Winning with Mortgage Partnerships

If customers ask you to recommend a mortgage or loan provider and you suggest one or two with which you are familiar, you are doing your customers a favor. However, if they ask you to recommend a provider and you respond, “We provide our own mortgage services,” you are not only providing your customers with a service, you’re doing yourself a favor.

Granted, if you operate a small business, you may not be able to offer such a service. However, you may be able to explore opportunities to partner with a mortgage or loan provider to provide transparent financing to your customers. 

“Small builders – those building fewer than 100 homes a year – would virtually never have their own mortgage enterprise,” says Tim Landwehr, first vice president, sales and marketing, construction lending, Consumer Construction Lending Group of Indy Mac Bank, Norcross, Ga. “They may have relationships with lenders that they know do good jobs. Then they can refer their customers to these lenders. However, they don’t have any ‘financial skin in the game’ and don’t get back any financial gain.”

Mid-sized builders — those building 100 to 500 homes a year — may have partnerships or joint-venture relationships with lending institutions, where business goes to the joint-venture. “Here, the lenders and builders both benefit,” Landwehr continues. The nation’s top 10 or 20 large builders may actually own their own mortgage companies. 

Exploring joint ventures
American Home Bank in Lancaster, Pa., is one financial institution committed to working with custom builders in a joint venture relationship. “Our goal is to help builders build more homes and make more money by controlling the mortgage process,” explains Jim Deitch, chairman and CEO. Builders say they want three things from AHB, and the bank has delivered.

First, builders want quick answers on mortgages so they know whether they can make the deal with the customer or not. “As a result, we have created access to Freddie Mac and Fannie Mae, as well as all of the other major lenders such as Wells Fargo and Chase,” Deitch says. “We have the underwriting authority to make the decisions and fund the loans, then sell the product to the appropriate bank.” Builders like the accessibility because customers have access to many different banking products.

Second, most custom builders want customers to buy the land and make progress payments, Deitch says. “They want to be paid quickly when they make a request for a draw or disbursement for work that has been done,” he adds. To address this, AHB operates a sister company called ConstructionMAC (Construction Mortgage Acceptance Corp.), which provides management of the processes. 

“We get to know the builders and how they like to work and how they like to be paid,” Deitch continues. For example, one builder might want to dig a foundation, lay block, and put the top plate on, then get a draw. Then, he will frame it and want a draw. “After talking with each builder, we construct the draw schedule so it follows that builder’s process,” he adds.

AHB also has a national network of inspectors with access to electronic communication, and they can provide 48-hour turnaround on inspection. They also post inspection pictures electronically. “We pay the builders from the reports, so builders don’t have to invoice us, and we can cut the check as soon as the reports are filed,” Deitch says.

Third, builders also want to participate in the economic side of the business, so they can provide one-stop shopping. This eliminates miscommunication between the builder and the bank because of the close working relationship. “We believe that if the builder doesn’t see the bank as a business partner, the relationship is doomed to failure,” Deitch notes. “We form a joint venture so we can share in the profitability.” 

AHB creates a mortgage company for the builder and private-labels it, using whatever name the builder wants to use, including its own name. “The result is that the builder not only has a good business lender, but also a good business partner,” Deitch says.

What’s required to participate?
What is required of builders to participate in a joint venture like this? First, they must be a quality builder, Deitch emphasizes. Second, they must have sufficient volume to justify the expenses associated with the joint venture (licensing, regulatory costs, etc.). Deitch says the minimum is at least $10 million of construction a year. Both partners capitalize the joint venture with about $100,000 each. 

“We also request that the builder actively market the joint venture to its clients and provide introductions to the mortgage officers for these clients,” he continues. For its part, AHB offers a turnkey mortgage company. It handles licensing, regulation, accounting, investor relations, loan officer supervision, etc., leaving the builder free to do what he does best — build.

Another institution offering financing arrangements to builder clients is Countrywide Home Loans, Plano, Texas, which does business with all types and sizes of home builders around the United States. “In 2004, we did over $14 billion of mortgage financing for home builders,” reports Jack Haynes, executive vice president, national builder division. Countrywide offers a loan program called One-Time Close (construction to permanent). 

“The benefit of this program to custom home builders is it allows them to offer financing off their balance sheet,” he says. In other words, the construction loan is in the consumer’s name, not the builder’s name. The draw schedule is set up in accordance to the builder’s schedule, and the draws are dispersed directly to the builder. 

“If the builder is building more than two or three homes at a time, it gives him a financial lift not having it on his balance sheet,” he adds. In addition, since Countrywide is not making the loans directly to the builders, the qualification process for them to work with Countrywide is not as strenuous as working with a bank that provides loans directly to them. 

“We look at whether they have built this type of home before, whether they have the correct insurance, whether they are licensed in that area, and whether the plans and specifications will appraise for the amount we will be loaning,” he adds. “We also expect builders to refer their clients to us for the purpose of being qualified for the mortgages.”

First Horizon in Leawood, Kan., launched its builder division three years ago. One popular program is its Extended Lock program, which provides a variety of different loan products that can be locked in by the borrowers during the construction phase, which can go out to a maximum of 360 days, if needed. “If the market gets better and interest rates decrease, they have the option to switch to whatever the market rate is, which is called a float-down option,” says Dan Schmidt, senior vice president, national builder sales director.

First Horizon also offers the One Time Close program, which is set up for borrowers and builders to use when building a custom home. “This program also offers the float-down option,” Schmidt continues. “The program takes the financing worries out of building a new home. That is, when building a home, there are so many decisions to make, which puts pressure on customers. If they’re also worried about interest rates, this adds more pressure on the customer. The customer then puts more pressure on the builder to get the house done more quickly.” As with similar programs, loans are taken out in the borrower’s name, so the builder doesn’t have to use his line of credit.

Indy Mac Bank in Irvine, Calif., is a wholesale correspondent lender that features affiliated business arrangements. “We partner with builder-owned and builder-focused mortgage companies to provide products and programs that meet their needs,” explains John Reed, senior vice president and director of national sales, home builder division. 

“We also provide alternative financing to help some of their customers who have lower credit scores,” Reed says. If a mortgage company wants to do business with Indy Mac, it can contact the bank to gain approval to be able to broker or sell loans to the bank. “Our finance team understands the nuances of new home construction, such as the need for escrow holdback. For example, if a customer wants to add a new pool or new flooring, we allow them to hold back some of the proceeds from the loan to complete that work without holding up the final sale.” 

Borrowers have the option of making three types of payments: a fully indexed payment; an interest-only payment; or a deferred interest payment. 

Taking advantage
One custom builder that takes advantage of mortgage firm partnership arrangements is Morrison Homes in Austin, Texas. The company’s program is called Morrison Financial Services, which is the lending arm of Morrison Homes. A home mortgage consultant (through Wells Fargo) helps customers through the prequalification process, including credit rating, level of approved financing and projected out-of-pocket expenses. 

“It is a controlled business arrangement with Wells Fargo,” explains April Solimine, vice president, sales and marketing, Morrison Homes. “We own 49.9 percent of the partnership, and it is basically a referral program.” Morrison’s sales associates provide customers with loan applications and refer them to the loan officer (or home mortgage consultant) at Wells Fargo, who contacts the buyers and begins the process. “Any time customers come in and are not sure if they’re qualified, or not sure who they’re going to use, we encourage them to consider our program,” Solimine says.

The program is so transparent that when customers call the Wells Fargo number, the person answering the phone answers with “Morrison Financial Services.”

By being able to leverage the buying power of Morrison Homes, customers are able to lock in competitive rates. The program also provides one-stop shopping, a 24-hour pre-approval process, competitive interest rates and a wide variety of financing program options such as FHA, VA and conventional. “Wells Fargo offers so many different types of loan programs that we rarely run into a customer who can’t qualify for something,” Solimine notes.

The biggest benefit, according to Solimine, is the direct accountability. “That is, by working directly with Wells Fargo, we can be assured that the loan will be ready when the home is ready, which is something we can’t always be sure of if the customer is using another source of financing,” she explains. “We communicate with the loan officer two or three times a week to get status updates on all of the loans that are in process. It makes my job a lot easier.”

Such programs are increasing in popularity, as builders, lending institutions and customers see the benefits to all involved. “Our business has been growing over the last seven years, especially as new home starts have been growing,” reports Indy Mac’s Reed. 

Countrywide’s Haynes concurs: “The popularity of our program has been increasing quite a bit. In fact, our program size has doubled in the last three years. The average loan size is also increasing on a monthly basis.”