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Killing An Elephant With A Bazooka

There’s an old saying that talks about “killing a flea with an elephant gun”. I think that may somewhat trivialize the issue at hand and I don’t want to do that. The issue is a big one, a serious one. So, I modified the saying just a bit to establish that I understand the gravity of the situation. What is the issue? Those damn loan officers! What I mean is that regulators, politicians and the media have chosen to blame loan officers (LOs) for the economic meltdown.

Why did people take loans they couldn’t afford? Their loan officer talked them into it! Why did they get approved for those loans? The loan officer pushed loan programs that ignored basic qualification items like income, credit and/or assets! How about those inflated appraisals? It must be because the loan officer had too cushy of a relationship with the appraiser! It goes on and on…

Let me admit some things:

  • The standards for entering the mortgage industry were pitifully low and many unqualified (and potentially unscrupulous) people started selling mortgages. That has now been addressed with testing and licensing.
  • Loan programs were too liberal. Those loan programs are virtually gone.
  • Many consumers got caught up in the home buying frenzy and they began to use their home’s appreciation like an ATM. The correction we are now enduring is fixing that issue.

With all that being said, the regulators have taken steps to corral the cowboys. The results are clear. The number of licensed LOs is down from a high of 450,000 to estimates of about 115,000 today. Those who are left have survived reduced loan products, testing, licensing AND the scorn of a reluctant public who views the LO with a suspicious eye. Those who are left are qualified professionals who are looking to serve their clients with solid financial advice and counsel. There are still some bad apples of course just as there are in any industry. However, the weeding out process has had a dramatic impact already.

But, that wasn’t enough. Bring out the Bazooka – LO Compensation. Effective April 1st (assuming there is no last second change or delay), the way LOs are paid is going to change. Without going into all the nuts-and-bolts, for the most part, the mortgage BROKER (who just a few years ago represented 70% of all loan originations) will become a dying breed with projections of less than 15% of originations in 2011. Individual LOs will now be compensated based on nothing other than the loan amount for a transaction and/or an hourly wage. (Some lenders are working on “bonus monies” tied to some other quantitative and qualitative metrics, but those payments represent a somewhat gray area at the moment.)

The Consequences

It’s too late for whining and there isn’t a likely outcry from a brainwashed public to rise up in defense of the loan officers. But, there does need to be an understanding by every one of the likely consequences:

  1. More Loan Officers are likely to leave the industry as their income is slashed…..estimates of 75,000 LOs by 2012 are not uncommon.
  2. Loan Volume will continue to consolidate to the 4 major banks, some regional banks & credit unions and some large mortgage banks with the smaller mortgage banks and mortgage brokers folding into larger companies or folding all together.
  3. The additional cost to cover the additional expenses for accounting and compliance resulting from this regulation (projected to be 20-30 basis points) will increase the costs of borrowing money.
  4. More loan products (like state mortgage programs that are below market interest rate programs) could go away because LOs need to be paid the same on those programs as they are on other programs and companies will not be able to afford to do that.
  5. LOs will need to do more volume to replace their lower commissions and customer service will suffer.

The good LO is now poised to pay an even steeper price for the LO who was part of the problem but has now left the industry. I believe in transparency. I believe LOs who take advantage of customers (in loan product steering or the timing of the locking in of the loan, for example) have been eliminated or can be controlled in other ways besides this vague directive. I do expect some dissenting opinions on this blog post. However, I am hard pressed to find another industry that discloses as much as we are required to do (in terms of costs) to the consumer. And now we are being told by the government how to dissect the revenue. What’s the next weapon to kill the elephant?


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11 replies
  1. Robby Leviton
    Robby Leviton says:

    I agree with you. This is another the government is getting involved to “protect” people and they are going to end up going from bad to worse. Good LOs will leave the business, costs overall will go up and people will have to work with the largest institutions which only have their LO’s be desk jockeys and not teach the buyer enough to have them really understand what is going on in the process. Another great way the government is hurting the Real Estate industry

    Reply
  2. Toby Williams
    Toby Williams says:

    I thought loan officers were paid based on the loan value. I guess you are saying they are also paid on all those “extra” fees they produce, like rate locks and points collected. You also discuss how many loan offices are now licensed, but fail to mention all those working for the big banks who somehow escaped having to get licensed, just those working for mortgage brokers. Others, who did not pass the licensing test are writing loan under someone else’s name at their companies. Our government is very good at leaving loopholes and they have done so in the license law for loan officers! Let’s all play by the same rules and license everyone meeting with the public and writing the loan. I think if you see LO getting paid on the value of the loan ONLY, then many fees such as points will be reduced. Only time will tell…

    Reply
  3. Gloria Jackson
    Gloria Jackson says:

    Yes, I agree, and Realtos and their clients will suffer along with them. Less LO’s and less banks mean less options for our clients. It only takes a few “bad apples” borrowing money to taint the whole industry. The bad LO’s were not the only people gaming the system. How about those investors who said they were making $200,000 a year when they applied for their loan? Nobody checked. Nobody was required to check. There are many, many good folks out there now who tried to pay their mortgages, got sick, lost their job, or something, and can’t pay. They also can’t refinance because their house is worth less than their mortgage balance. It’s a big mess started by some greedy people on both sides of the aisle and now we’re all paying for it.

    Reply
  4. brad veach
    brad veach says:

    Dean, you drive home the point wonderfully. As a mortgage banker, I had thought that I may be excluded from some of the “brokers” compensation challenges. Regrettably, that is not true. I take great pride in the profession of mortgage finance. However, with the number of cutbacks in staffing (processors, I have do work harder on a loan today than ever. I don’t mind, because up until now the compensation has been ok. Charge a 1 point origination and share in the YSP for another 1/2 point. Our banks underwriting guidelines have become stricter, thus causing more loans to fall out of the pipeline.
    I interviewed with another bank last week and their idea of a LO was a person that took a zillow lead and then turned the file over to a processor. The LO was reduced down to a phone person and the compensation was $400 per closed file. from that banks point of view, the traditional loan officer is being replaced by the internet where consumers pursue all loans via the least expensive price.
    I have worked hard to craft my profession, I am sad to see the present events taking place.

    Reply
  5. David Peller
    David Peller says:

    I couldn’t agree with you more. I deal with many well qualified borrowers and frequently “go thin” on my pricing to beat my competition. Under FRB’s new rules I can no longer compete for business, I simply have to quote a rate and hope I can sell my services. This country’s economic system was built on competition! This legislation will force more consumer to the major banks and we all know what happens when you eliminate competition. Consumers can expect mediocre service at best and the cost of a mortgage will increase quite a bit.

    Reply
  6. Max Leaman
    Max Leaman says:

    This is the best article I’ve seen on everything happening in the mortgage industry. Over the past few years, I’ve witnessed friends, colleagues, branches, and entire mortgage companies leave the industry for good. In April, we brace ourselves for another big change. I’m optimistic, because my company seems to be handling these changes well, but thus far, I’ve seen the big banks benefit and it seems the consumer is once again caught in the crossfire. I also completely agree with your point: mortgage brokers will no longer exist. So many great points. Anyway, your article is truly appreciated.

    Reply
  7. Bruce Beddard
    Bruce Beddard says:

    As usual, another great article written by Steve. However Steve, I would have loved it if you would have encouraged the professionals realtors in your mix to fight as hard to save the GOOD L/O’s as they fight to save real estate issues that help them. All we need now is to have the 3-4 big banks controlling more of the market. That will not help and will only hurt the industry, thus the real estate professional.
    Realtors should stand up and demand that congress get out of the business of regulation since they have no way of doing it in a way that will help the public.

    Reply
  8. Steve Harney
    Steve Harney says:

    @Bruce,
    I would suggest that every real estate professional help their mortgage partner as much as they can. That is why this post appears on the blog. As Coach Bill Hart says, we’re “Better Together”. However, as a point of clarification, I didn’t write today’s post. My good friend, Dean Hartman, did. He writes for the blog each Thursday.

    Reply
  9. Dean Hartman
    Dean Hartman says:

    one other point I failed to mention….with LO compensation being driven by primarily one factor (loan amount), who is going to serve our low and moderate income neighborhoods? They need us most for advice. It’s not good.

    Reply
  10. Todd Triolo
    Todd Triolo says:

    LO licensing and education was long needed and I can even deal with some addition federal and state fees as a result. Sounds like a restraint of trade issue, and good luck as far as benefit to borrower.
    What’s next-Realtor compensation regulation.

    Reply

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