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Originator Compensation Overhaul to Cost Consumers

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.

Related posts:
  • How Mortgage Originators Will Be Compensated By Borrowers Under The Financial Regulatory Reform Act of 2010
  • HR 3915: Mortgage Reform and Anti-Predatory Lending Act of 2007
  • Mortgage Grader: Revolutionary or Just One More Marketing Widget?

  • 8 comments

    8 Comments so far

    1. Jim Klein March 23rd, 2010 4:12 pm

      Spot on, Brian. Hey, why ask mortgage brokers about this stuff? That would be like asking doctors and technicians about health care, or widget makers about widgets.

      For me, you really hit the nail on the head with this…”All parties win, too.” Innocent as that is, it’s the one thing they can’t stomach. That’s how it is when the goal is power over others, instead of power over yourself. Too much responsibility, dontchyaknow.

      Leeches and lemmings are screaming for ever more, while warriors are just itchin’ to shoot for the cause they imagine freedom to be. I’m getting stumped at coming up with any rational answer besides, “Let ‘em all have it.”

    2. Brian Brady March 24th, 2010 8:02 am

      “I’m getting stumped at coming up with any rational answer besides, “Let ‘em all have it.””

      That’s happening in the industry, Jim.

      Good mortgage brokers are switching to direct lenders and working less. Service is down, way down. Everyone is shrugging their shoulders when customers complain and say “what else are you going to do?”

      Many REALLY good brokers have finally thrown in the towel, to say “Let them all have it”, and gone on to other pursuits. I can’t say that I blame them

    3. Rhonda Porter March 24th, 2010 8:42 am

      I believe that banks really want this to happen. It’s in their interest to pay their mortgage bank tellers peanuts. I understand that BOA has all ready changed their compensation program at the beginning of this year. Many banks have closed their mortgage centers and moved “mortgage bank tellers” into bank branches. I can’t go into Chase and make a deposit at the branch without the teller trying to cozy up to me and encourage me to talk to a manager to review my financials–it wasn’t this way before (at the branch).

      Banks can also justify paying their LO’s less since they do not have be licensed with the NMLS–they’re only registered. Licensed LO’s are held to a higher standard and are worth more.

      Any LO worth their salt, or who wants to be paid their worth, will leave the bank and seek out a “non-depository” mortgage company so they can be compensated….unless the Fed mucks it up.

      Banks have far too much influence with Congress thanks to lobbyist.

    4. Brian Brady March 24th, 2010 9:50 am

      Rhonda,

      This isn’t about bank LO compensation, this is about “leveling the playing field” so that ALL originators, bank, non-depository lenders, and mortgage brokers are compensated equally.

      The banks have already cut the compensation to LOs (ask BofA), Now they want legislation that makes all of their competitors to follow their lead.

      Imagine if Wal-Mart cut everyone’s pay to $5/hr and enacted legislation that required Target to follow its policy (for the stability of the industry).

      Tim Geithner is a modern day, real-life Wesley Mouch

    5. Al Lorenz March 24th, 2010 10:08 am

      I’ll bet there are people reading this thinking I’m glad I am a real estate agent because this isn’t happening to me. But, it will. How long do you think the government is going to allow real estate agents to charge 6% on a transaction where, in the government’s mind, the agent didn’t earn it?

    6. Sean Purcell March 24th, 2010 2:11 pm

      For once, I’m going to disagree with you and argue what is normally your point Brian. What the gov’t doesn’t understand (never understands) is that leveling the supposed income / price doesn’t level the actual need. As you correctly point out: there are plenty of borrowers that need more service than a bank lending salesperson can provide. There are also many, and many of your clients specifically, who may or may not need the extra effort but damn sure want the expertise on rates, loan choices, asset allotment and so forth. (Not going to get that from a teller/loan sales person/passbook savings “expert”.)

      Here’s the good news: if there is a demand, there will be price discovery. When the gov’t caps prices, some brokers will succumb to the lowest common denominator of service (ALWAYS the outcome of price fixing), but others will continue to offer more and continue to be in demand because of it. Just because the gov’t professes to cap origination doesn’t mean they actually can; there are plenty of ways for an original originator to answer the demand of clients willing to pay more for more service: clients could join my monthly network and pay for 1 year up front, they could pay me for my detailed White Paper on home ownership. They could subscribe to my newsletter… the options are limitless.

      That’s what’s so great about the marketplace: value creates demand and demand leads to wealth transfer (real wealth transfer, not the theft and redistribution we see by centralized power). No matter how “they” may try to quash it, “we” will always be smarter than they are.

    7. Rodil San Mateo March 24th, 2010 2:13 pm

      One factor that might make the “too big to fail” lenders change their minds on this, once the housing market fully recovers, is greed. When residential mortgage volume goes up, what’s the fastest and lowest cost method to ramp up production for a bank?

      Hire more LOs, increase advertising, rent more office space and equipment? Or go to the broker channel, where costs are paid only when a mortgage is delivered?

      I think the mortgage brokers that survive their current troubles will have a lot of wholesale Account Executives knocking on their doors in a year or two.

    8. Brian Brady March 25th, 2010 10:14 am

      “Just because the gov’t professes to cap origination doesn’t mean they actually can”

      I love the spirit Sean but you know what’s coming: Disclosure of outside income activities, limits on those activities for licensees, etc; we saw it with the NASD

      “Or go to the broker channel, where costs are paid only when a mortgage is delivered?”

      Rodil, we are in agreement but you have to read the proposed order. The Fed wants to make all originator compensation equal. The only way wholesale lenders can enforce that is to offer one or two rate options on a rate sheet.

      @Al That’s a whole other thought for me to address