A New Business Choice Emerges

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TME-Becky-BarbaraDo you know what a homeowner, a farmer, a Fortune 500 business and an independent mortgage company have in common? No, it is not the CFPB! It is the use of a cooperative business structure. Most people are familiar with some type of cooperative. In larger metropolitan areas it may be known as a form of homeownership. Others are probably more familiar with their local farmers cooperative where locally produced vegetables and other farm products can be purchased. Most likely less well known are the large fortune 500 businesses that are in fact cooperative businesses. For mortgage lenders this form of organization has been growing in favor over the past ten years and is continuing to flourish. As a result many small and mid-sized lenders are now considering whether or not they should become a member.

So what exactly is a cooperative? According to Gail Sessoms, writing for Demand Media, “a cooperative business is formed and operated to meet the needs of its members.” Cooperatives are made up of individual producers or owners who are working together to achieve common goals. Their intent is to leverage the buying power of their combined membership as well as leverage the combined opportunities offered by its vendors and in turn offer benefits to its customers.

Unlike most businesses, which traditionally have a hierarchical leadership structure, a cooperative organization is typically developed around a democratic methodology of governance. Members of the cooperative can vote on the group’s mission statement, its business methods and even its formal structure. Some cooperatives may choose to be organized around a loose relationship between members while other may decide on an organization with defined responsibilities. For those cooperatives that want a very structured organization, a centralized core of decision makers is established.

This centralized core of individuals oversee the operations of the organization and, where necessary, may employ or acquire functions that are not part of the cooperatives core abilities. For example, a farmer’s cooperative may hire or acquire an accounting firm and a housing cooperative may hire a building management company to handle problems that occur within the apartments or the building in general.

Recently cooperatives have begun to change their structure from these more traditional models to one that is an investor-driven, for-profit, model, which involves converting member-owner rights into common stock shareholder rights.   Going even further, some cooperatives have converted to publically traded companies in order to attract investor capital.

When considering whether or not to join a cooperative, companies should consider both the advantages and disadvantages of these organizations. Another key in making the determination is understanding the focus of the organization to ensure it fits with the company’s goals. Equally important is investigating the management of the cooperative so that you can be assured of getting the benefits and rewards promised to its members.

Pros And Cons

One of the most highly recognized advantages of being part of a cooperative is the advantage of its purchasing power. In most cases smaller companies do not have the volume necessary to qualify for volume-based pricing when they are purchasing goods or services. However, with the volume offered based on the totality of the cooperative members, these lower prices are achievable. The cooperative is able to negotiate prices that would otherwise be unattainable by the individual members. As a result, members are able to compete with similar firms that are much larger.

Of course there is a downside. Keeping in mind that a company and some of its competitors may join the same cooperative, each one will receive the benefit of the reduced pricing. In other words, the competitive advantage realized is not just against the large competitors, but against competitors of the same size that are part of the organization.

Another advantage of belonging to a cooperative is the marketing power it provides. Cooperatives are able to obtain more prominent advertisements in more widely read industry periodicals, as well as other well placed information about the cooperative and its members. In addition, individual members can, get reduced rates and more exposure than they would otherwise achieve on their own. However, all of these advertisements will most likely tend to be rather generic in nature and once again, members will be lumped together with all others in the cooperative and specific branding that any individual member wishes to promote may be lost.

Mortgage Lending Co-Ops

Today there exists several mortgage cooperatives. In reviewing the material available on the Internet about these entities, it appears that all of them have similar mission statements. Overall these entities are using the collective power of their members to enhance the individual execution of loans in the secondary market. According to their mission statements, two of these companies see this as their primary and in one case, their sole mission. Although they may offer some additional buying power, the reality is, according to at least one member I spoke with, the discounts and cost savings can be obtained by individual companies outside the membership.

One thing evident in the companies that are focused on secondary marketing execution, is the background and experience of the leadership team. For each of these companies, it appears, that this focus is driven by what the leadership team has done successfully in the past. While this makes good sense, it leaves open the issue of how can a company benefit from such a membership if the support they receive is focused on just one area?

What these existing organizations seem to lack is an overall plan to address all of the issues and opportunities facing mortgage lenders today. While each of them promise discounted services such as QC and access to networking, there is nothing to demonstrate that they will support lenders in dealing with issues such as new CFPB regulations, finding new ways to combine efficiency opportunities with effective results or make their voice heard in Washington D.C. Assisting lenders/members is critical to any lender’s success today yet cooperatives seem to be silent on these matters.

A New Category

In 2013 a new cooperative emerged in the San Diego area. Known as The Mortgage Collaborative, this entity is led by a group of individuals who have a long-standing and comprehensive view of what it takes to make a mortgage operation successful. The founding members include John Robbins, CMB and past president of the MBA, David Kittle, CMB and also a past president of the MBA, Gary Acosta, President if the organization and CEO of the National Association of Hispanic Real Estate Professions and Jim Park, former chair of the Asian Real Estate Association of America.

In addition to the power of better execution promised as part of the cooperative, this group is committed to helping members and partners build a strong and diverse network of companies that are actively working on supporting multiple community and outreach goals. The group has put together a substantial plan to support their members through the use of a consumer direct lead generation and the implementation of a peer-to-peer accessibility program to provide advice on industry best practices. They are also offering professional training programs presented by the best in the industry.

A strategic difference that this group indicated will be part of their program is the creation and development of new and more relevant tools for its members. Vendors and partners will be supported by the organization in joint development projects that, once in place, will give these members a unique competitive advantage over other players in the industry. The acceptance of these new programs will also be supported by the leadership of the cooperative, which due to their high profile in the industry and the respect of their peers, can be expected to generate a rapid response and acceptance from the industry.

Another area that is an integral part of this cooperative, which is not seen in others, is the accessibility to industry leadership, regulators and congressional leaders. No other cooperative has the ability to obtain information such as early indications of new regulations or to collectively provide meaningful insight to the developers of these regulations.

Supporting Internal Development

One of the ways all cooperatives benefit their members is through the discounting of prices for goods and services. Each mortgage cooperative reviewed for this article indicates that they can provide this advantage to their members. In fact, one of the cooperatives stated that with their vendor platform, members have been able to gain an efficiency of “14 bps per loan.” At a time in the industry when costs have increased exponentially any reduction in these expenses can mean the difference between staying in business or not.

In order for cooperatives to provide support in the area of cost reduction, they must develop good relationships with vendors and/or provide some of these services themselves. To this end, some cooperatives have begun to offer such advantages as providing servicing to members in order to allow them to retain servicing fees. In addition, they may have purchased external support organizations and will offer these goods and/or services to members at a reduced cost.

Unfortunately these products and services, although reducing costs initially, don’t automatically translate into effectiveness. Having discounted QC services that provide reviews and reports that are meaningless to management can backfire if the company fails any investor or regulatory audits. Likewise technology support that may appear advantageous, but it must be viewed cautiously until such time as the company determines whether the cost savings is eaten up by additional work effort on the part of the staff.

As each lender considers whether or not to join a cooperative, these issues must be addressed. However, The Mortgage Collaborative has, as part of its plan, the mission to provide best in class goods and services including regulatory compliance issues and operation implementation advice. In addition, with the strong focus of the leadership team on diversity in lending, issues such as Fair Lending will be a key part of their support.

At the end of the day, the choice to become part of a cooperative is dependent on what is needed and expected by your organization. In today’s mortgage market, getting support in areas that are critical to your organization’s success can make all the difference.

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