Capture the Mortgage

Big builders find in-house mortgage affiliates offer better control while satisfying customers.

Source: BIG BUILDER Magazine
Publication date: 2003-03-13

By Jay Holtzman.

The number of production builder mortgage affiliates appears to be on the rise. It's easy to see why. Whether constituted as a bank, a broker, or in some other form, builder affiliated mortgage operations bestow a host of benefits on builders, say those involved in the industry.

With an affiliated mortgage operation, builders can manage resources better and gain greater control over the process of home building and sales, right through closing. When sales and home financing are integrated, customer satisfaction tends to increase, builders say. And an affiliated mortgage operation provides another source of income, too.

"In its most basic sense, especially in the affordable housing sector, we find that it's critical to have an integrated financing and building platform for the customer," says Joe Troy, vice president of financial services for Tampa, Fla.-based Walter Industries, a parent corporation of Jim Walter Homes and three smaller home builders. The corporation also operates Mid-State Homes, a mortgage servicing operation, and in 2001, Walter Industries established a new subsidiary, Walter Mortgage Co., to offer land and home financing.

"We want to present getting into a home as being easy. With the financing integrated you are controlling your own destiny versus having an outside partner dictate terms. You can set your own conditions for dealing with your customer," Troy adds. (For similar reasons, a number of builders also operate their own escrow and/or title companies, too.)

"The number one benefit is backlog control," says Roger Pastore, president and CEO of Englewood, Colo.-based Pulte Mortgage Corp., a subsidiary of Pulte Homes. "This is our way to ensure that the buyer is qualified and will be ready to close when the house closes. That's clearly a major component for large home builders," he says.

Controlling the mortgage process enables a builder to manage many resources better, explains Brian Connor, operations manager for Dominion Financial Services Ltd., a company created in 1999 by Dublin, Ohio-based Dominion Homes. The builder can make more informed decisions on any number of steps in building a home, all of which, "involve monetary or human resources that have a cost," Connor points out.

"Access to information is very important. If Dominion gets a credit application from someone with a low credit score, they probably aren't going to dig the foundation on that home until I approve the loan," Connor adds.

In-house lenders also support the trend toward earlier buyer qualification, which makes the entire sales cycle more efficient. "We're involved in pre-approving buyers before sales writes a contract, to make sure it's a deal that is going to close," says Karyl Gately, president of Shea Mortgage Co. and Shea Financial Services, of Walnut, Calif.; Gately helped found both companies seven and a half years ago.

And an affiliated lender works harder to get financing for a borderline buyer. "Every mortgage is not just a mortgage, it's a home sale," says Dan Schreiner, president of Ryland Mortgage Co., in Calabasas, Calif., "so we go above and beyond to make sure that if they potentially qualify, we will get them a loan."

In-house lenders make the financing process easier for home buyers and that translates into better customer service and happier customers, builders say. "Being part of the value of buying a Ryland home, we build customer satisfaction," Schreiner says. "By controlling the process, we can control that customer's expectations and deliver what we promise as part of the overall home buying process," he adds.

Gately says making it easy for consumers is a key competitive advantage. "It's so competitive and people come in who are pre-approved before they walk in the door. What we sell is the one-stop shopping aspect of it, the ease of the transaction with the whole team working on it."

Additionally, builder affiliated mortgage companies contribute to the bottom line. They're formed as independent entities that must stand on their own in terms of profit, builders say. But their contribution to profits tends to be minor compared to those of the home builder itself. Process control and customer satisfaction are far more important. Builders find that these benefits accrue more fully when the mortgage company is tightly integrated with the builder's entire organization.

Common Cause

"When we started Shea Mortgage, I didn't take the job until I was assured that everyone was on board, because it takes everyone at every level to cross sell one another," Gately explains. Financing options are part of every salesperson's presentation, she says, and throughout construction, "the loan officer, the sales person, the construction superintendent, and the [company-owned] flooring company talk about each escrow, one by one, week after week to make sure that they are on track and everything is in place to orchestrate a timely closing."

The seamless integration that builders call the "critical difference" requires training and coordination. "It's never ending," says Connor. Shea, for example, works hard to avoid the "mass confusion" buyers can experience when they get documents from sales, escrow, mortgage, and title, Gately says. The goal is to make sure correspondence doesn't send mixed messages, doesn't overlap or ask for the same information more than once, and, "all looks like it came from the same place," she adds.

And integration with home sales personnel directly impacts the "capture rate," the critical measure of how many eligible buyers choose the in-house lender.

The key to boosting the capture rate, "is to provide the service to the home buyer at the point of sale," says Pastore. "We've tried to include the Pulte sales person as part of the mortgage process in the front end. Not that they are in the mortgage business. But they are familiar with the mortgage company and its products and they can speak to the consumer about what we can do for them."

It's crucial that the builder's sales people know how to talk about financing, says Connor, "so we are integrated into the weekly sales meetings. Then we meet internally every week to review problem loans and if there is a loan at risk ,we communicate that to sales."

Of course, capture rates are affected by other factors, too. First-time buyers tend to be easier to capture than move-ups, who may have existing relationships with lenders, says one builder. And today's low rates and hot refinance market tend to keep competitors busy and away from sales offices, says another.

Operations Vary

Balancing an efficient centralized operation with a customer-friendly, field-oriented approach is a question on which builders differ. Some have moved to "complete field operation where everything that happens to that mortgage happens in the local division," Schreiner explains. Others take the complete opposite tack.

Ryland opts for a hybrid approach.

"We have mortgage offices co-located with the builder, but we've centralized our critical operations for efficiency and speed to make sure buyers get approved quickly," Schreiner explains.

Opinion also varies among builders about the best role for the Internet in mortgage operations. Some only post information to Web sites. Others allow consumers to apply for financing online.

Meritage Corp., in Plano, Texas, is turning to the Internet to connect its new mortgage operation, MTH Mortgage, with its communities and consumers, according to John Landon, co-chairman and co-CEO.

"We decided we wanted the opportunity to do the mortgage brokerage business long term in all our divisions," Landon explains, after having a limited brokerage in Dallas for some years. The company had been approached for an Internet brokerage, but declined to make the investment. "But we liked the idea of streamlining," Landon adds.

The Internet-based operation, being rolled out in Dallas, will eventually cover all four states in which Meritage is building. Flexibility is one of its key features, Landon explains. Consumers can apply for a mortgage online or do it in person with an MTH representative. Or they can call and be coached through the online process. MTH personnel will use the same system to input data.

"We like it because it's easy to deal with. The system takes the information and centralizes the processing. We can do everything in one location, but have service centers in each division where a loan officer can provide service to people who need it and want the personalized attention," Landon says.

With so much going for them, why doesn't every large production builder have a mortgage affiliate? Size is an issue, for one thing. A builder needs the volume and buying power to buy credit at competitive wholesale rates. Yet those in the industry say that building as few as 300 houses annually is sufficient to make a mortgage affiliate viable. Finding a qualified management team -- crucial for success, builders say -- may be a greater hurdle. Laws governing mortgages vary widely from state to state, which puts a premium on experience. And industry observers note that proposed HUD regulations are likely to burden much of the industry with more and more demanding paperwork.

Home builders acknowledge the value of in-house lending affiliates and it seems likely that more builders will create such organizations, even if it's not easy to quantify the contributions they make.

"Our profitability [from mortgage originations] will never hit a home run in the Shea Home organization," says Gately. "But it is the other, soft benefits that we bring to the table that make a difference."