An overview of net branching and the factors to consider when selecting the right options.
Americans have always liked to go it alone, at least in theory. We’ve lionized John Wayne, who never needed anyone, and every detective movie seems to have a lone wolf, high-testosterone type who refuses to be saddled with the inevitable partner, insisting, “I work alone.” It is Theodore Roosevelt-styled “rugged individualism” that is at the core of every American, and everyone knows it, don’t they?
Not even close. The national psyche understands there is safety in numbers, and nobody clumps together faster or better than we do. Who willingly goes without health insurance, self-insures their auto or shuns the concept of mutual funds in favor of going it alone? Where did labor unions gain their first large-scale economic influence? Why are trade groups like NAMB so critical? We talk a good game about being mavericks and lone wolves, but we’re really conflicted on our mindset. The idea of being part of a “herd mentality” is not attractive, but we’re smart enough to know its advantages when we see them.
Which makes it wholly appropriate to discuss net branching strategies, since they are all about maximizing the power of the little guy by making him part of a more powerful whole, a network. During the refinance boom, there were far fewer compelling reasons to worry about safety in numbers, but that was then, this is now. With the current conditions, there are a lot of good reasons to consider a net branch strategy to remaining independent, all of which flies in the face of James Thurber’s cynical observation, “There is no safety in numbers, or in anything else.”
Is Net Branching For You?
For many who have pursued net branching, there is not only safety in numbers, there is stability, growth and better prospects for long-term success. For others, there have been pitfalls, so careful due diligence is necessary for independent originators looking for such arrangements. So where does one start? As usual, just as in any sales situation involving a multitude of alternatives, one starts by asking questions.
But what questions need to be asked of my own situation, you wonder? Some good starters would include:
- Is this a good time for me to consider becoming part of a net branch network?
- Is there risk in staying a small and independent broker, or are there benefits?
- What alternatives are available?
- What are the benefits of net branching?
- What kinds of questions should I ask net branch providers?
- What are some specific pitfalls I need to look out for when considering net branch opportunities?
- What is preferable, a large net branch system or a smaller one, and why?
- Can a net branch affiliation help my business become more durable over the long term?
- What technologies should I look for from a net branch provider, either now or in the future, that will enable me to maintain or improve my business?
As expected, the answers and their relevance will vary according the individual broker’s specific needs and depending on which net branch companies are asked. To provide a range of responses and rationales, several companies were consulted for this article.
Daniel Jacobs, CEO of 1st Metropolitan Mortgage, of Charlotte, N.C., weighed in on several of these questions, and offers a few questions of his own for brokers to use in their due diligence process. As to whether it is a good time to consider the merits of joining a branch network, he says, “Yes, this is an excellent time. Many independent brokers are experiencing a decline in volume while fixed overhead is increasing. Regulatory compliance is becoming more and more cumbersome and more time is being spent on non-revenue generating activities than ever in running a mortgage company.” Regarding the ways in which a net branch arrangement can help, he adds, “The back office infrastructure that a branching company offers allows the branch manager to focus on revenue generating activities, while sharing the costs of basic infrastructure with many other branches, lowering the per branch cost and increasing sales opportunities. At the same time, large branching companies are able to negotiate significant pricing incentives with lenders, enabling even small branches that are a part of their company to be far more competitive in the marketplace than the small ‘mom and pop’ brokers.”
Hunt Gersin, CEO of Interactive Financial, a Troy, Mich.-based network, agrees it is a good time to consider branching options. “In our experience in growing our branch network, I have yet to see as much interest as there is today. With competition rising along with the rates, having the opportunity to reduce operating costs, become an overnight turn key mortgage banker, be able to lend in multiple states, offer all types of products, receive accounting and support services, and never-ending marketing support and training, the branch network is the right place to be in this market.” In a nutshell, that’s the major compelling reason there can be safety in numbers—to allow originators to originate more loans by minimizing the administrative and negotiating associated with the fulfillment stages of the process. But there are others, especially when considering the risks of remaining independent.
Steve Hops, senior vice president of San Diego, Calif.-based Guild Mortgage believes that it’s a good time for considering net branching, but advises against hasty actions. “These are difficult times for the mortgage industry, and originators are looking for ‘lost magic.’ Since adopting a net branch strategy will not reproduce the magic of a five percent, 30-year fixed rate loan, looking at change should be done with a ‘clear lens.’
Understand why you are looking at a net branch model,” he says.
Back to John Wayne, there is a certain amount of comfort knowing you are the captain of your own ship, controlling your own destiny. But as John Donne observed, “No man is an island, entire of itself; every man is a piece of the continent, a part of the main.” Even the most independent-minded businessperson needs advice from time to time, particularly in a business as closely observed and regulated as mortgage lending. Daniel Jacobs feels that a significant strength of belonging to a network is having that advice a quick phone call away—especially powerful when dealing with compliance issues and a plethora of laws from multiple states. It’s not a bad time to be a “piece of the continent.”
Questions To Consider
Okay, so it makes sense to you to look into net branching. There are a lot of companies out there for you to ask questions of, but what questions? Here are some suggestions from Interactive Financial’s (a branch network) Hunt Gerson:
- How long has the company been in business?
- How many states is the company licensed in?
- Does the company have reverse mortgages and commercial mortgages available?
- What type of marketing support does the company offer?
- Does the company offer a “Flat Fee per Month Option?” (This is my favorite question. If the answer is yes, the broker should leave at once, end the conversation at once. What motivation would a branch corporate office have for you to close loans or give any service if they just collect a monthly fee?)
Jacobs adds several to the list:
- Are they compliant with HUD Mortgage Letter 00-15? (If they are not they are also likely violating various state net branching laws and may have compliance and licensing issues in the future).
- Have you been sanctioned or fined by any regulator in the past three years and if so, why? What have you done to correct this problem going forward? (It is important for people to know that they are going to a company that will continue to be in business and treats its regulators and licensing authorities as partners rather than adversaries).
- What types of support systems do you have in place for branches with questions ranging from compliance to human resources to business planning and more?
- What charges and fees are allocated to the branch beyond the standard revenue split? (Everyone has small fees that are passed on to the branch and the candidate should be well aware of these before signing on the dotted line.)
- What type of orientation will be required of me to open a branch? (Anyone not conducting an in-person, multi-day orientation is likely not serious about maintaining any sort of quality standards.)
- What type of ongoing sales training will be available to me and to the LOs in the branch?
These questions offer a good place to start before deciding what companies are worth your time for a second date (Also see “Net Branch Resource Guide” on page xx for detailed information on several companies). At that point, you will doubtless have many other questions, most centering on product array, specific services offered, such as loan processing, and types of technologies either supported or required. Not to mention, of course, the all-important financial WIFMs (“What’s in it for me?”) surrounding the financial arrangements.
Hops advises originators to look inward and really understand their situation. “What are your needs?” he asks. “Do you just need licensing and accounting, with your funding arrangements with your wholesalers left unchanged? Many firms offer platforms with these features. If you and your loan officers have a long history of brokering loans, these companies would be the best match.” He is quick to caution about overly high expectations, and even to view lofty promises from companies with a bit of healthy skepticism. “Don’t go into the relationship thinking it will change your business in large degrees. You may be given access to funding in other states, but your world will stay the same. If you have good relationships with your lenders, they will stay intact.”
Does Size Matter?
There are lots of answers to this one and they’re all correct—depending on what is important to the asker. For some, a monolithic giant is comforting, but others might be concerned they will get lost in the shuffle. Jacobs is partial to a large net branch provider, saying, “But then again, we have more than 250 branches.” He notes that the only way for a branch company to provide effective services is to have a good revenue base, and that requires a lot of volume. “This is a slim margin business,” he says, “and without volume the home office can’t afford to offer a value proposition that would justify a [prospective] branch manager to associate with a branching company. I think the larger branching companies are the only ones that will thrive long-term.”
Gersin has a different opinion. “Certainly, a smaller, more personal relationship focused branch system is preferable,” he feels, harking back to the “lost in the shuffle” concern. “Most of the large systems do not create the smaller company feel, and treat the branches as a number, not as an important relationship that is mutually beneficial.”
A good amount of this may be cultural, not strictly tied to size alone. Companies that give off a certain vibration that it is “all about them” may actually be saying they are impersonal organizations that will indeed treat branches as numbers. Others won’t have the issue, just as many of the Fortune 500 firms are among those cited as great places to work. They have cultures and values that reflect the importance of the individual, and they can usually be found using the “sniff” test. In this case, it means asking the company for a list of branch managers you can contact as internal references.
Guild Mortgage’s Hops echoes in importance of chemistry with the culture. “The most important ingredient is the people involved,” he says. “It’s easy to just meet the management people and have friendly discussions, but you must meet the people who do the work every day.” He stresses the “every day” factor. “Who would you interact with the in the finance, personnel, underwriting, compliance and secondary departments? You need to meet them and ask a lot of good questions, and become comfortable.”
What are the Benefits?
Both Jacobs and Gersin agree that the benefits of net branching are many and diverse. “Tremendous economies of scale for better pricing, marketing and branding will increase overall productivity and longevity in the business,” Gersin explains, citing some specific reasons the strategy will make network members stronger over the long haul. Since he feels we’re in for continuing competition for a smaller market, Jacobs concurs, feeling that “Industry branding and clout, as well as cost savings and support, help more in the lean times than in any other [market environment].”
Collectively, Hops, Gersin and Jacobs present an impressive list of potential benefits for adopting a net branch strategy. They include:
- Offering every possible product
- Pricing incentives to branches
- Input on product development
- An integrated technology platform far superior to those available to independents.
- Continuing technology development
- Training on technology and ongoing support
- Faster processes, reduced time impact for branches
- A strong support team with complimentary disciplines and expertise, allowing branch managers to focus more attention on revenue production
- Consistent underwriting from one team
- Overload processing assistance from the corporate office
- Advice on staffing and financials
- Outsourced back office administrative functions, such as licensing, legal, HR, payroll, lender sign ups
- Sales and business training for inside staff and sales team
- Consistent financial reporting
- Mass marketing initiatives to increase production throughout the branch network.
- The better branching companies supply advertising manuals, advertising review committees, pre-made customizable advertisements and marketing libraries, as well as full service marketing and creative services departments available to its branches.
- The opportunity with limited risk or operational expense to be a mortgage banker for better pricing/more profits without disclosing the yield spread premium.
- Access to economies-of-scale pricing and credit policy not available to small-volume companies
It is a remarkable list of good, even compelling reasons to consider joining a network. The overall theme is clear: for very little effort aside from doing what you are already doing, which is originating and closing loans, you can look and act like a big company. Different companies do things different ways, but you can generally count on next-level marketing, legal and compliance assistance, much improved financial execution through more sophisticated secondary marketing, and significant lift in technology and support.
Certainly the majority of these benefits are available for the branches of a traditional mortgage banker. The big difference lies in the flexibility and autonomy that the net branch office has, most importantly the ability to retain their company name, and very often, a larger portion of the profits.
What are the Pitfalls?
Some branch networks require you hang out their shingle and remove yours, while others want you to leverage your local brand while adding their own, a tactic used by real estate companies for generations. Are these pitfalls? Probably not. But that doesn’t mean you don’t have to be on your toes as you evaluate the opportunities out there. Hops, Gersin and Jacobs on the important subject of things to look out for:
- You will be linked to a company that expects to fund the majority of your loans. If this will be a problem, net branching may not be for you.
- If the company has been in business for a short period of time, beware.
- If there are few or no quality requirements to become a branch, beware. A company is only as strong as its weakest link, nothing substitutes for the quality of the affiliated branches and their loans.
- If the company isn’t eager for you to contact their branch managers, beware. This is the single most important part of your due diligence process, by the way. You should talk to no fewer than three or four branch managers from different markets within each company.
- If the deal sounds too good to be true it probably is. We’ve seen several branching companies come into the market with corporate fee splits that seem too small to earn a profit. We are now seeing them go out of business because their business models failed.
- Ask the recruiter if out of state deals can be originated using another branch’s license or the corporate license. In most cases this is a major regulatory no-no, yet a common practice that companies allow and get sanctioned for. The reality is that when a company allows this they are putting everyone’s licenses at risk. Too many branching companies are afraid to set strict standards out of fear of losing a deal or a branch to a competitor. Brokers should align themselves with only the best.
In every complex decision there are complex issues to be considered. To most independent originators, few decisions will be more important or complex than deciding such trivialities as the future of their businesses and the ongoing welfare of their families. Net branch companies are pretty smart about this. They want you to fit culturally and business-wise, and want to keep you affiliated for the long haul. As a result, some of them offer ownership incentives and other financial considerations to reward productive branches. An example of this is Interactive Financial’s “Model Branch” program, coupled with its stock option plan. “Along with (all the other benefits), we have recently announced our Equity Sharing Incentive (ESI) plan,” according to Gersin. “It was designed to create massive net worth for successful branch managers throughout the company and attract successful independent brokers to join our growing team.” There’s a good chance this will be a trend among the more successful net branch companies for the simple reason that the universe of available brokers is not growing, it is shrinking. They’ll need more tools to land the better candidates.
Another trend to look out for is the growth of technology’s role in the business models of better companies. For example, mortgage bankers understand that paper is the enemy, and they will be looking for and adopting technologies to reduce paper in the process, from application to securitization. E-mortgages are something different, and most agree they are a ways off yet, but paperless, electronic loan files that multiple viewers can access simultaneously will certainly become a mainstay.
Likewise, more technology is being applied to CRM, or customer relationship management, to keep the lender in the customer’s mind. Predictive marketing concepts have yet to take firm hold in the mortgage industry, but they will. Lenders will be able to use CRM technology to trigger offers and communications with predicted “life events” of borrowers, and their branches will benefit from the outreach.
Will becoming a net branch change your life? Certainly. Will it rock your world? Hopefully. You will find safety in numbers in becoming “a piece of the continent, a part of the main.” But as Hops says, after you do your research and make a commitment to become a net branch, “Don’t expect miracles. While you can expect to improve production by shedding some of the many accounting and personnel functions you are performing as an independent mortgage broker, you still have to produce the business,” he says. “No company is going to give you loans. You still have to be the rainmaker.”
John Wayne would have liked that.
Due Diligence Review
When evaluating branching opportunities, there are a few key points to consider. First, some organizations don’t refer to themselves as “net branches,” instead using such terms as “branch network,” “affiliate branch,” “model branch network,” “interactive partners” or “branch affiliates, in part to distinguish themselves from the competition. Doing a thorough analysis will enable you to evaluate the various benefits or business structures of each—regardless of the name.
In addition, other companies have made the distinction more for compliance issues that have arisen over the years. As George Allen, senior vice president of Business Development at Superior Mortgage, Tuckerton, N.J., noted, “As the net branch concept grew in popularity, many companies joined the party and this caught the attention of investors and state regulators, not to mention the FHA. The branding of net branching began to take on a negative stigma.”
One of the most critical issues of net branching—discussed at industry conferences and elsewhere—is the occurrence of business practices that fall out of compliance by failing to adhere to state and federal guidelines/statutes. If you’re planning to join a net branch (or similar “partnership”) organization, be sure that it meets the legal criteria. For example, a state’s “in compliance” steps might include:
- Don’t transfer or assign your mortgage broker or banker license to “branch managers” or “owners.”
- Don’t require branch managers to pay for branch start-up costs, including, but not limited to, the cost of branch office licenses, bank account deposits, background checks, accounting fees, HUD license fees, security deposits, training, payroll fees, and loan software fees.
- Don’t fail to maintain a uniform settlement service fee structure among all of your branch offices. Borrowers should be able to pay the same fees at any office. You should not allow branch managers to set their own fee structure.
The best advice—do your homework. Consult your attorney, state and federal licensing agencies and other regulatory bodies to ensure the net branch candidates are compliant with guidelines. Failure to comply could result in severe fines and legal action.