THE CLIMATE IN THE MORTGAGE INDUSTRY IS constantly changing. One aspect of the business that has changed quite a bit in a positive way is net branches. There have been growing pains along the way with this unique approach to the origination business. And lessons have been learned. Yet all these developments have left the net branch production approach in the enviable position of gaining market share, and with new respect from peers.
The concept of net branches is still relatively new. The business model actually existed long before a formal name was given to it. The first net branches were owner-operated shops where one of the originators wanted to go into business for himself (or herself) but did not want to sever the ties completely or did not have the net worth to obtain licensing. With net branching, the originator did not lose the support and license of the home office, and the owner-operator did not have to pay the overhead associated with having an employee.
But since those early days, the model has evolved. Today, there are several net branch models. Even the name for the model is evolving as the term "net branch" became associated with older models no longer seen as fully compliant in today's regulatory environment. Because there is no industrywide consensus on a term for the new breed of net branches, we will continue to use the term "net branch" while making the effort to educate people about the new characteristics of this model. And because there is no one, universal definition for net branches, it should be understood that some operate as mortgage bankers that fund loans or a combination of banker/broker that originates and funds loans. However, the vast majority of net branches operate primarily as mortgage brokers that originate loans for lenders.
Because net branching is such a budding segment of the industry and because it is so entrepreneurial, there has been a tendency to allow anyone to migrate into our segment of the industry without a border patrol. If nothing else, the mortgage origination industry has no barriers to entry, and has allowed too many people in who were looking for a quick buck during a booming market.
These brokers who built first-generation net branches--just like the borrower with no vested interest in his no-doc loan with gift funds who will go into foreclosure without any heartache--walked away from our industry and allowed the first generation of net branching to be foreclosed upon.
However, it was in 2000, when the Department of Housing and Urban Development (HUD) released Mortgagee Letter 00-15, that a clear definition of what a net branch should be (and subsequent compensation) was provided to the industry. The letter endorsed the alternative compensation structure whereby the branch manger may be paid the net profit of the branch he or she manages.
"The HUD/FHA [Federal Housing Administration]-approved mortgagee collects the revenue from the branch, pays the branch expenses and then pays the branch manager the remaining revenues, if any, as a commission," according to the letter. "Such an arrangement is, essentially, an alternative compensation program for the branch manager and is an acceptable branch arrangement if all other branch requirements are met."
The bottom line is that the branching company has remote branches like any other mortgage company, and the "net branch" term refers to compensation to the manager, not the soundness of operation or responsibility of the licensed corporation. Many state...