Part Two of a Two-Part Series

[Editors note: This series examines the evolving relationships and competition between real estate firms and agents and their counterparts in home purchase transactions, mortgage lenders and originators.]

Late last month, the National Association of Realtors launched an education campaign through its membership to help consumers avoid predatory loans. With the announcement came questions from some mortgage lenders and brokers as to who should really be counseling consumers on home financing: lenders or Realtors. Lenders also are reviewing the evolution of their relationship with Realtors and the role that each plays in a home transaction. Traditionally, that relationship has been cooperative one, but competition between them is growing. More and more frequently, there is a race between lenders and Realtors to reach the consumer first. At the extremes, mortgage lenders and real estate firms each may seek to exclude the other from transactions entirely.

“Lenders are getting there [to potential homebuyers] first most of the time,” said Charlie Nilsen, Massachusetts Mortgage Bankers Association board member and New England regional manager at JP Morgan Chase. However, as more Realtor-owned mortgage companies market themselves to consumers, the competition is increasing.

Nilsen said the association is in favor of the predatory lending education being provided by NAR, but questioned whether it might be “self-serving” in some instances. He wondered if some Realtors would be providing education to consumers with the intent of directing the lending business to their in-house mortgage companies.

“A lot of them have gotten very aggressive about freezing out lenders,” Nilsen said, adding some Realtor-owned mortgage companies aren’t receptive to marketing from outside lenders.

Realtors, like Linda Kody of Kody & Co. in North Andover, said consumers generally come to the Realtor first.

“We are the first contact in many cases,” Kody said.

She said lenders would like to be the first point of contact, but calls it a “bad idea.” When consumers do go to a Realtor after seeing a lender first, Kody said it can be problematic. She recalls an instance when a consumer was pre-approved and once Kody reviewed the loan term and rates, she determined it was a predatory loan.

“The biggest problem is when they [homebuyers] come with their own lender,” Kody said.

Others disagree that Realtors should be the first place for consumers to turn for financing advice, especially in an age where pre-approved loans are popular.

James F. Flynn, president of Hopkinton-based Marathon Mortgage, said an environment exists where many Realtors expect consumers to be pre-approved before looking at homes. Working with would-be buyers who are not pre-approved for a loan and ultimately may not have the wherewithal to actually purchase a home is not a productive use of a real estate agent’s time.

Flynn admits that the race to get to the customer first has forced his company to devise unique strategies.

“I want to get the borrower first,” Flynn said.

Because the firm’s referral base from Realtors had dwindled from about 80 percent to 40 percent of its total loan volume, Marathon Mortgage loan officers began going onsite to corporations and establishing relationships with certain companies to offer loans to their employees. Flynn said he really began to notice the shift in referrals from Realtors in 1996.

Nilsen said JP Morgan Chase also builds relationships with businesses to secure more loans and the company advertises directly to consumers about pre-approvals.

“We have to get more creative,” Nilsen said.

Another local lender said the consumers’ first point of contact has changed over the years.

“It used to be the Realtor [was the first point of contact],” said Dean Caso, president of Homevest Mortgage in Needham. “Now I disagree that Realtors are the first point of contact.”

Consumers behave differently than they did 20 years ago and they tend to go to a lender first when considering a home purchase, Caso said.

“Consumers are more savvy,” Caso said. “They are more interested in finding the deal themselves.”

Ralph Miller, broker-owner of Hughes & Hughes Real Estate Co. in Natick, said the majority of people who walk into his office are getting pre-approved by lenders first.

“Most sellers want pre-approval [letters from potential buyers],” Miller said.

Such pre-approval letters may show that a homebuyer is qualified for the necessary loan amount and are considered one of the best methods for determining whether a buyer is truly committed to making a purchase and not simply window shopping.

Miller said as a Realtor he might still suggest a lender he knows, but ultimately it is up to the consumer to choose.

For lenders looking to get to the consumer first, pre-approval has been the key, according to one lender.

Rick Fedele, president and founder of Summit Mortgage of Boston, said that it is not just Realtors and seller who have fueled the growing use of pre-approval letters. “They’ve [the mortgage industry] pushed for pre-approvals” as well, he said. The pre-approval process not only facilitates home-buying transactions, it also serves as the first step in securing the mortgage business for the lender.

The first point of contact for consumers has evolved over time as the lending industry has pushed for pre-approvals and Realtors began to expect it, according to James Dougherty, executive director of the Massachusetts Mortgage Association. In the mid-1970s, the real estate broker was most often the first point of contact for homebuyers, but many buyers today seek to get a sense of how much they can afford to borrow before searching for a home, he said.

“A buyer never approached the bank first” before the pre-approval process caught on, Dougherty explained.

As mortgage brokers and lenders gained a foothold in the industry and competition increased, pre-approvals became more popular. The first point of contact in a home purchase began to migrate to the mortgage industry in the 1980s into the 1990s. But while things have changed, Dougherty said he doesn’t entirely believe a race between Realtors and lenders is necessary.

“I’m not convinced the race is a [productive] one,” Dougherty said.

The first point of contact with homebuyers today is very much split between real estate and mortgage professionals, according to Sonny Romano, mortgage loan officer at Danvers-based Mortgage Network. Both Realtors and lenders feed each other business and to compete against each other only makes the job harder.

“It’s counterproductive if you make it a race,” Romano said.

In the House

Regardless of whether Realtors and mortgage lenders perceive the quest for more business as a race, the fact remains that both lenders and real estate companies are doing everything they can to reach the consumer first. Realtor-owned mortgage companies sprang up in the late 1980s and early 1990s, according to Bill Mullin, president of NE Moves Mortgage Corp., an affiliate of Coldwell Banker Residential Brokerage.

“They [Realtors] were responding to consumers,” Mullin said. “The consumer has a strong preference for one-stop shopping.”

Mullin said Coldwell Banker Realtors rarely work without outside lenders and, instead, affiliated loan officers are assigned to one or more Coldwell Banker offices with work with Realtors.

According to the 2004 NAR Profile of Real Estate Firms, 6.5 percent of Massachusetts real estate firms use an in-house mortgage firm while 8 percent of real estate firms maintain full or partial ownership of an outside mortgage company. These numbers are close to the national figures showing 6 percent of real estate firms have a mortgage company within the firm and another 6 percent have ownership of an outside loan company.

Many lenders take issue with such business models. Dougherty said when Realtors make lender recommendations they are “very motivated” to use in-house mortgage companies. Fedele of Summit calls in-house loan companies “a huge mistake.”

“One-stop shopping doesn’t help the consumer,” Fedele said, calling it the “most anti-consumer creation.”

Summit receives referrals from independent contractors, but Fedele said the internal controls of in-house mortgage companies is concerning to him.

“It’s the real pressure [to steer buyers toward an in-house lender] from within [real estate companies] that concerns me,” he said.

Jack Conway, chairman of Norwell-based Jack Conway & Co., said his Realtors are not obligated to send a consumer to Conway Financial Services, the firm’s in-house mortgage arm.

“The choice is up to the consumer,” Conway said, adding the staff is not penalized for not referring a deal to one of its in-house lenders.

Realtors aren’t the only ones guilty of freezing out their competitors on the other side of the fence. Lenders have also attempted to cut out Realtors with sites like East-West Mortgage’s Danvers-based Web site ISoldMyHouse.com, which encourages consumers to finance with the firm and list their homes for sale at the site rather than with a real estate agent. However, Nilsen said he is unfamiliar with any other mortgage company that has used this strategy so far.

“East-West kind of stands out,” Nilsen said.

Kody said it’s imperative to have enough diverse options in a transaction to assure a consumer is treated fairly.

“It’s a good [way of ensuring] checks and balances,” Kody said, adding she wouldn’t want to see a marketplace where Realtors have control of every aspect of a home sales transaction, including mortgage financing.

Other lenders view the Realtor-owned mortgage companies as a legitimate and effective business model.

“It’s a nice profit center for a real estate entity that can add a mortgage entity to the total package,” Caso said.

Because most real estate agents are independent contractors, they are not required to refer business to an in-house lending arm at their firm. Caso said Homevest loan officers often work with Realtors who work for a company with an in-house mortgage arm simply because the Realtor trusts that particular loan professional.

Both Mullin and Conway point out that, despite the existence of in-house lender at their firms, the outside mortgage industry is still involved in many of the sales transactions conducted by their businesses.

Despite claims from some lenders that in-house mortgage divisions at real estate companies will decrease competitive rates, Mullin said if the company couldn’t offer good rates, “we wouldn’t be in business.”

“It’s just healthy competition,” Mullin said. “There’s probably room for everybody.”

Conway’s company also sells loans to 32 different investors and Conway said this means consumers get the best rate.

“The consumer isn’t stuck with one rate, one lender,” Conway said.