Mortgage lenders hoping to enter the point of sale origination market can glean some advice - and a few words of warning - from a recently released study.

The study highlights a 50% increase in taking loan applications at real estate offices in the last 12 to 18 months. Weston Edwards & Associates of Laguna Beach, Calif., did the study, with funding from Fannie Mae, Freddie Mac, GE Capital, Chicago Title, EDS, and MGIC.

With this increased activity came one big surprise - such originations were resulting in cleaner, higher-quality mortgages. "One of the chief concerns Fannie Mae and Freddie Mac had was the quality of mortgages that would be generated," says Robert Edwards, an associate with the consulting group.

"There was this common argument that if realtors got into this business, they would push through bad paper, but we've found the opposite to be true."

According to the study, lenders have independent-minded real estate agents to thank for originating mortgages with above-average quality.

"Most (real estate) sales associates consider themselves independent contractors," says Mr. Edwards. "They're Machiavellians by nature," and they'll use the service that makes them look the best.

Consequently, real estate brokers need to ensure that their agents have access to the best rates, terms, and service from a lender or investor - or else the agent will refer another lender that can deliver. And the only way for realtors to offer optimum financing and service is to build a top- quality relationship with a lender.

"Realtors realized that they had to run a clean shop," says Mr. Edwards. Real estate brokers "found the only way to get their agents to use them was to become the best."

Becoming the best is starting to pay off for real estate brokers, with more than a dozen recently succeeding in placing mortgages with at least 30% of their homebuyers, and achieving profits per transaction two to four times greater than in their other residential brokerage business.

"Real estate firms are under tremendous pressures for profit, and they need to diversify into real estate related activities that they have knowledge of," says Forrest Pafenberg, director of real estate financial research for the National Association of Realtors.

But despite the interest in point of sale loan applications highlighted in the study, real estate experts are offering words of caution.

"Clearly, until there is a final rule from Respa, it will be difficult to form direct relationships with mortgage brokers," Mr. Pafenberg says.

Many large real estate brokers are keeping their noses clean when it comes to violations under the Real Estate Settlement Practices Act, known as Respa. But for smaller companies, the study says, problems are still widespread when it comes to kickbacks.

Regional mortgage brokers commit some of the most flagrant transgressions. Paying for a real estate agent's advertising is one of the most common violations.

According to the study, real estate brokers have been reporting these violations to responsible regulators and getting no response. "It's just something too big for Respa to handle," says Mr. Edwards.

The Edwards study also pointed to a need for a different approach to mortgage origination when going directly from a real estate broker. Dropping previously trained mortgage origination managers into a point of sale origination operation has not worked in many instances.

Another surprise: The technological boom that was expected to turn the business around has not even made a dent. Not one of the real estate agents studied uses a computerized loan origination system, opting instead for mortgage professionals to help with origination. Adds Mr. Edwards, "We suspect that will always continue."

The consulting firm was founded by Weston Edwards, chairman of the Housing Roundtable, in 1988.

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