with the builder to find the best fit. "We can transfer Countrywide employees to a new joint venture or, more often, we recruit externally and fill those positions with people who are strong in the market or who have had a previous relationship with that builder," Stewart says.

Most often the loan officer works within the home builder's offices, he adds. "We find that by putting the originator at the point of sale, the home builder's customer satisfaction rates go up. And it's been pretty well-documented that there's a clear demand on the part of the consumer for one-stop shopping. By putting the originator on-site, we're able to deliver that," Stewart says.

Capture rates depend on the type of builder Countrywide partners with, Stewart says. "It's definitely going to be impacted by whether it's a first-time builder, a luxury builder [or] whether it's in a rural setting or an urban setting. There's so many things that can impact capture rates. But 70 percent is a fairly well-accepted [industry] target for a builder joint venture," he says.

SUNTRUST MORTGAGE

SunTrust Mortgage began partnering with both builders and Realtors a few years ago, and since then has come on strong. SunTrust hired Dave Robinson as senior vice president in April 2002 specifically to set up the joint ventures.

"SunTrust had done a lot of the leg-work, but that's when it really got up and running. It's now more of a growth strategy rather than a retention strategy," Robinson says. Previously, Robinson had been with CTX Mortgage Company, Dallas, and First Horizon Home Loan Corporation, Irving, Texas.

SunTrust has a total of 17 joint ventures--13 with builders and four with Realtors, according to Robinson. While many lender-builder joint ventures are set up with the lender serving as a type of correspondent, SunTrust's are set up as more of a broker model, Robinson says. "We originate the loan in the name of the joint venture, then we hand it off to SunTrust for underwriting, processing and closing. We close in the name of SunTrust," he says.

SunTrust's two largest builder joint ventures are in Florida: Custom Home Mortgage Co., Orlando; and Partnership Mortgage LLC, a venture with Nohl Crest Homes, Tampa. Custom Home Mortgage provides about $100 million a year in mortgage volume, and that figure is projected to go up next year, Robinson says. Mortgage volume from Nohl Crest Homes runs at roughly $70 million a year, he adds.

As of late last year, Robinson expected total volume from builder joint ventures to be about $740 million for 2004, up from $640 million in 2003.

The capture rates for SunTrust's builder joint ventures average 74 percent to 75 percent, according to Robinson. "We've got a couple that are as high as 85 percent, and a couple in the high 50s. Quite honestly, a lot of that is driven by builder incentives that are paid, such as closing costs or a certain percentage of closing costs being paid by the builder," he adds.

Superior service

SunTrust processes, underwrites and closes loans that come through its builder joint ventures locally, Robinson says. "The local service sets us apart from some of our major competitors. I think our service levels are superior because of that," he adds.

"Our local managers have a lot of decision-making authority that some of our competitors don't. The builder mindset is they want the loan to close without any problems. They want their customers to feel good about it, because the mortgage company is a reflection on the overall service and value proposition that the builder has brought to the table. By having everything done locally, it gives them a little bit more of a warm and fuzzy [feeling]," he says.

SunTrust monitors its customer service satisfaction levels by surveying customers in its retail operations overall, and then specifically in its joint ventures.

SunTrust's builder partnerships fall within the mortgage companies' retail footprint--16 states in the mid-Atlantic and Southeast, Robinson says.

In addition to local service, Robinson believes SunTrust offers builders "a good overall value proposition. Our construction-permanent loan program and our extender rate-lock programs are very attractive to the builders. Our portfolio product is very popular as well," he says. Locks can extend out as far as 12 months, and go out to 15 months on the construction loans, Robinson says.

SunTrust seeks builders that will be very active in the joint venture, Robinson says.

Maintaining good communication is also key, Robinson adds. "We have monthly financial calls, and service calls where we talk about different aspects of the joint venture. They need to be as proactive as our loan officers in trying to achieve a certain capture rate," he says.

The types of builders SunTrust partners with "are really all across the board," Robinson says. "We want to keep a quality loan officer engaged and focused on the production of our JV partner. Because we pay a reduced commission on our joint ventures, typically we like to see closed loan volume at $20 million or more. That turns out to be a fairly good return for the loan officer," he says.

When hiring employees for the joint venture, SunTrust sometimes uses its own employees, but also recruits from the outside, Robinson says. "We ask our builder partners to be active in that selection process. If they have loan officers they'd like us to interview, we're more than happy to do that. We also like to give SunTrust loan officers the opportunity, if they're so inclined," he says.

Loan officers are most often located inside the builder's offices, Robinson says. "It makes it convenient one-stop shopping for the consumer. The consumer can come into the design center to make their color and other selections, and can fill out their loan application also."

SunTrust will "absolutely" partner up with more builders going forward, Robinson says. "We have a number in the pipeline," he adds.

WELLS FARGO HOME MORTGAGE

Wells Fargo Home Mortgage has about 70 joint ventures with builders, which are part of the company's 600-plus affiliated business relationships, according to Joe Jackson, senior vice president for retail business development for the lender.

Some of the larger builders Wells Fargo has joint ventures with include Weyerhauser Real Estate Co., Los Angeles; and Standard Pacific Homes, Irvine, California. "Our largest builder JVs [individually] exceed the $1 billion mark," Jackson says.

Some of Wells Fargo's builder joint ventures have capture rates as high as 90 percent, Jackson says. "Most of our builder JVs are in the area of 70 [percent] to 85 percent," he says.

Wells Fargo has joint ventures with six of the top 20 home builders, according to Jackson. "We have correspondent relationships with virtually every one of the top 20," he adds. Even though the larger builders often have their own mortgage companies, they may partner with a national lender as well in order to provide a broader product mix or to serve local markets, he says.

The full-credit spectrum

Wells Fargo offers the "full-credit spectrum" to builders customers, Jackson says. "We can find a financing option for virtually every customer that meets their needs. We offer 1,800 product, program, rate and lock combinations," he says.

The company's Builder Best[SM] program is the most popular product for builder joint ventures, according to Jackson. It gives borrowers the opportunity to lock in loan pricing options for 90 to 360 days, he says. "It has one of the best long-term locks in the country. Most lenders require an upfront fee and additional points to lock a loan for an extended period of time. Because of our size and hedging sophistication, we're able to substantially reduce those costs to the consumer," he says.

Products targeted to emerging-market borrowers are increasingly popular, Jackson says. "One of the things we've been excited about recently is helping builders capture the emerging-markets opportunity. They're starting to see that this is really a growth area for them, and there are very few lenders who have the expertise that we do in that particular segment," he says.

Wells Fargo created an emerging-markets team to focus on that segment of the market. The team managers assist joint ventures in hiring ethnically diverse home mortgage consultants and identifying emerging-market opportunities, Jackson says. The emerging-markets team also provides training on specialized emerging-market products, he adds.

Wells Fargo looks both inside and outside its mortgage company when hiring employees for a new joint venture, Jackson says. "Our goal is to attract the best talent, so we will work within Wells Fargo as well as outside to attract superior talent. We believe the team with the best talent wins."

In terms of processing and underwriting, Wells Fargo tailors to its JV partners' needs, Jackson says. "We leverage local markets where we have it, but primarily we leverage fulfillment service centers with dedicated relationship pods that maintain the local processing philosophy," he says.

That means assigning certain employees to a specific joint venture, depending on the size, Jackson says. "Those people are dedicated to the joint venture. The fact is, by doing that we've created the economic advantages of a large processing center, yet retain a local feel and relationship," he says.

"Builders want the consistency of dealing with the same person or people dedicated to their business, who knows their business, knows their customers and knows their market," Jackson adds.

Wells Fargo looks for builders committed to growing their business, Jackson says. "We're here to help create homeownership across the country. We look for partners who share that vision and who want to grow at an above-normal market growth rate. We look for a culture of delivering quality, reliability and service. Our preference is somebody who helps improve our brand, and we help improve their brand," he says.

RBC MORTGAGE

RBC Mortgage has 25 builder joint ventures and several more in the pipeline, according to RBC's Stewart.

RBC Mortgage purchased Sterling Capital Mortgage, Houston, in 2003, in part because of Sterling's expertise with builders, Stewart says. "Sterling Capital has been in the builder business since 1993. That was one of the pieces of business that attracted RBC Mortgage to Sterling to help stabilize the platform," he says.

RBC Mortgage has ventures with builders of various sizes, Stewart says. "We have clients that build in excess of 1,500 homes as JV partners, and some that fall in the 125-home range," he says. RBC Mortgage aims for roughly one-third of its retail volume to come through its joint ventures, both Realtor and builder, he says.

Stewart believes RBC's financial stability and strong commitment to builder partnerships make it an appealing choice for home builders looking to partner with a lender. RBC Mortgage is a wholly owned subsidiary of RBC Centura Bank, which is an indirect subsidiary of Royal Bank of Canada.

"During times of turbulence and high interest rates, it's important to have a strong financial partner--not someone who's just trying to play in this game," Stewart says. "When it becomes more of an intermediate-ARM [adjustable-rate mortgage] market, the ability to either portfolio these type of intermediate ARMs or to sell in bulk is a big advantage," he adds.

RBC Mortgage prides itself on the integrity of its financial statements, Stewart adds. "We give monthly financial statements to our ABA [affiliated business arrangement] partners. Our structures have been audited. We feel that, at the end of the day, there's something worthwhile in not pushing the limit. We see some of our competitors stretching things," he says.

The ability to offer extended locks is also critical, Stewart says. RBC offers extended locks from six months to more than a year, he says.

The employees of a new builder joint venture often work on-site in the builder's offices, Stewart says. "If the builder has a big center where customers come in to sign their contracts and pick out their colors and carpets, the mortgage company is injected into the process at the builder center. We have other builders who have 10 to 12 subdivisions. We would generally have two or three loan officers dedicated to that builder, and would send our loan officers out to meet with the builder [and the borrowers]," Stewart says.

Targeting first-time homebuyers

RBC deals with a number of home builders that target first-time homebuyers and emerging markets, according to Stewart. "The emerging markets are going to be a huge factor in builder growth for the foreseeable future. First-time buyers may need a little more counseling, so you need qualified staff who understand all the first-time homebuyer programs, from FHA to some of the Fannie Mae initiatives," he says.

Stewart believes there is more volume in the lower- to moderate-priced housing market. "There's a bigger segment of the market [in low- to moderate-priced homes] than in the segment building $500,000 to $1 million homes. There's just a lot more volume, so that's the market we focus on," he adds.

And capture rates are typically higher among first-time homebuyers, versus veteran buyers who may already have an established relationship with a lender, Stewart notes. RBC's capture rates on its builder joint ventures vary, but some have surpassed 75 percent, he says. "The great thing about builders is, if you do a good job for them they're very loyal to you."

When looking at potential builder partners, RBC Mortgage looks for builders with a sound growth strategy, as well as a product mix that's conducive to having an affiliated business arrangement with a mortgage lender. Higher-end homebuyers are generally less likely to go with a builder's lender partner, Stewart says.

"A real upper-end product can make it a little tougher. That consumer profile is a little different. That type of consumer has been through the housing purchase process before, probably several times. It can be a little harder to work with the ABA to get that business," Stewart says.

RBC's joint ventures with builders are currently concentrated in the West and Southwest, Stewart says. "We're trying to expand in the Southeast and in the North Central region. Those areas look promising," Stewart says.

Publicly traded builders

While most of the large public builders have their own mortgage companies, they would be ideal candidates to team up with a large mortgage lender, executives interviewed for this article say.

"Why wouldn't they want to let us either buy their mortgage company or fold their mortgage company into a joint venture with Chase Home Finance?," asks Smith. "We'll be a general partner, and we'll basically take all the risk because we manage the mortgage company. I think we're going to have some opportunities in 2005 and beyond to go to some of these large home builders and present that offer," he says.

Much depends on the economy and the how both the building and mortgage industries fare in the future, Smith says. "It's [2004] been a phenomenal year for the home-building industry, and a phenomenal several years for the mortgage industry. If things start to tighten up at all, my sales pitch to that home builder would be 'Why would you want to have this risk, when your goal is to build homes and sell those homes?,'" he says.

The trend recently has been for builders to convert their wholly owned mortgage companies to a joint venture with a national lender to reduce their operational and compliance risks, according to Jackson. "We are in discussions with several large builders right now to evaluate converting their wholly owned [mortgage companies] to a joint venture, thereby increasing their bottom-line profits as well as reducing their risk. It would also improve service levels, because we have the operational and product strength," says Wells Fargo's Jackson.

The large public home builders "are very logical joint venture partners for us," says Countrywide's Stewart. "A lot of the large home builders have experienced very dramatic growth, particularly the publics. They've gone on an acquisition spree that's left them with a need to service far more clients than they had just a couple of years ago. Many of them have struggled to have their mortgage companies keep pace. When a mortgage company hasn't been able to keep pace, they've had some gaps. Countrywide is a very large organization throughout the country, and can help fill those gaps," he says.

The coming years will show which way all these trends play out.

RELATED ARTICLE: RESPA ISSUES

AS MORTGAGE-BUILDER PARTNERSHIPS BECOME MORE POPULAR, lenders need to be vigilant about following all appropriate regulatory guidance when structuring the new entities, executives agree. The Department of Housing and Urban Development (HUD) is more carefully scrutinizing these arrangements, according to several sources.

Desmond Smith, senior vice president with Chase Home Finance, Edison, New Jersey, has witnessed numerous instances of affiliated business arrangements that violate the Real Estate Settlement Procedures Act (RESPA.) "I've absolutely seen that--not from any of the national players, but from some of the smaller players," he says. "Especially when it comes to the builder joint ventures [JVs] and marketing agreements, some smaller lenders have been doing things that some larger lenders are very suspect of. I have heard HUD has started an investigation into at least a couple of lenders."

Violations are more likely to occur with marketing agreements, Smith says. "On the joint venture side, the legal terms are very much laid out. There's really no gray area," he says. "RESPA is very clear that you cannot pay per loan. You cannot pay per individual transaction or lead. You pay a marketing fee for a builder to market Chase Home Finance as the lender, and it's not based on volume. You can't say for every loan you give me, I'll give you 50 basis points."

When setting up builder joint ventures, RBC Mortgage Co., Chicago, is "very cognizant of making sure we follow RESPA guidelines to the 'T', so that not only can we sleep [well] at night, but our JV partners can sleep [well] at night," says Randy Stewart, RBC's Houston-based senior vice president for secondary marketing.

"RESPA is very specific as to how you set up an affiliated business arrangement. We run into numerous deals out there when we compete [for builder business] that we would not be comfortable with from an allocation standpoint or a structure standpoint, that they would pass the RESPA test," he says. "It is an area that HUD is looking into more and more. It's just imperative that the JV is set up right the first time."

RESPA requires that an affiliated business arrangement have dedicated employees, and also that a mortgage joint venture operate as a true stand-alone mortgage company, Stewart notes. "We see a number of [instances] where they try to get around that. We see so many third-party services being contracted out of the [affililated business arrangement], and they would be very hard-pressed [to maintain] they're a stand-alone mortgage company if HUD were to come in," he says.

Mary McGarity is a freelance writer based in Trumbull, Connecticut. She can be reached at mmcgarity_l@charter.net.