Since the passage of the Real Estate Settlement Procedures Act in 1974, government officials and lobbyists have been debating how to define a legitimate relationship between real estate brokers and lenders.

Meanwhile, the brokers have been rapidly redefining these relationships on their own, especially in the last year.

This is one of the findings of a five-month study by Weston Edwards & Associates, a consulting firm in Laguna Beach, Calif., that was commissioned by Fannie Mae, Freddie Mac, GE Capital, Chicago Title, EDS, and MGIC. Its full results will not be released until August, but a preliminary summary was made available to American Banker.

With lender-realty relationships such a hotly contested issue, Weston Edwards said, "We thought it would be helpful to just get some facts."

The early findings show that a growing number of real estate companies are entering the mortgage lending business in one way or another, changing the business in a fundamental way. Some 90% of the top two brokerage firms in major markets have established some kind of in-house mortgage services or are about to do so. And in the past nine months, 40% of the second-tier firms have joined them.

"It's just leaped in the past year," said Mr. Edwards.

While lenders are generally eager to form relationships with real estate brokers, they are uncomfortable about the possibility that the realty people will dominate the process.

"We're concerned when a real estate agent has a financial interest in where a borrower gets a loan. That can turn the process on its head," said Brian Chappelle, staff vice president at the Mortgage Bankers Association of America.

But preliminary results from the Edwards study suggest that brokers who enter the mortgage business are in no way guaranteed success.

What's more, realty companies in the mortgage business have to work hard to keep the business in-house, the Edwards study says. "Most have stumbled. It's not an easy business to manage," says Mr. Edwards.

The consultant says sales associates demand far more from an in-house mortgage service, whether it originates loans or not. With an outside lender, if something trips the transaction, the broker can blame the lender, switch to another one, and still keep the commission, says Mr. Edwards.

"With an in-house service, if something goes wrong, the blame stays with the sales associates and they are in serious jeopardy of losing the deal and their commission," the study's summary says.

The brokers that have been successful have gone through three to four managers, says Mr. Edwards. They realize that to get the best pricing and service from their lenders and investors, they must deliver a top-quality product. "If they do survive, they are good lenders," says Mr. Edwards. "They cannot survive if they are making bad deals."

In fact, he says, the evidence suggests that realty mortgage services are producing high-quality mortgages, with delinquencies and defaults well below the average.

But the profitability of realty company-owned mortgage operations is suspect. Some of the successful real estate companies are financing as much as half of the deals their brokers put together and making a healthy profit. More typically, though, the capture rate is 20% to 25%, and many are at 5% to 10%, which may result in losses for in-house operations.

Among the larger real estate companies, the desire for a lending operation is prompted by flagging brokerage earnings. Among the second-tier companies, the immediate drive has been to remain competitive with the larger companies for top associates, who want to be part of a company that offers the broadest possible services.

Mr. Edwards says that while there has been a good deal of negative talk about realty-lender relationships, "We also hear a lot of, 'If you can't lick 'em, join 'em.'"

Ms. Temes is a freelance writer based in Marblehead, Mass.

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