Last week we visited the first Starbucks location in Seattle, Washington (original location was actually a few doors down, but moved). Starbucks has a very strict and very successful corporately owned chain model and we got to talking about retail mortgage bank "franchising" verses "corporately owned" branch models.
We’ve visited very successful mortgage bankers operating retail franchising models and very successful mortgage bankers operating corporately owned models (and both models being run not so successfully). However, there have been trends across the country coming from both models.
The goal of being a mortgage banker is to ultimately maximize pre-tax revenue while mitigating repurchase risk. Most mortgage bankers will also include serving the community, providing local employment and assisting borrowers for their mortgage needs as company goals, but a successful company must make money and manage their long term risk position. In the last few weeks, we’ve visited several retail branches with two distinctive business models. The two retail models are franchising and corporate branding branches. Generally one model is focused on best execution and expansion and the other is focused on branding, corporate culture and tends to be less price sensitive. Recently we’ve seen best effort selling retail corporate mortgage bankers earning double or triple pretax revenue in basis points of mandatory retail franchising mortgage bankers. In addition, several retail best efforts corporate branding mortgage bankers do not employ Underwriters and send all files out for investor prior approval.
Different business models lead into different branch criteria.
The corporate branches tend to be focused on:
- Servicing the community
- Relationship driven
- Cautiously calculated in opening and maintaining branches
- Corporate culture
- Expansion into a predetermined footprint
- Select product mix
The franchised branches tend to be focused on:
- Sales centric
- Entrepreneurial driven
- High turnover
- Large product mix
The concept of best efforts selling mortgage bankers (who often send to investors for prior approval) gaining higher pretax operating income than mandatory selling mortgage bankers (and underwriting files in-house) seems counterintuitive. However when we dove deeper into the pricing structure we found why. While the mandatory selling mortgage bankers were earning more revenue in basis points, they were giving it away in pricing to generate additional volume. More volume means more risk and not necessarily an increase in pre-tax operating income.
For example, the small mortgage banker originating $10M a month and making 100 basis points pretax operating revenue ($100,000) was realizing the same revenue as the larger mortgage banker originating $40M a month and making 25 basis points pretax operating income, while taking 75% of the trailing risk!
In addition, an increase in volume means an increase in employees, office space and an increased focus on operational workflow.
While we’re agnostic about the retail corporate verses franchise branch business models, we’ve been seeing a trend of the more successful companies focusing on corporate branching. Because ultimately the goal of a mortgage banker is to maximize pretax operating income while mitigating the Company’s risk.
Cameron Watts, CMB
C. M. "Corky" Watts, CMB