Mar. 23: Letters & notes on MLO comp; “fun” with Agency guarantee fees in capital markets pricing

“Rob, the industry is focused on the ‘price wars’ raging in the wholesale channel. But what is to stop any lender from running loans through DU and LP, gaining approval, but pricing the loans, especially high balance, without the 55 basis point gfee, and then selling them directly to investors who would rather have yield than pay F&F the 55 basis points? Especially if both parties feel that the 55 basis points is too high a premium for current mortgage risk, and ‘why should the government earn that?’”

Well, good question, and many will say that, “over-priced guarantee fees paid by borrowers are being used to reduce the Federal Government’s deficit.” First, any queries regarding Fannie’s DU or Freddie’s LP should be addressed to your reps. Using the Agency’s software but not delivering loans to them may be an eventual red flag. DU and LP are ubiquitous, and ever since the Agencies stopped charging for it, and provided access to unapproved Sellers, I’m not certain that widespread use of the tools without sales to the Agencies is an issue. Perhaps they could use it to monitor things like Chase using it and then not selling them loans (putting them into their portfolio or PMBS), but I haven’t heard that this is an issue.

In “the old days” prior to 2008 some guarantor or guarantee fees were in the teens. Different fee structures were given to different lenders based on risk profiles. But in 2008 the entire industry discovered “risk,” Freddie and Fannie went into conservatorship, and pricing became more conservative. F&F are in business to make a profit. They still garner about 70% of residential originations (including Fannie and Freddie doing financing for some very high-end multi-family developers). And yes, gfees are about double where they were, and critics believe that they should be lowered to match the lowered risk of delinquencies and foreclosures. That is for the FHFA to determine.

That all being said, cleverly bypassing the gfee hit and/or the securitization market and still complying with all the regulations and Agency policies would certainly lead to you being able to offer your clients better pricing than your competitors who haven’t yet discovered this trick.

(While we’re on the Agencies, Fannie has a new General Counsel. Stergios “Terry” Theologides is a 20+ year legal vet who takes over March 28. He previously led the legal department at CoreLogic Inc. and has served as an in-house leader for New Century Financial Corp. and Morgan Stanley.)

LO comp

I received this note from a grizzled industry vet. “Rob, here’s a quick story regarding LO Comp. A few years prior to the meltdown, a Hispanic borrower came to me to refinance because his rate had adjusted upward so much and he did not understand why. The reason his rate was so high was because his previous loan officer had sold him a neg am loan with a sky-high margin. Making matters worse, the loan officer convinced the borrower, who barely spoke English, that the ‘start rate’ was the actual rate, and the loan officer also failed to explain that there was a five-year prepayment penalty.

“One of the unfortunate things about neg am loans is that they all offered the same start rate no matter what the margin was.  So slimy loan officers would sell only the start rate and then foist sky high margins and five-year prepayment penalties on unsuspecting borrowers. The loan officer in the above scenario not only got a 3.5% rebate but he also charged the borrower a full point. And that is probably why we have the LO comp rules.  Slimy loan officers made them necessary in the eyes of regulators. I hate the LO comp rules more than any other regulations in the industry, but I can see why regulators thought they were necessary.”

Ed Wallace, Executive Director of The Community Mortgage Lenders of America, sent over, “I have noticed many readers commenting on LO Comp. This is an issue we have focused on for some time as well as spearheaded interaction with the CFPB. In addition, we are also at the forefront of an issue which will bring immediate relief to midsize and small IMBs, risk-based oversight for IMBs, already in Dodd-Frank and an issue we and the CHLA have been fighting for on our own.

“Last Tuesday, the CMLA met with the CFPB to discuss these two issues and their effect on midsize and small lenders. In attendance for the CMLA were Kim Curtis, Board Chair of the CMLA and President and CEO of Tidewater Home Funding, David Horne, Legislative Representative for CMLA, and Ed Wallace, Executive Director of CMLA.

“We presented Jennifer Stockett, Deputy Assistant Director, Mark McArdle, Assistant Director, Mortgage Markets & Regulations, and Derek Standarowski, Policy Analyst, with copies of our letter dated November 14, 2018 to Acting Director, Mick Mulvaney outlining the negative impact on midsize and small lenders resulting from the Rule.

“Specific incidences were provided which allowed the CFPB to fully understand if changes are not made within a short window of time, severe ramifications will take place with continued concentration of midsize and small lenders through consolidation and closures, underserved markets, and less competitiveness in the market which are all counter-intuitive of the Dodd-Frank Act.

“The CFPB stated the Loan Officer Compensation Rule is under consideration but, will take as long as 18 to 24 months to complete. We strongly recommended that the CFPB immediately act on the items that currently have consensus: (1) Reduction in Loan Officer compensation for mistakes and (2) Adjustments to Loan Officer Compensation for HFA loan programs.

“They could then, request comment regarding the final item, voluntary reduction by loan officers due to competition. This would provide some immediate relief to midsize and small lenders and enable them to continue to compete with large banks and brokers and thus retain the viability of their companies.

“In addition to Loan Officer Compensation, we provided copies of our letter dated May 21, 2018 to Monica Jackson of the CFPB, regarding risk-based oversight of IMBs which is already in Dodd-Frank. We again strongly expressed our desire to have this statute immediately implemented which will also allow midsize and smaller companies relief already granted by the statute.”

From Ohio, Bruce Calabrese, CEO of The Equitable Mortgage Corporation, sent, “Here is a pretty simple question. Why is it OK to steer clients to certain cars, mutual funds, stocks, bonds, jewelry, gold, retail items, recreation vehicles, utilities, Homes, vacation homes, condos, time shares, clothes, vacations, flights, hotels, food, anything Amazon sells, anything Facebook sells, anything Apple sells every single product, except mortgage loan products? Has anyone asked that question before?  Maybe if you answer that question the LO Comp questions will go away.

“I think people in our industry are tired of everyone assuming that we steer our clients toward higher priced products. I know for sure that I do not. So why not just prosecute the violators and allow Loan Officers to sell their products like everyone else. If I sell a 30-year fixed at 4.5% and make 2% on it, who cares if Chase is selling the identical product at 4.75% and making 5% on it? Why does anyone care what the loan officer makes on that particular transaction as long as the client is getting a better deal from that Loan Officer than by going elsewhere? How does the Loan Officer compensation possibly matter in a case like this? It seems like the Government is completely comfortable with Chase charging the client a higher 4.75%, .25% more than me as long as Chase makes the profit not the individual Loan Officer. This is mafia style reasoning.”


And this note came from a seasoned broker Out West. “I know being a very small office, we are different than large offices. We keep it simple with bare bones cost. But the laws and regulations always focus on ‘the bottom of the totem pole.’ Constrict what I can or cannot do. The problems, however, arise from policy at ‘the top of the pole.’

Back in the day, I could form an LLC and run my business like any other small business. But then an ill-informed bureaucrat decided by allowing me to operate in a reasonable manner, it somehow allowed me to lie, cheat, and steal. Supposedly being a W-2 wage earner stops someone from cheating?

“We, as brokers and broker agents, are hit on all sides and unable to operate in the realm of reasonable business. The CFPB had, and has, good intentions and did many good things. But again, the top of the food chain is where the problems originate and that is where policy is set. Wells Fargo is a good example.

It is ridiculous that I am forced to charge all borrowers and all loans the same amount. Wholesaler A is 1.50 LP versus Wholesaler B which is 1.0 LP. I take loans below $300k to Wholesaler A and am very competitive with that rate. I take loans over $400k to Wholesaler B with lower LP comp, so I am competitive in that market. Big jumbo loan I take to the best jumbo lender I can find and do a borrower paid, and charge whatever will get me the loan. I am happy with .5 on a $1 million loan.

“In my office, our policy is that I receive the same commission regardless of wholesale lender or comp %. But the worst for me is being forced to be a W-2 employee. I am not a true employee. I am commissioned. I have no company benefits. I hang my license on the wall, just like realtors. I am not allowed to deduct all my honest business expenses on Sch. C form, nor am I allowed to utilize the 401k program. I don’t have company insurance. But I am happy as a commissioned person. I just want to be able to take advantage of the tax laws that are available to small business.

“All lenders, wholesale or retail, do not have the same rate structure or fee structure, so why are we forced into very limited situation? Why is capitalism so wonderful for everyone except for us originators?

“I understand the issue of steering. Personally, I never did, and never will, steer a client to a loan and or rate because I made more money. I focus on what is best for the client which is why I have lasted 33 years, and I have clients that go back to 1985. When I work with a new client, my goal is to become their real estate mortgage lender for life. I know I am old fashioned and considered a dinosaur.”

Robert, age 85, marries Susan, a lovely 25-year old.

Since her new husband is so advanced in his years, Susan decides that after their wedding, she and Robert should sleep in separate bedrooms. She is concerned that her new but aged husband may over-exert himself if they spend the entire night together.

After the wedding festivities, Susan prepares herself for bed and the expected knock on her bedroom door. Sure enough, the knock comes, the door opens, and there is Robert, her 85-year old groom, ready for action. They “unite as one.” All goes well, and Robert takes leave of his new bride, and she prepares to go to sleep.

After a few minutes, Susan hears another knock on her bedroom door, and it’s Robert again. He is ready for more “action.” Somewhat surprised, Susan consents for more “coupling.” When the newlyweds are done, Robert kisses his bride, bids her a fond goodnight, and he leaves.

She is set to go to sleep again, but soon Robert is back again, rapping on the door and as fresh as a 25-year old, ready for more “action.” And, once more they enjoy each other fully.

But as Robert prepares to leave again, his young bride says to him, “I am thoroughly impressed that at your age you can perform so well and so often. I have been with guys less than a third of your age who were only good once. You are truly a great lover, Robert.”

Robert, somewhat embarrassed, turns to Susan and says softly, “‘You mean… I was here already?”

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Rob Chrisman