Recent developments have cast doubt on the growth prospects for the so-called net-branch approach to mortgage lending.
RBC Mortgage Co. is selling off the pieces of its mortgage business that rely on net branches, generally defined as independently run, entrepreneurial branches that receive back-office support from a central corporate office but can keep a bigger share of the profits than typical retail branches.
The Royal Bank of Canada unit's decision to exit from the business followed the disintegration this year of an effort to set up a trade group for net branchers.
Strong devotees remain - including the two companies that picked up the branches. They cite the aggressive sales culture the structure fosters, managers' incentive to keep costs down, and the freedom they feel to experiment with new products.
But Doug Duncan, the chief economist at the Mortgage Bankers Association, said other lenders may be reconsidering their net-branch affiliations because of heightened concerns about what branch independence entails.
"Part of it is if you have the companies' reputation and capital on the line, it is hard for some management to leave that a loose relationship," Mr. Duncan said.
The Innovative Mortgage Origination Council, a nine-member trade group formed last summer to represent net branches' interests, quietly disbanded this year, according to several people who were involved.
Managers of net branches oversee the day-to-day business decisions but are usually employees of the parent company, which pays expenses and provides benefits.
The Department of Housing and Urban Development has expressed concern about the oversight of the branches. In May 2000 it sent a letter to lenders meant to clarify acceptable "branch office" arrangements for HUD- and Federal Housing Administration-approved lenders.
RBC Mortgage sold Government Services, the U.S. East Coast division of its Pacific Guarantee Mortgage subsidiary, to Pinnacle Financial Corp. of Orlando last month, and last week it announced that it would sell the rest of Pacific Guarantee to CMG Bancorp of San Ramon, Calif.
Through the two deals, RBC Mortgage, which is based in Chicago, is unloading more than 80 branches and 650 employees, or about 20% of its total. When it was known as Prism Mortgage Corp., it acquired Pacific Guarantee Mortgage Corp. in 1998 and Government Services in 2000. (Royal Bank of Canada bought Prism that year.)
After making recent additions to its wholesale business, RBC Mortgage decided that it could no longer afford to devote "management bandwidth" to net branches, according to David J. Matthews, its president and chief operating officer. "We just felt we would be better off concentrating on two channels rather than three."
RBC Mortgage, which entered the wholesale business in 2001, in May announced a deal to purchase Bank One Corp.'s wholesale first mortgage and home-equity business that it said would more than double its wholesale loan volume. That deal is expected to close this summer.
The unit found that the margins on its wholesale originations were fatter than those on net-branch originations, Mr. Matthews said. "Frankly, we find it in comparison to net branching a more profitable business."
Running a net branch means devoting as much time to risk and compliance controls as would be applied to a regular branch, but the traditional retail model offers higher margins and more opportunities to cross-sell, he said.
In addition, RBC Mortgage's brand got no boost from the net branches, since they did business under other names, according to Mr. Matthews. The lender has other origination channels in the markets where the net branches are located, he said.
Doug Long, Pinnacle's chief executive, called the deal with RBC sensible for his company, because net branches have "more of a sales culture than a banking culture."
Since the branches' profits are used to pay employees' salaries, the managers are aggressive about keeping expenses low and cutting deals, and that makes them a good cultural fit for Pinnacle, he said. "From my perspective, I think those are some of the best businesspeople out there."
Christopher M. George, CMG's chairman and CEO, said net branches provide the economies of scale that individual mortgage brokerages do not have.
In addition, they can roll out new products faster than traditional branches, and their independent nature mimics what CMG seeks from its branches, Mr. George said. Several other proprietors of net branches have offered to sell to his company, he said.
Despite the freewheeling reputation of net branches, CMG plans to keep close tabs on those it is acquiring. It will conduct weekly phone calls with the branch managers to help higher-level executives keep an "ear to the ground," Mr. George said. "I don't ever want to be disconnected from that level of information."
