DONUT SHOPS ARE LIKE MORTGAGE BANKS
Years ago, I helped a couple that owned a donut shop refinance – and I was shocked by how thin their margins were; they were working 75 hours per week and making very little money.
BUT, if I had offered to somehow refer them 50% more customers in exchange for a referral fee of 50 cents per donut, would they have accepted my offer?
Not a chance.
B/c their margins were so thin, my referral fee demand would have forced them to raise their prices by 50 cents, and that would have eventually driven all of their customers away to lower-priced competitors.
The above story comes to mind b/c we have had numerous agents come to us recently to discuss Introlend.
Introlend is pitched as a “fully operational, agent-owned mortgage company…housed inside a real estate brokerage.”
While I am not precisely sure how the program works, I believe that agents refer their clients to Introlend for financing.
Clients then fill out a loan app via Introlend and then that application is used to garner competitive bids from participating lenders – who will pay a fee to Introlend of as much as half a point if they end up closing the loan.
The problem for most mortgage banks is that they don’t have anywhere near an extra half point to give away.
This is b/c most mortgage companies in competitive markets like the Bay Area, Austin and Dallas operate on very thin margins just like the donut shop.
We do so to remain competitive and b/c we always want to offer the very best value to our clients.
If we had to start paying an extra half point referral fee to Introlend (or anyone else), we would have to raise our rates by 1/8 to 1/4 percent to cover the extra fee (if we still want to make enough money to survive).
Many agents and borrowers mistakenly think mortgage banks are just rolling in money, but unfortunately operating margins are paper-thin b/c of labor, regulatory, technology, and backend financing costs.
The other assumption that Introlend seems to make is that consumers will get a better experience b/c of the competition that Introlend will foster.
But that too seems flawed to me b/c lenders like JVM have literally spent millions to make the loan application, pre-approval and closing process as smooth as possible.
Adding an intermediary to the mix will only add extra steps and extra costs for clients.
Note: I am not picking on Introlend but am just using them as an example. I readily acknowledge that my information may not be entirely correct, so I welcome feedback. In addition, the agents who have asked us to look into Introlend are all excellent agents and people whom we very much enjoy working with.
All I am trying to illustrate, however, is that margins are just too thin for most lenders to be able to pay for referrals without in turn raising rates.
And that is something we simply cannot do in good conscience.
This is very similar to the blog I wrote last month about Who Really Pays the Cost of Co-Marketing.
Extra fees always result in higher rates for consumers.
Founder/Broker | JVM Lending
(855) 855-4491 | DRE# 1197176, NMLS# 310167