LO comp issues: the “gift that keeps on giving”
This week I posted a letter from a non-bank CEO asking if anyone is talking about cutting LO comp levels, given lower lender profit margins. “Rob, for what it’s worth, we have many members who echo the sentiments of the comments on LO comp in the opening of your newsletter. The smartest lenders I know are all saying the same thing: less overall volume, little to no refinancing, a mortgage industry ripe for consolidation that has yet to happen, and forced investments into compliance and technology, have compressed margins and make an industry-wide correction to LO comp levels inevitable. The question is not if it will happen, but only when and how it will play out.” That note from Rich Swerbinsky, COO of The Mortgage Collaborative.
J.R. opined, “Many companies are dealing with the same issue, important to understand basis points don’t pay the bills. Markets change, for LOs old enough to know – when markets changed like this in the past, they made less or no overage, and many times kicked in part of their commission to earn the deal. Those days are gone for both overage and LO participation. For that reason, many LOs set their compensation based on a larger more diversified mortgage market, or a mix of product business that has dramatically changed.”
On the flip side, I received this note from an originator in Northern California. “Tell the non-bank lender in the Northeast that with the new tax plan, LOs receiving a W2 just lost the ability to write off even a little bit of their business expenses. I’m paying for car, cell phone, marketing, travel, subscriptions, business gifts, lunches, etc., out of my pocket and can no longer deduct anything.”
And this from R. “When you hear that LOs have no loyalty… I am wondering if owners and managers will remember that some LOs change companies because they were promised things on the way in that don’t really exist. For instance, if you have a call with the CEO and you ask about products, and he claims, ‘We have those!’ do you take his word for it (and not insult him) or do you ask for proof? When the manager says we pay for that, and then you get here, and you see that the company doesn’t, what should you do? Or when you start, and they say, ‘Yes, we design your marketing materials,’ should I ask how long does that take? I am just tired that people can’t be trusted and tell the truth.”
Then there’s this. “I have a loan officer friend who works for a well-known lender. She was telling me of her company’s pay structure for LOs is rather than have a set comp with a dollar amount ceiling cap, as stated in Dodd Frank, the company pays LOs based upon a loan size scale: The smaller the loan amount, the higher the basis points. The higher the loan amount, the smaller the bps. How is management allowed to do that and get away with it? LO comp is supposed to be the same, regardless of loan size, and cannot change unless a new agreement has been established between LO and company.”
“Title insurance companies in the U.S. are concerned that blockchain would reduce the need for title insurance, threatening that multibillion-dollar business.” Most LOs and real estate agents wonder about the expensive role of title insurance in the process anyway. “In a blockchain data structure, transactions are created and shared among a network of computers. There is a unique digital record of every transaction, which is grouped into a “block.” Any changes or additions to the block would need to be verified by most other participants on the network, making it hard to alter information stored on the block.
A fintech cyber security consortium? Yes sir! Citigroup, online lender Kabbage, Zurich Insurance Group and Depository Trust & Clearing Corp. are among companies that have developed a consortium to address cybersecurity risks of financial-technology companies. The first objective is to develop criteria for fintechs to evaluate their cybersecurity.
I received this note from Aaron Ninness, a branch manager with New American Funding. “In response to your commentary about whether lenders and loan officers were caught off guard by the recent rise in rates, I think it is important to note the timing of this increase is no different than previous years. In the last 5 years, except for 2015, you can note rates have accelerated at the beginning of the year. This year is no different EXCEPT for how aggressively fast the rates have moved.
“Every September, my partner (and father) Tom Ninness and I start working with our teams and branches for off-season prospecting. Those who took this exercise seriously, made the connections, taught the CE classes, invested in their own personal knowledge, and expanded their network are seeing an increase to their business. Year-over-year we saw 200% growth for our group in February.
“With extremely tight inventory, we have found our biggest difference in the marketplace comes from focusing on specific programs and underserved segments. This generates a real unique need for ours services. Anyone can finance a condo – but can you finance a condo with litigation? Anyone can do a 20% down loan, but can you outline and explain the benefits of using a program like Home Possible or HomeReady with a 19.99% down payment? Anyone can do a VA loan – do you understand, and can you properly complete a residual income calculation?
“Just like any industry there will always be a need for the advice and services of a true ‘Expert’ at any interest rate. So, if you are looking at your pipeline wondering where your applications are, chances are you can roll back your calendar 3 – 4 months and find plenty of days that the prospecting was relaxed or training sessions on new programs were skipped. Getting on the ‘program’ now can certainly right the ship, but it still is going to take months. As we finish the end of a strong economic growth cycle, volatility will only increase further, and market swings will be more complex. It is best for LOs to take note that the best defense then is to properly invest in their own personal knowledge growth, better systems & processes, and aligning themselves with leadership that invests and promotes these avenues. Prospecting and networking will always be important to establishing strong relationships with your referral partners, but the more this market changes the more we will see agents send their clients to the loan officers who are truly known as experts.”
“Reducing tax rates on both individuals and businesses and regulatory burdens on lenders definitely benefit housing, but there are other factors that we believe will offset those benefits, namely higher interest rates,” says Les Parker, senior vice president of industry relations and consulting at LoanLogics. “The Federal Reserve is moving away from monetary accommodation, which mutes the fiscal stimulus from tax cuts. In my daily newsletter, MarketLogics, I’ve indicated that I don’t see tax cuts as altering my 2018 outlook for significantly higher volatility in mortgage rates. Because of that higher volatility, some mortgage bankers may be exiting the business.”
As lenders deal with both shrinking margins and shrinking volumes, the courts continue to look at the past. This week word broke that Lehman Brothers Holdings Inc.’s bankruptcy estate will pay $2.38 billion to compensate for its role in the previous decade’s mortgage crisis.
Josh Rosenthal, a partner at Medlin & Hargrave, PC, writes, “There was a significant development in the Lehman bankruptcy on Thursday, March 8th. After years of wrangling between Lehman and the RMBS holders, the Court set the value of the RMBS claims at $2.38 billion – down from the $37 billion initially demanded. If history is any predictor of future events, we can expect Lehman to take the same approach it took against originators after the 2014 GSE settlements; meaning, that originators throughout the country are likely to soon receive demand letters for payment based on alleged rep and warranty breaches. Regrettably, originators may soon be facing a new slew of litigation over very old loans.”
The topsy-turvy, zany world of mortgage insurance
“Have you heard anything about lenders asking the MI companies to bid for their business? This seems like a very unfair practice by the MI companies and theoretically, if the top 3 or 4 lenders all did this, then they would beat out everyone for the business. I have heard specifically that Essent is the MI company that currently has the deal with Quicken and we are seeing times where the MI is 50-60 bps a month cheaper with Quicken.”
Answer: I had not heard of that, nor of Quicken or Essent in particular, but a scan of the internet indeed turned up a LinkedIn post from a Quicken account executive. “We’ve done it again. That’s right – we went ahead and negotiated lower BPMI rates. Now we have an even greater advantage over our competitors…” But it is always better to ask the specific companies about their activities. I remember at conferences you’d always compare your guarantee fee to others to see if yours was high or low. No one seems to do that anymore.
Private mortgage insurance company account execs will tell you that you can usually tell on the earnings calls who has high LPMI saturation, and that they must be participating in those transactions. It’s a quick way to gain market share but less profitable business.
Also, there are different rates for different customers. Every MI company has credit union rates, and some have different rates for community banks. Some run special BPMI prices for different clients. Perhaps the rule of thumb is that if an MI company offers rates within the range of which they filed, they can use them.
Turns out that word on the street has it that Quicken, as well as a handful of other lenders and investors and at least one well-known wholesaler, puts its BPMI out to bid every 3-6 months and management started that practice last year. Some MI companies will obviously be more aggressive than others, while some may not bid above their standard rate card.
So, there are MI companies that hand them a rate card that is more aggressive than what they show on their website and more aggressive than nearly every other lender sees. MI AEs will readily tell you that it was one “winner take all” because the industry could see the spike in their market share, particularly market share in the refinance market where a company like Quicken has a disproportionate share. And Quicken reportedly has more MI than any lender so the spikes become obvious.
AEs will remind you that there are a limited number of MI companies bidding on it, and going through the, “We want that price, or else you won’t be in the rotation” situation. Those that don’t bid will tell you that telling a company like Wells Fargo or Chase that you just gave Quicken a better price than they have is a no-win situation. There are no secrets in the MI industry, and ultimately, you’d have some explaining to do. MI companies that win the bid for one company’s business run the risk of alienating other large companies and being cut off. After all, there are several alternative MI companies.
For a broader view, MI pricing “advantages” never last. Is the risk priced accurately, or is it too low? Think back to your Econ 1A class. Like lenders that cut their margins to gain market share, it could be argued that MI companies doing this begin the next margin compression war. And either lenders who didn’t get the lower price offered to other lenders cut off the offending MI(s), and they stop bidding, or all lenders end up at about the same pricing eventually.
In fact, there is a school of thought that says you can’t negotiate borrower paid MI. And I seem to recall that the overseer of Freddie and Fannie, didn’t like MI companies negotiating lender paid MI a year or so ago. But my memory may be faulty.
If anyone needs a refresher, Wells Fargo has a nice comparison of LPMI and BPMI.
Of course, BPMI must be compliant in all states in which that lenders’ borrowers reside. I understand that California sent a letter out last year that basically said any “rebate” must be consistently applied based on criteria. So, if you like a model, and that’s your criteria, you would have to go out and offer all who have a similar model the same pricing. That is obviously not happening, or you’d see similar posts like the one sent out by the Quicken AE. LPMI is a bit different in that the lender’s state of domicile rules the compliance not the borrower state. This, coupled with the fact that LPMI is less transparent, creates a little more variance between lenders.
The mortgage banking business is sorry to hear the tragic news about the sudden death of Colorado’s Ken Portz during the “Hurt-No-Mor” ski trip in Utah. Our thoughts go to those in his life left behind.
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