Builder Joint Ventures: Several Lenders Are Hot on the Trend of Setting Up Joint Ventures with Home Builders. Big-Name National Lenders as Well as More Moderate-Sized Lenders Are Making These Ventures Work. They Are Also Being Used to Target Emerging-Markets Business

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LAST YEAR SAW DEMAND FOR NEW homes continue to soar. Mortgage lenders today are fully realizing what a boon partnerships with home builders can be to their business. Joining forces with home builders has become a popular way to obtain quality purchase-origination business, and lenders are hooking up with builders more than ever.

Most of the top lenders in the country now have affiliations with multiple home builders. And smaller and medium-sized lenders are looking at teaming with builders as one way of replacing the record volumes seen over the past few years.

Partnerships with home builders typically guarantee a higher percentage of customer business than similar arrangements with Realtors, those interviewed for this article say. Realtor joint ventures (JVs) typically show capture rates of 20 percent to 25 percent; builder joint ventures often yield capture rates of 60 percent to 70 percent or even higher, executives say.

That's because individual real estate agents operate as independent contractors, and many already have established relationships with a lender. "Individual real estate agents largely drive the decision as to whom they may refer a loan," says John Stewart, managing director of strategic business development for Countrywide Home Loans Inc., Calabasas, California. "If you do a JV with a real estate company that has 100 real estate agents, you would in essence need to convince 100 individuals of the value of the joint venture. With the home builder, you don't have that same hurdle," Stewart says.

"On the builder side, it's typically more of a captured book of business," agrees Dave Robinson, senior vice president with SunTrust Mortgage Inc., Richmond, Virginia. "A big part of it is real estate agents may already have established relationships," Robinson adds.

The trend to partner with home builders will accelerate going forward, in part because those ventures meet the consumer desire for one-stop shopping when purchasing a home, executives interviewed say. "We will definitely be seeing more affiliated business arrangements with builders in the future," says Desmond Smith, senior vice president for business development with Chase Home Finance, Edison, New Jersey.

In addition to providing homebuyers one-stop shopping, affiliated arrangements also give home builders more control over their business, Smith adds. "When someone walks into a builder center and is a qualified buyer, the builder wants to get them approved and lock them in as soon as possible. The builder has control if they have a marketing agreement or joint venture with a lender. They know that the customer is qualified, so they can feel comfortable building that house," Smith says.

Experience counts

There are a number of new players trying to enter into joint ventures or other arrangements with builders, notes Randy Stewart, senior vice president for secondary marketing with RBC Mortgage Co., Chicago. Stewart is based in Houston, the location of RBC Builder Finance, RBC's arm that targets builder business.

"There are many companies that were living on 60 [percent] to 75 percent refinances, and are now trying to retool themselves and reposition. When you have a good builder partner, you get a good consistent volume [of loans]," Stewart says.

Lenders without experience in builder joint ventures will have a hard time competing, Stewart adds. "It's like anything else--you can't just come in and be a qualified expert in a short period of time. Doing builder business is a very specified book of business. [Newcomers] are going to have to compete against companies like RBC, who always understood who their customer was and never left that segment of the market," he says.

The increased competition will likely mean tighter margins going forward, Stewart predicts. "Just like in a normal retail book, your margins will get compressed as competition increases. …