The move elicited strong surprise from at least one real estate professional who cited the possibility of conflicts of interest between the brokerage and mortgage sides of Redfin. However the company said it’s “building a comprehensive compliance function and leveraging industry leading technology to ensure all laws and regulations are met.”
The company, which already serves more than 80 major metro areas with its real estate brokerage, said its ultimate goal “is an entirely digital process” where customers can expect a faster closing and lower fees.
“Redfin Mortgage will put the customer first through a combination of technology and personal service,” Redfin CEO Glenn Kelman said in a news release. “This approach to mortgage is the same that has made us successful serving more than 75,000 customers buying and selling homes. We’ll meet customers through digital channels to lower customer acquisition costs. We’ll hire our own mortgage advisers with incentives that reward service, not just sales, so customers get advice they can trust. We’ll track every aspect of the closing in a single system used by mortgage advisers, real estate agents, title experts and the customer so everyone works together on an on-time closing.”
The standalone mortgage business will be run out of a new Dallas office led by Jason Bateman, formerly executive vice president of mortgage operations at BBVA Compass. The company plans to begin issuing loans in the first half of this year, initially serving customers in Austin, Dallas, Houston and San Antonio markets.
Software engineers supporting the new business will be based in Seattle.
Seattle-area real estate professional Jeff Reynolds has been a broker at Windermere Real Estate for 14 years. He was caught by surprise upon hearing about what the competition was up to.
“This is gonna flip lenders upside down,” said Reynolds, who also runs Urban Condo Spaces, a Seattle real estate team and blog. “If you look on Redfin’s site, you can see the lenders that they prefer and you can see how much business they’re driving toward those lenders. You’ll see guys who have been reviewed like 600 times. And those reviews are obviously correlated from direct referrals from the folks that are buying properties with Redfin. So in theory, that guy’s business would go away if Redfin started doing the mortgage broker side of things.”
But Redfin said in its news release that its agents will continue partnerships “with lenders of all stripes, encouraging customers to work with the lender that offers the best combination of service and rates.” The company said that “there will be no incentives for Redfin real estate agents to recommend a Redfin loan.”
In a followup email responding to GeekWire’s questions, the company gave the following replies:
On precedents for this type of business combination: Re/Max actually recently launched a new mortgage franchise, Motto Mortgage, that Re/Max real estate brokers can use to set up affiliated mortgage brokerages. Motto Mortgage is a bit different though because it’s for mortgage brokerages, not direct lenders, which means they connect borrowers to loan options. Redfin Mortgage on the other hand is a direct lender, which means we fund the loans ourselves. Therefore, ours is a much larger investment and endeavor.
On potential regulatory challenges: The mortgage business is highly regulated by both the federal and state agencies. Therefore, we’re building a comprehensive compliance function and leveraging industry leading technology to ensure all laws and regulations are met.
Additionally, there will not be a conflict of interest between Redfin’s brokerage business and mortgage operations. According to the federal Real Estate Settlement Procedures Act (RESPA) realtors, lenders and settlement agents are forbidden from paying each other for business. We have no intention to require any customers to use our services and we do not compensate anyone for referrals to other divisions. Moreover, Redfin’s business model is to give commission to our agents (and now lenders) based on customer satisfaction and any incentives beyond that would go against our company values.
Reynolds said he can understand how a company might use the streamlining of processes as a selling point, but he said he thinks most customers would be taken back by it a bit.
“It’s the exact fear that the government has always had with getting real estate agents involved in banking, or banks getting involved in real estate,” Reynolds said. “It really is something that’s been avoided, because it’s just not arm’s length. To me, at least, it doesn’t feel right. It would possibly be a conflict of interest.
“Most customers feel like there would be some separation there because you are talking about the two biggest decisions a buyer makes before committing to a property: picking a broker and picking a lender. Those systematically have always been separate from each other.”
Bateman, the head of the new Dallas office, said in the news release that buyer’s “win” when the agent, title professional and lender work together.
“Lenders should spend their time determining which loan is right for a customer, not looking for new customers,” Bateman said. “If an appraisal comes in low or an inspection turns up a problem, everyone should learn about it at the same time, without relying on telephone calls and email messages hours after the fact. Automating tasks that were once performed manually should not only lower costs, but reduce the possibility of errors that create lending risk. Our vision is the way I’d always imagined home lending should be.”
Because Redfin’s mortgage service depends on integration with its brokerage operation, the company does not initially plan to support refinancings or loans to consumers who buy a home without using a Redfin agent, the company added.
“This will be a big shakeup in the market, because it’s just a lot of volume that they’re currently referring to lenders,” Reynolds said, specifically referring to independent lenders in Seattle, and foreseeing the business moving beyond Texas.
He said he often refers two or three lenders to his clients because he doesn’t want it to look like he’s favoring one person.
“I’m acting as a better fiduciary if I give them options,” Reynolds said. “That to me is one of the biggest reasons in and of itself why this to me feels a little bizarre.”