Originator Compensation Overhaul to Cost Consumers

by Brian Brady

Commercial Real Estate Finance Expert
Structured Debt and Equity
Licensed Real Estate Broker in AL, CA, and FL

Author website

I said new legislation would benefit mortgage brokers to the detriment of direct lenders.  In the comments, I feared something insidious might happen (responding to Wayne Long):

WAYNE: “It is interesting that the new rules benefit the broker vs. the direct lender”

BRIAN: It wasn’t by design (which is why I expect legislation that “forbids” my expert opinion on whether a borrower can be approved)

The government-banking complex doesn’t want negotiated rates for any consumer loans.  The government wants to “set” the rates, according to its whim.  That’s price fixing . 

Don’t believe me?  Look at the prestidigitation that just happened in the health care bill.  While you were arguing about the hijack of the health care industry, the Federal government quietly nationalized the student loan industry.

“Good.  Lenders are all thieves anyway!” you snort. 

Think again.  San Diego had a thriving student loan industry until last year.  Thousands of jobs were eliminated with this bill.  Moreover, Grandma can’t buy securities now, collateralized by those student loans, in order to juice up the yield on a portion of her portfolio.  The student loan industry nationalization is just one more way to buy party loyalty from young voters; the base of this Adminstration’s voters.  Loan “grants” will be the “new moniker”, designed to portray the Federal Government as the “kinder, gentler” nanny.

Shall I continue?  When rates fall again (sometime way in the future), the hordes of private companies, wanted to offer graduates a chance to save money, by refinancing or restructuring their student loan debt, won’t be there.  Graduates will be stuck paying above market interest rates, to retire debt.  Forget that the federally-guaranteed student loans inflated college tuitions, this provision raises the overall cost of a college education (the value of which is debatable anyway)

But I digress.

As quickly as you could say “expansion of the size and scope of Government“, did the left hand start new projects, to get you to stop thinking about the right hand’s health care hijack.  Immigration reform is the larger scaled sleight-of-hand but, hidden in the bowels of the Fannie/Freddie takeover, is the anti-consumer price fixing that is being proposed.  Read this:

Geithner called for aligning incentives for mortgage issuers, loan originators, brokers, ratings agencies and insurers so that mortgages are originated and securitized with the goal of long-term viability rather than short-term gains. If government guarantees are provided, appropriate returns should be earned for taxpayers with the assurance that “private sector gains and profits do not come at the expense of public losses.”

Mortgage products need to be standardized and transparency improved as well, he said, and government support needs to continue for multifamily housing to ensure affordable rental options.

Sounds innocent enough.  No originator should be paid more than another, for a consumer mortgage loan, right?  All borrowers should be treated equally, right?   The failure is (like always) in the unintended consequences.

Mortgage brokers deal with those borrowers who don’t fit the banks’ onerous lending policies.  We are compensated to help fit slightly oval pegs into round holes.  We originate good loans, for good borrowers, who need special attention.  Sometimes, it’s counseling how a credit score can be raised so that the lower down payment option is available.  Other times, we go the extra yard, to document a file more completely, so that the underwriter’s job is easier. 

Make no mistake about it, we are compensated MORE than our direct lending salespeople counterparts for that “extra touch”.  Borrowers either pay us higher upfront fees or finance those costs, through the disclosed yield spread premium we earn, by electing a higher interest rate.  Mostly, mortgage brokers can offer that great service at loan terms that are less than what they might get at a direct lender because we have access to wholesale lending rates.

All parties win, too.  Mortgage brokers originate loans at a lower cost to the lender than it would pay its internal employees.  In short, the bankers want their employees to work on the easy loans while they pay us to spend the time on the harder ones.   Most of my business , these past two years, has been getting difficult loans approved, with the very same bank that declined my borrowers a month earlier.  That’s not fraud; that’s expertise.

It is proposed that ALL originators shall be compensated equally.  Brokerage originators will be paid the same way as their banking cousins, regardless of our value or expertise.  Forget consumer-negotiated rates, the mortgage market will become a rigged game.  A rigged against against the consumer and for the industry’s benefit…once again.

PS:  Watch how this one passes like the student loan takeover did.  The Administration wants you to attend tea parties, and scream “No Mas“, while it picks your pockets through rigged mortgage rates.  Who the hell cares about “liberty” when they control all the money?  If it weren’t so damned evil, I’d consider it brilliant.