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Promising affiliations (mortgage lenders affiliating with corporations and membership groups as a new method of marketing) (Cover Story)

Promising Affiliations

The amount of PHH US Mortgage Corporation's origination volume that comes from its affinity group business has climbed from 0 to 17 percent of the firm's originations in the past two years, says H. Robert Nagel, president of the Cherry Hill, New Jersey-based firm. Affinity group sales are somewhat like joint ventures, in that a lender provides originations by telephone or through the mail to group members, or to a company's employees. In return, that mortgage firm is endorsed by the organization's management as a preferred provider of mortgage funds.

PHH's clients include Marriott Credit Union, the Pentagon Credit Union, Boeing and Jon Douglas Company Realtors in Los Angeles. Generally, the mortgages are priced the same as retail loans and payments are not made to the group's management. Most affinity groups sign up for mortgage services either to provide a benefit to their members or to solidify the financial bond between the affinity group and its members in order to sell other products.

In bypassing the traditional means of loan originations, selling to corporations and affinity groups offers "a new way to get to potential borrowers," adds Arthur Lewis, director of business development at The Travelers Relocation Mortgage Company in Mt. Laurel, New Jersey.

Besides enjoying the benefits of being endorsed, lenders appreciate the financial status of the borrowers. Lewis describes these homebuyers as the type of "people [that] lenders would give their eyeteeth for." He notes that the borrowers typically are mid- to upper-level managers between the ages of 34 and 39, who have worked the last eight or more years with the same company.

Other institutions are finding affinity marketing to be fruitful. For instance, total production at Charlotte, North Carolina's First Union Mortgage Corporation was more than $3 billion last year. However, originations through affinity groups are "growing faster" than through the company's "mature wholesale and retail" network, says Senior Vice President Larry M. Dew, Jr. He adds that First Union is "pursuing [affinity relationships] more vigorously" than it is other lines of business.

Credit unions and Fortune 500 companies are the targets of his firm's sales efforts, Dew adds. First Union helps credit unions originate home loans for their members because those financial institutions "don't have the expertise or staff" to produce mortgages on their own. Many companies see mortgages as keys to capturing customers' "hearts and minds," Nagel adds. Yet they will turn to experienced origination firms for help after finding that starting up and running a mortgage banking business is difficult.

A corporation wanting to help transferees move quickly, an association looking for a member service, or a credit union trying to offer a full range of products can benefit from working with a mortgage firm. "They know their members and their hot buttons," Nagel says. "We tell them how to sell mortgages."

PHH US Mortgage got into the business in 1984 by acquiring a regional mortgage banking company. Its parent, PHH Corporation, supplies financial and management services to corporations, ranging from maintaining truck fleets to managing foreclosed homes. For fiscal year 1990, PHH Corporation subsidiaries closed almost $2 billion in real estate loans, more than twice the volume booked in fiscal 1989.

Getting started

Members of organizations trust lenders who have been recommended to them by management, originators say. "You don't get the resistance," adds First Union's Dew.

But this strategy isn't without its hazards. "It's slow business to develop," says Dew. The originator's reputation "drives the business," he adds. Affinity groups want to be sure their members will be well-treated before endorsing a mortgage lender. Negotiating with a group can take anywhere from "two meetings to two or three years," says Pete Bonnikson, senior vice president of IMCO Realty Services, Inc., Santa Rosa, California.

After getting into affinity marketing in 1986, IMCO now works mainly with groups ranging from 10,000 to 30,000 members, although some groups have more than 100,000 members, Bonnikson notes. One key to success is "knowing the culture" of an organization before trying to sell mortgages to its employees or members, adds Nagel. The lender is "an extension" of the group, he explains.

For instance, PHH telemarketers handling United Services Automobile Association (USAA) - an insurance and financial services cooperative with 2 million military members - are instructed to address callers by their military rank.

"It's a lot different than running a branch operation," Nagel says. For one thing, PHH "can have a 19-year-old [young woman] selling a $400,000 ARM over the phone."

Bonnikson adds that other lenders have tried without success to market to affinity groups. "It's hard to do business this way. It's hard to get companies to say, `Yes,' and get their members or employees to think of you first." He explains that a homebuyer might be wary when taking out a $1 million mortgage by phone, having "never met the people" originating the loan.

Good, consistent service is necessary to overcome this natural resistance, Bonnikson says. "You have to love it. You have to get up in the morning and want to answer the phone." Evidently, Bonnikson's staff shares his attitude because he has had almost no turnover in the last two years.

Keeping on your toes is important. Affinity group marketers realize that if they make a mistake, the news will travel quickly to other employees or members. "If you do a bad job," Bonnikson says, "they'll tell everybody they see." Adds PHH US Mortgage's Nagel: "Water cooler and lunchroom talk is unbelievable."

And if IMCO makes a mistake, the firm "will always correct it," Bonnikson adds. Even if doing so is expensive, he believes the long-term benefit of maintaining the firm's reputation outweighs the immediate costs.

To provide this service, IMCO recruits telemarketing loan officers from the servicing department. When they started doing this in 1986, IMCO gave these workers a salary and "tiny commission," says Bonnikson, amounting to about $100 for every $1 million in loans closed. However, IMCO found that a higher commission was needed to motivate the loan officers to provide good solid service. Bonnikson notes, however, that the commission still is "quite a bit less than the standard retail commission."

One reason to keep the commission low, adds Nagel, is so that a loan officer won't harm the relationship with the affinity group by trying to make a bad application acceptable. If the deal doesn't work, he says, the homebuyer needs to know quickly.

First Union Mortgage also has "salaried loan officers with incentive," Dew says. "There is some selling." About seven or eight of his staff of thirty are telemarketers. Together they originate about $10 million each month. Support and processing functions are handled by the remaining staffers. Selling to affinity group and corporate managers is done by two or three people, including Dew and James Abbott, president and CEO of First Union Mortgage.

Developing business

Getting into the affinity business can be tough even for experienced lenders. In 1987, First Union hired someone "to help us open up a relocation lending department," Dew recalls. However, even with the help of outside expertise, business was "slow for a year or so," says Dew.

While calling on Fortune 500 firms for relocation business, First Union found that those companies often had credit unions that could use the mortgage lender's services. In time, First Union discovered "how to approach and find a fit" with these institutions. "Each credit union is different," Dew notes, in terms of size, products and relationship with its parent firm.

In 1988, First Union was contacted by USAA, which needed help providing home equity lines of credit and second mortgages. The next year, First Union began offering first mortgages to USAA members.

Dew explains that the San Antonio-based group advertises its mortgages through a member magazine. Calls first go to USAA. Eligible applicants then are forwarded to First Union telemarketers. Phone contact and the mail are used to take applications, process them and go to closing. Dew says loan pricing is the "same as what's available on the street." Convenience and the strength of the affinity group's recommendation are what bring the business to First Union, he adds.

Because USAA spends money on telephones and magazine publishing to support the mortgage program, it works on a joint venture basis with First Union. Dew says that rather than taking a loan fee, First Union and USAA share both costs and income.

Processing efficiently

Service is what guarantees return business. Lewis notes that production at Travelers Relocation Mortgage has "tripled since 1987." He adds that the number of accounts hasn't tripled; he's just getting more business from old customers.

A Travelers telemarketer often will talk two or three times with a transferee before taking an application. Such counseling helps the process go more smoothly, because homebuyers will know information to have ready during the phone application. Workbooks also can be mailed to applicants to help them prepare.

"Consistency of service" and "cost efficiency" develop from working out of one location, says Lewis. Immediate approval and rate lock-ins can be given over the phone, and loans can close in 10 business days, says Lewis.

Once Travelers is recommended to a particular group of transferees, Lewis says he expects to provide mortgages for 25 to 30 percent of the workers in that group. Competition arises because most large corporations suggest more than one lender.

He also has to "fight the local marketplace." Lewis prefers to contact transferees before they move to a new area. This helps prevent the transferee from forming a relationship with a local Realtor who then will suggest other local lenders. Travelers competes with local lenders by offering flexible underwriting. This is possible because relocating employees have stable employment, and also because a corporation often agrees to buy back a transferred worker's home before he is forced take a loss.

Affinity group marketers agree with Lewis that results depend largely on "what level of endorsement the affinity group is willing to provide." For instance, some firms that are relocating employees simply will give those workers the phone number of a mortgage firm.

But lenders prefer to have the names of transferred employees given to them, so they can be directly contacted. For instance, PHH US Mortgage's Nagel instructs his loan counselors to call workers, and mention that the firm's relocation director has asked the counselors to call.

PHH US Mortgage counselors are assigned to specific affinity groups because each group "has its own idiosyncracies, strengths, weakness and desires," according to Nagel. For instance, one group might be providing mortgages as a member service, while another sees them as a way to establish a relationship and sell other financial products. Transferred employees also need to be treated accordingly if they are being moved due to a big promotion, or because their division was shut down.

So in addition to knowing mortgages, PHH US Mortgage loan counselors are trained how to treat different types of groups. Products are geared to the group's needs. For instance, a three-year ARM sold to military families is called the "Tour of Duty Mortgage." Counselors are also responsive to certain situations that could affect the type of loan needed. For instance, inquiries are made as to when and where military personnel are planning to retire, before making loan suggestions.

A walk through the PHH US Mortgage Corpration offices reveals that the telemarketers are fully in-tune with the companies they work with. Their work areas are decorated with banners displaying companies slogans. Additionally, Nagel signs up his loan counselors to take part in the same orientations as the company's employees. Some affinity groups with a heavy demand for mortgages have dedicated phone lines, and loan counselors answer the phone using that group's name.

Nagel says PHH US Mortgage originates loans at a cost of 150 basis points each. Included in that figure is the cost of PHH's phone equipment. Nagel notes that technological advances in phones, facsimile machines and overnight mail have been more important to his business than breakthroughs in computer technology.

Member savings

IMCO markets their program as an employee or member benefit that doesn't cost the corporation or group anything. However, Bonnikson says the firm asks for at least a one-year contract. And IMCO tries to get the group to tell members or employees at least twice a year about the IMCO home loan program, adds Bonnikson. IMCO Realty sells its mortgages as a benefit by offering 50 basis point reductions in loan fees. Because IMCO has a "smoother, cleaner, more-efficient operation," says Bonnikson, they can "pass those savings on" to the group's members.

Brochures, statement stuffers, newsletter articles, and on-site generic seminars are common marketing methods. IMCO develops the marketing tools, although the affinity groups have final approval as to what they say.

Reduced closing costs and the convenience of a paperless application are the main selling points, says Bonnikson. As do other originators, IMCO makes sure each applicant deals only with one person during the process.

Preliminary decisions are made at the time of the phone application, he adds. A credit report is run while the loan officer is on the phone with a homebuyer. Next, the computer calculates ratios and tells what other documents are needed from the borrower. Later a manual review is performed to double-check the file, says Bonnikson.

IMCO spent between $300,000 and $400,000 on phones, computers and marketing materials when they started their affinity group marketing, Bonnikson says. Money was lost the first year of operation, he says, but that was anticipated. However, he expects his 28 loan officers to bring in some $400 million in originations during 1990. Experienced telemarketers, Bonnikson adds, produce $2 million in loans a month.

Legislative help

In an era of fading government support for housing, affinity marketers surprisingly got a boost on the West Coast. After California passed a law requiring that pension funds must be invested in mortgages within the state, opportunities arose for helping make those investments happen. For instance, last year the California Public Employees' Retirement System (PERS) began soliciting lenders to become part of its Member Home Loan Program.

Today, 50 lenders offer mortgages through that program to 850,000 current and former state employees, says Gary Kell, executive vice president of Dallas-based Lomas Mortgage USA, Inc. Eventually, Kell expects 100 originators to be part of the PERS program.

PERS buys the mortgages taken out by its members. However, servicing is kept by the originators. As master servicer, Lomas reviews the loan packages, warehouses them until they are securitized, and issues one servicing report to the retirement system.

Originators currently make loans available in 321 California communities through the PERS program, Kell says. PERS puts names and phone numbers of approved mortgage originators in mail stuffers to its members.

In addition, Kell notes, "lenders can market in their community." Some do so by putting brochures and posters advertising loans in offices of state agencies. "We leave it to lenders to seek out market share," Kell adds. For instance, IMCO Realty is a PERS-approved lender that distributes flyers describing how it can take phone applications 12 hours a day, and offering a toll-free number.

To sign up for PERS, originators must send back a participant questionaire to Lomas, along with audited financial statements for the past two years, copies of errors and omissions insurance and fidelity bond certificates, along with quality control procedures.

Kell explains that Lomas is looking for lenders who have been profitable during the last two years, have a $1 million net worth or federal deposit insurance, have average or better delinquency and foreclosure experience in the state for the past three years, and can show servicing portfolios of at least $500 million. Approved lenders pay a one-time fee of $1,500, and then $1,000 annually. Out of both of those payments, Lomas applies $500 to statewide advertising.

Lomas prices the loans every day, and offers lock-ins for up to 60 days. However, homebuyers receive a lower rate if prices "float down" during the lock-in period. Both adjustable and fixed-rate mortgages meeting Fannie Mae guidelines are available - including buydowns and limited documentation loans. Kell adds that the average loan-to-value ratio of the loans is 70 percent.

Lenders pay $350 for loan review and underwriting. GEMICO is the contract underwriter, and also provides mortgage insurance. At times a warehousing fee also is charged, Kell says. These charges can be passed on to borrowers, along with other expenses and a 1 percent origination fee. Loans are sold to PERS without a brokerage commission.

Kell expects that between 1 and 2 percent of PERS members will apply for a mortgage each year. Approximately 25 percent of those borrowers get loans through the PERS member program. With this rate, Lomas obtains the $500 million in annual originations that it hopes to get from the program. Regional lenders, who don't need that much volume, most likely could approach smaller organizations.

Lomas got into master servicing in the late 1970s, Kell says, when the company began overseeing the servicing of tax-exempt bond issues. Today, it handles $7 billion in securities that have multiple servicers. Generally, Lomas expects to receive $30 to $60 of revenue each year per loan, Kell says. To get that, Lomas usually requires between $50 and $300 for loan review, plus 3 to 5 basis points annually.

More variations

Master servicing is one of several business niches found within affinity group lending. In fact, Travelers' Lewis says the "greatest potential for growth" is realized by offering mortgages to all employees in a corporation, even those who aren't being transferred. He notes that the business builds on corporate relocation relationships, and that the workers are good credit risks.

Demand for this service comes from employers whose workers have "got to be able to afford housing, or [the company] can't maintain its employee base," says Lewis. He says Travelers has been approached by firms that are looking to offer loans to all employees, not just relocating workers, as a corporate benefit. Some firms even put up funds to discount loans by 1 point. But other corporations are looking to provide their workers with "consistent treatment, not price breaks," notes Lewis.

Mortgage firms also can provide special financing to corporations wanting to sell the homes their transferees previously lived in, says Lewis. In soft markets, good rates can mean the difference between selling an empty house and having to make payments on it.

But as with any new venture, this one has its challenge. Learning to work with Realtors would be new for Travelers Relocation. However, Lewis believes that "more referrals are possible" if Travelers can keep real estate agents happy.

Another concern for Travelers is having to "work differently to sell on the secondary market" the loans it originates for corporate customers, says Lewis. "Companies are willing to become risk partners with their employees," he says, and that results in home loans that aren't always conventional.

Companies are "committing resources to get employees up and running," that is, to help them find a home so they can settle into their jobs. Travelers' challenge is to understand the corporation's needs, "and define [those needs] to the investment community."

A variety of new mortgage instruments raise these investment concerns, says Lewis. Shared appreciation mortgages, buydowns and "forgiveness loans" are examples. In a forgiveness loan, the employer takes care of 20 percent of the balance each year.

Other mortgages offer no interest charges for the first five years or 100 percent financing with the corporation - in essence, operating as a private mortgage insurance company.

Lewis adds that it's "not our intention to portfolio" such loans. Therefore, Travelers will tell investors why the employer wants the loans to work as they do, and, therefore, discover any problems the investor has with the mortgages. Lewis wants to see the discussions isolate one problem, and then "deal with that issue with credit enhancement." After doing so, Travelers sells the loans to one of the agencies or to Wall Street.

Lender benefits

When originating loans for credit union members, Dew says First Union gets servicing without having to spend capital to acquire mortgages - which it would if it was buying from correspondents. Most affinity groups make sure that the originator won't sell the servicing, in order to ensure good service in the future.

Dew notes that there is a "pretty small circle" of potential clients who can provide sizable mortgage production opportunities. Yet, First Union can take advantage of these opportunities, because it is licensed in all states and capable of closing loans nationwide.

Documentation and processing are streamlined, Dew adds, when affinity employers or credit unions can provide credit and employment histories, plus account balances and salary information. He says loans usually close in two weeks. A number of the mortgages used by transferees are two-step loans, which adjust after five years. Lenders find that they are good assets. Travelers' Lewis reports a 0.5 percent delinquency rate on its relocation mortgages - which is low even among affinity group markets.

His concern is customer satisfaction, not credit quality. As do other affinity originators, Travelers surveys customers to make sure they're pleased with the service. In fact, Travelers even surveys a portion of transferees within a company who use another lender.

PHH US Mortgage Corporation sends survey results to their client affinity groups, along with reports on phone call and loan volume. Nagel reports that between 20 and 85 percent of calls turn into sales, depending on the quality of the leads.

Being able to produce millions of dollars in originations while working with pension funds, credit unions and Fortune 500 corporations was unheard of a few years ago. Even today the majority of lenders focus on traditional wholesale and retail methods, although competition is great in those areas.

However, "the future is very, very bright" for affinity originations, counters IMCO's Bonnikson. Today, he's finding "fewer players" to compete with because some firms who tried to originate loans by phone then dropped out of the business. Those who remain offer competition on service, not pricing. Affinity group lenders have found "a great way to do business," Bonikson says, [by being] a big producer of mortgages at a very low cost."

Howard Schneider is a freelance writer based in Ojai, California, specializing in real estate issues.
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Author:Schneider, Howard
Publication:Mortgage Banking
Article Type:Cover Story
Date:Nov 1, 1990
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