A loan officer is making the rounds offering agents $5,000 of co-marketing per closed transaction.
I have nothing against the idea or co-marketing in general, but I thought I’d discuss it briefly in a blog, given that several agents have told me about the offer.
Co-marketing, as most readers know, is simply an arrangement where a mortgage lender shares the costs of marketing with a real estate agent.
For compliance purposes, it is important that the lender is featured in the marketing proportionally to the amount of money the lender spends.
If the co-marketing involves the purchasing of leads, it is important that the leads are equally accessible to both the lender and the agent.
The problem with co-marketing in general is that it always results in higher rates.
This is because lenders are all operating on extremely tight profit margins, so the only way they can cover the cost of co-marketing is by raising their rates (to get additional yield premium or rebate).
(a major misconception in the real estate industry is that lenders have tons of extra margin they can share with agents or borrowers without having to increase rates)
The loan officer offering $5,000, for example, would have to increase his rate by at least 1/4% for a $500,000 loan to cover the cost of his co-marketing offer.
And – in this rate environment, where borrowers are extremely rate-sensitive and willing to shop for every dollar of savings, charging an extra 1/4% will not go well.
Doing so would probably cost the lender the loan and it would reflect poorly on the agent who referred the borrower to the lender.
As an aside, I once met with a broker who asked me to match the co-marketing spend of the lender who was in his office at the time. That lender was spending a whopping $25,000 per month though, and only closing an average of three loans per month! So, that lender was either ripping borrowers’ heads clean off (expression lenders use when very high rates are charged) or that lender was losing a lot of money.
The other problem with the loan officer’s $5,000 offer I describe above is that it looks like a “pay to play” proposal that would violate RESPA rules and other regulations (lenders can’t offer specific sums to agents as a reward for referring a transaction – even if that money goes towards co-marketing).
What is so risky about “pay to play” arrangements is that both the payer (the lender) and the payee (the agent) are at risk, and many agents are blissfully unaware of this liability, per our compliance attorney.
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