The Merkley Amendment to the Wall Street Financial Reform legislation limits loan originator compensation to no more than 3 percent of the loan amount. If you want to debate the Merkley amendment, please visit this thread or this thread. From the Mortgage Banker’s Association, here is a summary of how loan originator compensation would be limited under the new Dodd-Frank Wall Street Reform Act HR4173
Prohibition on Steering/Loan Originator Compensation – Establishes new anti-steering restrictions for all mortgage loans that prohibit yield spread premiums and other compensation to a mortgage originator that varies based on the rate or terms of the loan. Would allow compensation to originator (1) based on principal amount of loan, (2) to be financed through the loan’s rate as long as it is not based
on the loan’s rate and terms and the originator does not receive any other compensation such as discount points, or origination points, or fees however denominated, other than third-party charges, from the consumer (or anyone else), and (3) in the form of incentive payments based on the number of loans originated within a specified period of time. Expressly permits compensation to be received by a creditor upon the sale of a consummated loan to a subsequent purchaser, i.e. compensation to a lender from the secondary market for the sale of a consummated loan but creditors in table funded transactions are subject to compensation restrictions.
All fees that enure to the benefit of the lender (the entity funding the loan) as well as any third party mortgage broker, now appear in box 1 of the Good Faith Estimate. The loan originator rarely if ever is earning the total dollar amount in that box. Instead, the loan origination fee is divided up between different people. If the massive Wall Street Reform law passes, loan origination fees would be capped at 3 percent of the loan amount, with some exceptions:
3 Percent Limit – Definition in TILA with the following exclusions (1) bona fide third-party charges retained by an affiliate (2) up to and including 2 bona fide discount points depending on interest rate. Also, excludes any government insurance premium and any private insurance premium up to the amount of the FHA insurance premium, provided the PMI premium is refundable on a pro rata basis,
and any premium paid by the consumer after closing
Consumers have ample opportunity to shop for mortgage rates on the Internet and hear radio advertisements all day long for refinance “rates as low as….” however low they might be that day. We would all hope that consumers are much more savy mortgage shoppers when compared with the peak of the real estate bubble.
Some loan originators believe consumers do not care what their loan originator is paid as long as the consumer receives the lowest possible rate and fees available on that particular day for his/her particular loan needs. I happen to believe the opposite is true, with one twist. Consumers do care what loan originators are paid, when they are educated as to how to understand LO compensation.
Some loan originators hold an irrational belief that consumers couldn’t possibly care about their compensation…that consumers ONLY care about getting the lowest rate because their note rate is the single most important thing affecting the monthly payment and their monthly payment is typically a homeowner’s biggest check he/she writes every month. However, it’s important for LOs to understand that they have a vested interest in keeping consumers in the dark about how and how much LOs are compensated. If consumers were to fully understand LO compensation, consumers would have the ability to better negotiate a lower fee. Since many consumers roll their closing costs into a refinanced loan, this *does* affect a person’s monthly payment because the consumer is amortizing the loan originator’s fee and paying a little part of it each month.
If consumers were forced to pay their closing costs in cash up front at the close of escrow on a refinance, consumers might suddenly become much more interested in understanding how to shop for all the settlement costs.
The mortgage industry trained Americans to serial refinance with very little out of pocket expense and to purchase a home using 80/20 loans with sellers paying all their costs. We’re now requiring more money up front on a purchase money loan but many buyers are still in the driver’s seat asking and getting seller concessions and many consumers still refinance by rolling all their closing costs into the new loan.
There are many different ways loan originators are compensated. Here are a few:
Percentage of the loan amount
If the loan amount is $350,000 and the loan origination fee quoted is 1.75 percent, your loan originator is likely not going to take home a $6,125 paycheck. Typically a loan originator is going to split that $6125 with his or her company in some way. It might be a 50/50 split or perhaps some loan originators will get a better split if they are bringing in their own clients.
On that same transaction, a loan originator may have been able to sell you a slightly higher rate than what you could have received had you known a better rate was available that day. When a loan originator works for a bank OR non-depository lender such as a mortgage bank (no checking and savings) this is called earning “overage.” This LO is going to earn an additional .50 percent of the loan amount in extra compensation that he/she does not have to disclose to the consumer. On our sample transaction, that comes out to be an extra $1750. This may or may not have to be split with the loan originator’s company.
When a loan originator works for a mortgage broker, all compensation, including any “overage” which is also called “yield” or “yield spread premium” is disclosed to the borrower on line one of the good faith estimate and the consumer is shown, on the GFE that the consumer is choosing a slightly higher rate in order to pay his/her loan originator this extra compensation.
Before the 2010 changes in how compensation was disclosed to consumers on the good faith estimate, loan originators might have earned even more compensation through processing, underwriting, and administration fees. There’s nothing wrong with these fees, provided there was actually an underwriter, processor, and administrator doing work for that fee. With the new 2010 good faith estimate, all these fees are now disclosed on line one of the GFE.
Besides receiving a split of the origination fee, other ways of LO compensation might be paying LOs based on the total volume of loans and/or total loan amount each month, an hourly wage with a bonus, a salary, or a combination of different methods.
What’s a fair way for consumers to negotiate loan originator compensation?
Fair can be defined in may different ways. Some LOs prefer to always charge the same percentage of the loan amount: 1 percent, 1.5 percent, 2 percent, and so forth, for all their clients. Yet some LOs believe that’s not fair.
Why should one customer who’s loan amount is $350,000 pay $6125 (1.75%) and another customer whose loan amount is $600,000 pay $10,500 (1.75%) and another customer with a $100,000 loan pay $1,750 (1.75%)
Suppose the person’s loan who paid only 1,750 took more time and effort than the person who paid 10,500.
Why should the consumer paying $10,500 help subsidize the price of the loan for the guy who needs constant handholding?
If a loan originator works hard trying to find the best loan program or the absolute lowest rate (so the consumer does not have to spend time shopping) and she put in all kinds of time and effort, this LO is arguably worth more to the consumer. This is the broker model of originating loans. The mortgage broker LO acts as a third party middleman, an “agent” for the borrower, and helps the consumer select the best fit from lots of different mortgage money choices.
Conversely, some consumers are anal retentive (nothing wrong with that. Takes one to know one) and like to do all kinds of research, spreadsheets, analysis, interviewing, reading and experimenting on their own, sometimes for many weeks or months. By the time this person is ready to select a mortgage, the AR borrower has already selected the mortgage product, rate, and company. This obsessive compulsive has even run a background check on the firm and its history of consumer complaints, knows the name of the CEO, where her kids go to school, what type of loan she currently has on her own home, and what paperwork will be asked of him at application. Arguably this customer has already done most of the loan originator’s job (in his opinion), so why should he have to pay a heft LO fee if he’s just going to fill out an online Internet application, send in a package of paperwork, and close “in as little as 2 weeks?”
Well, anyone in the mortgage lending industry knows that the borrower in the mortgage broker scenario could end up being a bunny file, where the broker/LO only spends 5 hours max on that file whereas mister anal retentive’s file ends up being the nightmare scenario from hell and the low-fee company ends up losing money on that transaction.
I take these two polar opposites as examples because a loan originator’s real life is some of the above but mostly everything in between. A loan originator never really knows for sure how much time he/she will spend on a particular file. This is one of the reasons (I’m sure there are others) why LOs simply revert to a percentage of the loan amount: Because everything washes out in the end.
Today’s consumers are left wondering what the hell happened during the meltdown and really don’t buy any of the crap the industry tries to use to brainwash the world into thinking it wasn’t the industry’s fault. “It was the rating agencies,” or “those greedy Wall Street investment bankers are to blame,” or “It’s the big banks: They are the ones who told us to sell the toxic mortgages.” Somebody needs to tell the industry that the more the industry tries to shirk all responsibility, the more guilty the industry looks. The more the industry points outward at everyone but itself, the more the politicians and regulators will pass laws and rules like what we haven’t seen since the 1970s which gave us RESPA, TILA, ECOA and FCRA.
There is no doubt in my mind that the mortgage lending industry will find creative ways of compensating those that can bring the business in the door.
Here is an idea: Why not pay loan originators by the hour? Consumers can pay their loan originator the way we pay for an accountant, a lawyer, an engineer, a paralegal, and other traditional professionals.
In the above example of a $350,000 loan with a 1.75% loan origination fee of $6125, if we estimate that the average number of hours spent with the loan originator was 5 hours, that’s like paying an originator $1225 per hour. There is no LO on this planet worth over a thousand dollars an hour. But this isn’t an accurate figure if indeed the $6125 fee is split 50/50 with the originator’s company So $3063 would be the originator’s compensation….divided by 5 hours means this LO is charging $613 per hour.
That’s a VERY hefty hourly fee for a person who doesn’t even have to hold a high school diploma to become a loan originator. In fact I have personally now met 5 people who have only finished 8th grade that are originating mortgage loans. Even a 20 hour education requirement and a national exam will not keep predatory lenders away from the industry.
Charging by the hour for an LOs time would serve two purposes: 1) it would motivate people to be more efficient with their time when working with a loan originator; and, 2) it would separate the men from the boys and the women from the girls. By this I mean loan originators with over 25 years of experience would be worth more because of their vast amount of knowledge: These LOs would theoretically be more efficient and competent and since they’d spend less time per file, they would be worth more. On the other hand, a baby loan originator who just received the license is going to be in training mode for a while and would arguably be worth less per hour.
Imagine an LO saying to his or her client, “Mr. AR, based on our initial consult, I estimate that it will take me and my team X number of hours to originate your file. It could be more or less, I’ll give you a weekly or monthly fee sheet as we go along. You can pay me by the hour…my hourly fee is X, or you can pay me no more than 3% total. Which would you prefer? It might be less if you select the hourly rate but it will never be more than 3%.” I will bet you 100% of the time the client chooses the hourly rate for the chance that their fee might be lower in the end.
But will things change all that much if LOs were paid by the hour? Maybe not. The baby LOs will still end up working for the depository banks and the experienced pros will still end up at the non-depository mortgage banks and mortgage brokerage firms. When the Dodd-Frank Bill passes, our lives will all change once again but it’s still a great way of making a living and I know the majority of us will still be here doing just that.
Wow. A lot to digest.
From an escrow perspective:
1) consumers are bottom line oriented and do have an interest in knowing how much it costs and
2) what their interest rate is (but it stops there).
Since January of this year I have experienced exactly one client asking about how to compare Good Faith Estimates (GFE’s) or about shopping. The consumers (for better or worse)place their trust squarely on the loan officer to produce the best terms possible. In my opinion, the new GFE has done exactly the opposite of assisting homeowners to “shop.” It has made it worse. The new GFE allows for lumping of sums (BOX 1 and BOX 4) , which does not itemize what each fee is for. Nor, does the GFE provide for approx. cash to close or cash back which is INSANE. What is common is the old GFE is now coined “initial fees worksheet” which is helpful in itemizing for the borrowers benefit.
I am still of the opinion that compensation tied to rates is inconsistent on its face value with operating under a fiduciary duty framework that LO’s in Washington State have to work under. It cannot occur. That does not mean the LO is not operating “within the framework” of how markets (securities & bond market influencing rates) price loans and is obtaining the very best terms they can get their customer in a fluid changing rate environment that can occur two or three times a day. The consumers certainly can produce a favorable marketplace for earning their business by telling their LO they are shopping, or use a service like Zillow Mortgage marketplace. Unfortunately, using Zillow Mortgage marketplace is not a substitute for a local referral.
We work with a lot of LO’s, so if anyone needs a few referrals, particularly in Snohomish Co, let me know. Rates are very good.
Hi Tim,
What percentage of people would you say actually studies the final HUD, comparing costs to their GFE, reads through their paperwork in advance and reads the note and deed of trust before signing…compared to people who just sign everything without carefully reading the documents?
Jillayne, Lynlee and I can’t think of one instance that a buyer actually had their initial GFE (since the new reg’s in January) with them to sign docs. For that matter, we can’t think of an instance where any really went over page three of the HUD, even though I personally tell them its purpose.
Since we opened in 2003, I can maybe count on one hand the number of clients that brought their initial GFE to a signing I’ve conducted. We certainly have had clients upset that something was not what they expected but that is due to their recollection of terms, not due to having a GFE with them at signing.
Very few EVER get an opportunity to review docs prior to signing mostly due to the fact that loan docs are always at escrow at the last possible day or so buyers can sign (refi clients do get their rescission period).
Clients always read the portions of the Note because I go over all the terms at signing so they have a clear understanding, plus many loan docs are submitted with FAQ’s about the terms in a separate addendum (particularly if it is an ARM which we are seeing much more again.) Nobody (with very few exceptions) reads the Deed of Trust.
The primary documents I go over in high detail are the HUD-1, NOTE, TIL and FHA/VA forms. The other forms are pretty much disclosures, privacy policy, ECOA stuff, IRS stuff, etc….
Washington Federal loan docs are the best: About 1/8th of an inch thick and very clear. By the way, if you want to see a stable market, make the banks/lenders portfolio their loans like they used to.
Jillayne:
You still have not made a convincing case to me as to why LO compensation should matter to consumers. As long as I have been an LO, I still have not had a client give more than a fleeting care about my compensation. It all boils down to the final rate on the mortgage at the end of the day. I know in your ivory tower world this is sacrilege, but it is the reality. I really think you have a very naive and uninformed opinion of consumer behavior as it relates to mortgages.
Again, please find a consumer who cares more about their LO compensation than the final terms of their loan. I really want to meet this person.
Loan A is at 5% and the LO is making $5k in YSP/SRP/Profit or whatever you want to call it. Loan B is at 5.5% and the LO is making $500. Which is the better deal for the consumer? Where does the LOs compensation come in when the consumer is choosing between the two loans? Please show me a consumer who would rather take Loan B just because the LO is making less.
The only point I will concede to you on this is that I do think consumers should know if an LO is being compensated more on certain loan products since many consumers do look to us for advice. This was more an issue in the past when we had option ARMs, but I can see how a consumer might want to know that their LO is recommending something that pays them more particularly if that consumer is not well versed or educated in residential finance options. Then again, if that LO is recommending products based purely on compensation, I would be surprised if they last long in this business.
I recently read about a Major League Umpire who had to have hip surgery due to debilitating lower back and hip pain. He was recommended to a high profile doctor who suggested a porcelain hip replacement in which we learned after the fact (lawsuit) that he had a financial interest in with the manufacturer.
The porcelain hip failed/shattered causing substantial damage and infection. After numerous corrective surgeries, the umpire has been financially wiped out and cannot work due to disability. A very sad story, but one in which we can all learn that no matter what the industry, there is always special interests, back door dealings or incentives that consumers may or may not be aware of that would substantially change the outcome had they known at the onset.
Whoops, sorry Russ. This comment was to be a stand alone, not nested in your comment. My bad.
Hi Russ,
Glad you came by! I was hoping to chat. “Loan A is at 5% and the LO is making $5k in YSP/SRP/Profit or whatever you want to call it. Loan B is at 5.5% and the LO is making $500. Which is the better deal for the consumer?”
I argue that with the Loan A scenario, the consumer could have received a much lower rate than 5 percent with that kind of a compensation spread.
The industry has trained consumers to want the 5 percent rate from scenario A and have their costs as low as scenario B. RESPA and TILA are in place to encourage consumers to rate and fee shop.
What’s wrong with bringing compensation out into the open so consumers can “LO” shop?
If all consumers care about is their rate and monthly payment then why is the loan originator in scenario A earning five grand? For doing what?
I say consumers care way more than their rate and payment because consumers have been burned when rate shopping. Others have had a wildly successful experience with their LO and wouldn’t ever consider going anyplace else because they have lived through the experience of being well taken care of.
I had a group of LO students two weeks ago who work for a firm where all they do is take the loan app. That’s ALL. The processor at a centralized location does everything else and the LO never talks to the customer again. The LO earns $250 for taking the app.
I believe the opposite should happen.
I’d like to see LOs take on way more responsibility for their clients and be compensated for that higher duty.
Loans are getting more and more complex. The average random loan originator knows way more than the average random consumer about all the moving parts in the mortgage machine. Taking on more responsibility means more risk for the originator and LOs will be worth more.
But perhaps you’re right. Perhaps I’m too naive in thinking that consumers care about LO compensation.
Russ and I would love to hear from some consumers out there!
Russ, take a look at what Tim is saying.
Getting a mortgage loan is almost becoming like going to the doctor. There is no way anyone would read a medical journal to decide what’s the best procedure between three different scenarios.
We might do some internet research and interview a second doctor for another opinion but far and away people trust their doctor because there’s no way the average random consumer will be able to gain enough knowledge to equalize the knowledge/power imbalance.
The doctor can do great harm with his/her knowledge so the doctor has a very high duty of care for his/her patient. The highest duty is: do no harm.
What we’re living through is a transition period.
The documents at closing are so complex that nobody reads them.
Consumers “trust” there loan originator.
But there’s not yet that high duty of care across the board (no matter where LOs work.)
At some point in the future, perhaps before I retire, LOs will be brought up to the same type of duty of care that other (classic) professionals owe their clients.
The industry will never do this by itself. Instead it will be done by the legislature state by state or it will be done in one fell swoop at the federal level.
A more painful way is what’s happening right now. It’s being done through the court system where case after case is coming down showing the knowledge/power imbalance and the courts are holding the LOs to that higher standard of care.
Once that high standard of care is in place, the game of whether or not consumers care about compensation will go away. It will be mandatory to fully explain all compensation. In a way, the Wall Street reform bill is taking us closer to the future. It’s painful to have it forced on the industry.
It’s easier if the industry embraces the change.
I shop APR only. I don’t care about the rate. Best APR wins!
APR is where to total cost of the loan is factored into a total interest rate for the loan. It’s the sum of all evils.
In your example above with the 5% 5.5% $5k $500k, just show me the APR.
My point exactly, David. LO compensation is NOT included in the APR calculation because it doesn’t matter.
However, be careful about shopping for mortgages based on APR as there are some flaws in its calculation – assumes 30 year time frame, the items included are not standardized among banks, doesn’t work on ARMs, etc. APR cannot account for the intangibles associated with getting a mortgage. Just because a bank/LO gives you a rate quote with an APR doesn’t mean the deal is actually going to close.
If all closing costs are rolled into the loan then the APR WILL include LO $. I thought?
Here in lies the problem. Now it seems like a shell game.
Let’s say I shop for effective APR then, fee’s + compound interest. I studied engineering economics so I’m kind of nerdy. So yes indeed, all loan costs are rolled into this number. Thank you consumer protection laws at least to some degree not all of us are nerds.
Here’s the simple definition:
http://en.wikipedia.org/wiki/Annual_percentage_rate
APR does not include LO compensation from YSP and SRP because it is not a direct cost and it is already factored into the retail rate that you are getting. If it were included in the APR, it would be double counting and inaccurate.
Example:
Loan A: 5% Interest Rate $1000 in closing costs. APR 5.125% YSP to Broker is $5000
Loan B: 5.5% Interest Rate $1000 in closing costs. APR 5.625% YSP to Broker is $1000
Loan A is the better deal for you. The LO on Loan A may be making $5k in compensation. The LO on Loan B may be making $1000 in compensation. The 5% rate and the 5.5% rate that is used for the APR calculation already takes this into account because the compensation is tied to the interest rate. Ultimately, it doesn’t matter what the LO on Loan A is making because at 5% it is still better than your next best offer even if the LO is making more money than the LO on Loan B. If you were to shop based solely on the LOs compensation, you would have to take the worse mortgage.
The ONLY time that you may see LO compensation in the APR is if you are requesting a “par” interest rate and want to pay points to ensure you get the lowest possible rate available. In this scenario, the LO is removing any SRP/YSP from the interest rate and passing it on to you as a direct cost in the form of an origination fee. In this case, it would be in the APR calculation.
Russ,
You stated that YSP is not included in APR calculation, which is absolutely incorrect.
I’m not responding to your statement to criticize, I just want to make sure that people reading your statement have the correct information.
All YSP is disclosed in Box 1 of the 2010 GFE as a credit back to the borrower, which I’m sure you already know, and in return charged to the borrower as an origination point so that the broker realizes the “profit margin” (which I will get to later in my post), as you call it.
Per RESPA, all loan origination charges (Line 801 on the HUD) are construed as as prepaid finance charges and thus are reduced from the total loan amount as a basis of calculation of the APR.
Also, disclosure of YSP (yield spread premium – broker business only) is required, whereas SRP (service release premium – banks and mortgage bankers) is not. This is because brokers have no “skin in the game”. Brokers, outside of standard E&O insurance, have nothing vested. Bankers, on the other hand, do. Most correspondents have always required monies accessible to them, usually 15-30% of the credit line, to cover buybacks. This is in addition to the E&O insurance. Beginning in 2011, all mortgage shops deemed as “banking” shops will be required to service 5% of all loans originated. This is a good start in establishing responsible lending practices.
Now, let’s take a look at your use of the term “profit margin”. This is a fancy way of saying “markup” and the calculation of both are nearly identical and most people confuse them. They are NOT interchangeable. You are stating that the YSP amount is profit margin. This is not correct. Loan origination and the loan itself, are non-tangibles. Nothing was manufactured, purchased, or leased. Nothing was created by you or your company that played an integral part in lending the money to the borrower, therefore there is no actual profit margin by definition. Profit margin is calculated as (sales realized) minus (operating expenses plus cost of goods sold). The amount is divided by the cost of the goods sold (whether the cost is based on purchase price, lease price, or manufacturing/production cost). The reason I say NO profit margin can be calculated is due to the fact that service related companies who produce nothing of a tangible nature have an incalculable profit margin…there is no cost of goods sold to divide into. The YSP (along with ALL FEES paid to the broker-fees not costs) should be calculated as PROFITS only (as a fixed amount). The calculation for markup (as a fixed amount) in the case of mortgage lenders would be: (YSP or SRP plus lender fees) minus operating expenses. You have the ability to offer the customer a “par rate” paying you nothing “out the back” but you choose not to. You should be receiving an hourly wage no less than your State’s minimum wage (if you aren’t, your company is violating labor laws) , so you are opting to raise the rate to increase your overall income. This is your option and you are entitled to do so, but stating that “loan officer compensation does not matter” is wrong…it matters entirely. You may not be satisfied with minimum wage and raise the rates to your borrowers in return for compensation. I will state again that this is perfectly acceptable. You just need to realize exactly what you’re doing and why you’re doing it.
Joe:
YSP does not affect APR because it is credited back to the consumer. It is charged as an origination fee and then credited back effectively netting it out of the APR calculation. It is like adding 1 and then subtracting 1. You are left with ZERO. Look at the itemization on the TIL assumptions page. The only time compensation will affect APR is if the consumer wants a par rate and all comp is charged as an origination with no YSP whatsoever. Most consumers absolutely do not want to pay points.
Fully aware of the technical differences between srp & ysp. However, at its core it is they are the same as far as consumers are concerned. As a banker, we take a little more risk POST CLOSING with our SRP, however, the net effect is still the same as far as how the loans are priced.
You are splitting hairs with the profit margin and markup. The whole hourly compensation thing is an entirely different discussion.
Most consumer aren’t as dense as the politicians want to make them out to be. Still waiting on someone to find this consumer that wants the higher interest rate loan in my example above and explain how the YSP factored into their decision. I suspect the crickets will be chirping for awhile.
Even though commenting here has gotten to be a waste of my time because we lost the link back to my web site, I have to say comparing a Loan Originator, or mortgages, to a doctor is really a reach.
I kind of went along with, a mortgage person was in any way comparable to a Real Estate agent, but a doctor is ridiculous.
Lenders lend at a rate of return. The borrower either takes the terms or not. It’s not the other way around.
Hi David,
Yeah, you’re right. It IS a stretch to compare a loan originator to a doctor. The pre and continuing education requirements, liability, duty of care, duties of informed consent, and so forth, are all remarkably different. How about comparing LOs, who are emerging as a professional group, with paralegals or CPAs?
Loan originators are transitioning into a group of professionals and leaving behind the classification of retail salesmen.
When that transition is complete, they will be required to fully explain ALL compensation to their clients and will not be able to have a hidden side agreement with a lender to sell a homeowner a slightly higher rate in exchange for extra compensation at or after closing….whether or not the LO holds the opinion that his compensation matters to his client.
Hi Russ, “APR does not include LO compensation from YSP and SRP because it is not a direct cost”
Hold on.
If a mortgage broker LO will be earning extra compensation via YSP that compensation is now included on line 1 of the GFE as a “loan origination fee” and definitely is included in the APR calculation.
True, but it is also credited back to the borrower which should wash out any effect it had on APR. The fees above and beyond the YSP that are not being covered by the broker would affect the APR.
Example:
Lender fees are $1000 and the YSP is $4000 for a total origination of $5000 in Box 1. The $4k YSP is credited back to the borrower in box 2 which would lower the APR. Only the remaining $1000 is left in the APR calculation. The YSP is disclosed, but still does not affect APR
Admittedly, I don’t concern myself with this all that much because I bank about 99% of my deals these days, so I could be wrong. I couldn’t find a definitive answer and most seem to think it does not affect APR.
However, this still does not change the fact that the LO compensation is still irrelevant to the overall deal that the consumer gets. I agree with you that things are changing, some for the better. However, limiting or restricting LO compensation or enforcing over disclosure for something that has no effect on the consumer’s deal is just bad policy making imho.
The mortgage business is over burdened with disclosures which already makes it hard for the average consumer to understand. The last thing we need is more dead trees to add to the pile.
Thank you Jillayne for staying on point.
I recently had this conversation regarding closing costs on a refinance with a past client.
Me: Take the amount you pay in costs for the refinance and divide that by the amount you save and calculate your break even date.
Past Client: There are no costs.
Me: Consider the closing costs as if the money you are paying for them is coming out of your savings account.
Past Client: There are no costs.
Me: They are being added to the principal of the mortgage?
Past Client: Yes
Me: Then not only are you paying them…you are paying them with 30 years of interest. So take the closing costs, plus 30 years interest on those costs, and divide that by the savings to decide whether or not doing a refinance is “worth it” to you.
It’s not about the $30 a month you save…it’s about the $7,000 it might cost you in order to “save” $30 a month.
If you save $150 a month (which was the case because the refinance was about both eliminating the PMI and reducing the interest rate) and it costs you $3,000 (financed for 30 years at 4.5%) then it is costing you approx. $7,000 ($3,000 with 30 years interest.) OR calculate the interest on the “hold period” if you know it vs. 30 years. If you plan to own the house for 10 years…calculate the interest on the cost to refinance over a 10 year period.
Cost = $3,000 financed. Hold period 10 years. Interest over 10 years on the refinance costs = $1,350. Total cost of refinance $4,350. Savings $150 a month. Break even = 29 months. Savings if you hold the property for ten years is $18,000 minus $4,350 cost of refinance = $13,650.
In the instant case the “gamble” is that the new appraisal will be high enough to eliminate the PMI. Since it is an FHA, it’s possible you would deduct from the cost to refinance any up front PMI that may be refundable. Also it is best to do the math on an after tax basis. If the appraisal comes in too low to eliminate the PMI, you have to calculate based on interest savings only, and likely cancel the refinance given the difference in rate is small and it is the elimination of PMI that made the project worthwhile. So be willing to forfeit the cost of cancelling after you have the appraisal in hand.
Maybe it’s “too complicated” for the Average Joe…but all the more reason the Loan Professionals have to stop acting like there is NO cost because the costs are financed!
Many are saying that the consumer “doesn’t care” about the cost if the costs are financed. It is your job to make sure that they DO “care”, not say “oh goody, we don’t have to be competitive as to cost as by hiding it (by rolling it into the note amount) and saying it’s “free and no cost” we can pull one over on the borrower.
If “your” consumer “doesn’t care” about the cost, it is because you misled them into thinking that they should not care. Every refinance should come with a calculation of “break even” date. If the costs are financed, the interest on the “rolled in” costs should be part of the calculation.
Consumers should absolutely care about when they break even on the closing cost–that’s far more important that how much the originator is paid IMO. With lifetime low rates like we’re seeing, soon consumers with rates in the high 4’s will be jumping to refi to try to catch low 4’s… not knowing what their longterm plans are and losing site of breaking even.
The appraisal factor is totally out of our control… and no LO should guarantee that a home is going to come in at a certain value. The borrower needs to be prepared that with a refi, they may risk the appraisal fee.
Ardell, you are correct. However, your example isn’t really the same thing in the context of the YSP/SRP issue as we aren’t exactly talking about financing closing costs by rolling them into the principal of the loan amount. In most cases, YSP/SRP is not a direct financed cost to the consumer. YSP/SRP have little to do with the final terms of the loan which is why consumers don’t care about it.
Consumers care about the costs, but not LO compensation. Cost to the consumer and LO compensation are not necessarily the same thing.
Russ,
I’m pretty sure the YSP/SRP would be picked up in my calculation on the “amount saved” side of the calculation. If YSP/SRP pumps the rate, then monthly savings would be less, and that cost would be apparent in the calculation, and not omitted as you suggest.
The $150 savings a month could be only $140 a month, as example, due to the YSP/SRP differences. Consequently any consumer using a total cost divided by monthly saved would be taking all costs into consideration when calculating the “break even” date including the YSP/SRP.
Am I correct that the YSP/SRP difference from one lender to another will show in the new monthly payment?
Not necessarily. This is why I keep going back to keeping it simple. If a consumer calls around to five different mortgage companies the LOs will be compensated five different ways and there will be five different YSP/SRPs. The same wholesale bank pays different YSP/SRP to different brokers based on their volume, quality of loans, etc. Shopping for a mortgage on LO compensation is inconsistent at best and does not guarantee that the consumer will get the “best deal”
When the consumer talks to those 5 lenders, they typically are going to go with the cheapest final terms because that is what they are paying ultimately.
Again, Loan A is at 5% with $1000 in closing costs paying $5k in YSP. Loan B is at 5.5% with $1000 in closing costs paying $500 in YSP. At no where in these two loans does the YSP/SRP factor into the consumer’s decision as to which is the better deal for them.
You can argue that Loan A could be cheaper still and maybe the consumer could get 4.875% saving additional money as you suggest since the broker is making $5k and maybe would do it for $4k instead. The problem with this is that the brokerage with the 5% is already the lowest in the market and has no incentive or reason whatsoever to continue to lower their rates/profit margin. The savings you speak of do not exist and are fabricated in this context.
Regarding Tim’s comment
Consumers no longer need to bring in their Good Faith Estimate since the HUD compares the fees side by side. They could bring it in if they wanted to however, the fees are not line itemed on the GFE as it is on the HUD.
I also agree that consumers are bottom line oriented… at least most that I deal with are. I’m not saying they don’t care about what I’m paid–but what they care about most is “I’d like this rate at that cost–if you can do that, we have a deal”.
Russ, your scenario is suspect.
“Again, Loan A is at 5% with $1000 in closing costs paying $5k in YSP. Loan B is at 5.5% with $1000 in closing costs paying $500 in YSP”
I argue that the note rate for Loan A would be higher than the scenario in Loan B if the lender is paying the loan originator $5k.
Actually it is not suspect… since you won’t use facts, I will.
I had a client who called regarding a refinance. Too Big to Fail bank phone officer quoted him 4.875% interest rate. I can do the same deal at 4.5%. At 4.5% I can make $6k gross SRP on his loan on a 30 year fixed rate mortgage. If I priced the loan similar to the TBTF Bank, the gross SRP would be north of $10k. I will guarantee that I am making more at 4.5% than the phone officer at TBTF bank is at 4.875%. To make matters worse, my 4.5% would be sold to the TBTF Bank post closing! I hope you seriously don’t think the phone officer is going to get that $10k at TBTF Bank. The bank is keeping that overage much how Rhonda pointed out in a previous post.
To further illustrate my point, I have a range of commissions at 4.5% from $6k down to $1400 right now on the same exact loan among our different investors. What you fail to realize is that all brokerages are not equal and do not have access to the same loan products and wholesale lenders which is why you get situations were an LO can be making multiple times the commission at a lower rate than the next best competitor because the competitor does not have access to same cheap money. This is why YOU CANNOT USE LO COMPENSATION as a proxy for shopping mortgages. It is utterly irrelevant, inconsistent across lenders, and has nothing to do with the final terms the consumer will pay.
We use other people’s money to control a property until we can pay it off. There is no origination. A lender is investing in a property. It’s like a rent to own.
We take the money for thirty or fifteen years so we can have an option of the lower payment, but the goal is to pay the property off in 3, 5, 7, 10, or at an extreme 15 years. We take the thirty year money with the idea of paying with future dollars.
The compensation was fine as long as we were inflating the prices. Now we need to cut the costs, get as close to the investor as possible, and stop playing with phantom equity.
In other words, you can give all the classes you want, but the consumer needs to understand they are giving a gift of cash to an investor. The buyer, borrower, is doing the investor a favor. The investor has a security in foreclosure.
So to have some one negotiate the best terms for money is a paid skill. The cheaper the money the more you compensate. Otherwise $500 is way too much.
Hi Russ,
Thanks for this new scenario.
Gross SRP to me means you’d have to compare that to the gross SRP the too-big-to-fail bank is making and not compare it to what the bank loan officer individually is making.
Sounds like you own a mortgage bank when you’re talking about gross SRP.
Compare gross to gross or net to net please.
For our readers:
SRP and YSP are DIFFERENT.
Servicing release premium is earned after the close of escrow.
Yield spread premium is earned AT closing.
PLEASE NOTE EVERYBODY KEEP COMMENTS IN-LINE WITH THE NEWEST COMMENT AT THE VERY BOTTOM. THANK YOU!
Jillayne, Russ is referencing a post that I wrote about how a BoA LO was promoting they have no overages because they really care about the consumer. It’s no secret that BoA has recently changed their compensation program for their LOs — so just because the Bank LO isn’t making any “overage” or revenue on the “back end”, if I can offer a lower rate at the same or lower cost BUT the “catch” is I may make more revenue, should the consumer go to BoA just because they pay their LO’s less?
I don’t have any beef with how much a loan originator makes per deal, provided the consumer has a chance to know about that compensation and ask questions about that compensation.
That only seems fair.
Rhonda, if you’re offering a lower rate than BOA but making more revenue, isn’t it fair to say that the consumer’s rate could have been EVEN LOWER if the consumer knew ahead of time what the total LO compensation was, compared it to other LOs who are disclosing their compensation, and asking the LO:
CAN I GET A LOWER RATE BY PAYING LESS IN LO COMPENSATION?
That’s the question no loan originator wants to hear but I guarantee you SOME company will figure this out and be the one to get those customers who, once educated, will care.
Right now the loan originator with the highest duty of disclosure of ALL their compensation is the loan originator who works for a mortgage broker.
Jillayne, not all LOs should be paid the same IMO. I just got off the phone with a lady trying to help her Mom with her refi. She’s been dealing w/one of the big banks for 3 weeks trying to do a Home Affordable refi. The LO is a complete idiot…I was able to provide her more information in 5 minutes than this bank LO has in 3 weeks.
It’s no wonder bank’s pay their LOs less.
I think consumers should have a choice and do have a choice. They can go their “trusted” bank and work with a mortgage teller who probably doesn’t make as much as I do per loan (but the BANK IS MAKING MORE FROM THE HIGHER RATE–this is a point that you’re miss-J)…or they can select a LO who is not dependent on bank fed transactions.
LOs (currently) have a choice too. In fact–if I were to match bank rates–even though it looks like the fees may be less–it would be gross how much I would make…but I don’t. I price rates where I think it’s fair and for what I feel my value is.
Jillayne, do you see a difference between how LO’s and real estate agents are compensated? Currently consumers have the freedom to select agents based on commission structure. An agent could decide that one transaction is easier so they’re going to reduce the commission or that another is going to be challenging, so they’re going to ask for a full commission. Both the agent and the consumer have choices.
Why should this structure be any different for a mortgage originator?
@ Rhonda:
I think the big difference between LOs and Realtors is that Realtors don’t really have a product to sell, whereas an LO does which is the final terms of the mortgage. Because of this slight distinction, it is impractical to shop LOs by their compensation. Also, all Realtors have access to all properties for the most part whereas not all LOs have access to all mortgages (specifically the cheapest).
While LOs do a lot of advising, counseling, etc at the end of the day the final product is the mortgage which is a rate & term (the specifics of which are important to a consumer). Realtors on the other hand just basically provide counsel on buying a home. Their service the provide is constant and can be disengaged from any particular property where as the LO’s work cannot be separated from the terms of the mortgage.
Consumers CAN shop LOs by their commission or SRP/YSP. But as I have pointed out, that does not mean the consumer is getting the best or cheapest mortgage. It just means they are paying the least amount in commissions.
The ONLY way LOs could truly be like a Realtor is if every LO had access to same exact lenders at the same exact wholesale prices and LO compensation was constant across the industry. Instead of being w-2ed we would be 1099 like Realtors. Brokerages or Banks couldn’t “pad” rate sheets or hide srp, etc. There would have to be complete and total transparency. Wholesale mortgages would have to be done through an MLS like apparatus so every LO has access.
I am so grateful for these threads.
Yes, it does appear I do care how much a LO is making. I care how much a servicer is making, because it’s my money.
You are talking about the money I gift to the lender/investor in “my” property.
Russ, it sounds like you have some claim on my money, my gift of cash to the investor.
It’s a transfer of funds from the investor, that’s what you are selling. The rate, and terms should be as acceptable as possible to my business plan. That’s what a home purchase is, it’s a planned investment.
The Real Estate agent may not bring anything to the table, but it is sounding like LOs are about the same.
I have had a saying for years that everybody has a Real Estate license, or they are originating loans, some do both.
Aren’t these people “salespeople” for the bank/investor? Landing the coveted customer with the best mortgage deal is the key here and if the bank/investor wants to pay LOs $500 or $5,000 then that is their business!
Keep in mind that many companies that compete using the questionable in vogue marketing strategy of “transparency” will work out a compensation strategy to keep their salespeople happy. It may be a quarterly or year-end bonus structure.
What is the ratio of mortgage applications to actual closed loans? Rhonda or russ?
Doug, Russ may have figures on applications to actual closed loans–I should track my “closing” ratio but I don’t. Some of my clients may start an application and not close for a year while they’re looking for their home and some folks never make it to application…maybe they’re just a rate quote or they need to work on credit, etc.
And I agree with you…I don’t see how what I’m paid should matter if the consumer is getting a better deal with rates/cost.
If lender “A” is offering 4.75% with $2000 in closing cost and making $500 in compensation and
lender “B” is offering 4.625% with $1500 in closing cost and making $1000 in compensation–how does this impact the consumer?
Some lenders may be on different compensation programs due to their experience or value in the market place and the consumer can shop.
Doug, you are correct. It doesn’t matter what profit margin or LO compensation is built into the deal if the consumer is getting the most competitive terms. Yield Spread Premiums/Service Release Premiums and LO Compensation just muddies the water and is of no relevance to anyone.
I would say 65-70% of the apps I take eventually close at some point. It used to be around 95%. There is a lot of fallout due to appraisals, condo issues, subordinations, etc. Most deals that come across my desk that don’t close are due to B.S. technical underwriting problems, not because the borrower isn’t qualified.
I, Joe Plumber, am shopping for APR with financed, not out of pocket closing costs. I want the lowest one. Please provide it to me.
When consumers are financing their closing costs, the consumer is paying LO compensation by amortizing the compensation over the term of the loan. The consumer IS paying a small piece of that LO compensation every single month.
One of the differences between a salesperson and a professional is that the salesperson doesn’t want to or have to explain to the consumer his/her compensation or why it matters.
The professional has a high ethical duty to make it perfectly clear to his/her client WHY the professional’s compensation DOES matter to his/her client.
I could go on, but I have a class to teach this morning. Have a great day, everyone.
Jillayne, you pay a piece of someone’s compensation on every good and service you buy. Do you want to know what everyone you come in contact with is making off your purchase?
Do you disclose your profit margins on the classes you teach to your clients? Do you think your client’s should have a right to know? After all, if they knew your profit margin they might be able to negotiate a lower cost for the classes right? Or do your clients just compare what you are offering at a certain price relative to other educational services because ultimately, what you make personally or as a company in profit is of no concern to them?
Maybe our politicians should pass a law that says every good and service must disclose a profit margin. If we want transparency, everything should be transparent, right?
Eh, the straw man fallacy doesn’t work for me, Russ. A simple retail purchase or purchasing a continuing or pre-licensing education class surely has some consequences.
However, the consequences of purchasing a mortgage loan are far more grave than a simple retail transaction. This is why loan originators are being pulled towards becoming more like professionals and less like retail salesmen.
By the way, National Mortgage News is reporting that loan originator compensation limits would go into effect immediately upon the President signing the Wall St Reform bill.
http://www.nationalmortgagenews.com/premium/#1279123200
Jillayne:
You are a true politician… love how you dodge the questions and counterpoints. You should really run for office.
I don’t have any disagreement with you that LOs need to be and will be pushed to being like other professions. Where we disagree is how to get there. I am against disclosure because it does nothing to help the consumer as I have demonstrated to you time and time again. I am staunchly against regulation/legislation just for the sake of it versus having appreciable impact to help consumers. In addition, as many have pointed out, a lot of this feel good stuff actually raises costs to consumers instead of helping them.
But alas, it is too late so we will be stuck with yet more dead trees with increased disclosure and even more confused consumers.
Thanks again Rhonda! Your blog really is a good one.
That’s scary if people are “uneducated” and may not have the right specific training, but originate the largest financial investment of people’s lives!
Hi Russ,
Regarding the cost of laws/rules being passed on to the consumer, yes I agree that there are many more costs involved with originating a loan, however, since consumers and consumer advocacy groups typically are behind the laws intended to help the consumers, can we assume the consumer is happy with paying a higher price for their loan?
Actually, no. I think consumers want disclosures but they ALSO want the lowest interest rate possible for the lowest fees.
The company that can figure out a way to minimize costs while also providing competitive rates and fees and also good customer service will survive and thrive. This has been true in my lifetime and will likely continue to be true long after I retire.
“I am against disclosure because it does nothing to help the consumer”
Russ the loan originators who figure out how to use disclosures to HELP the consumer will win this game.
Jillayne, National Mortgage New’s info on when the LO compensation will change is debatable:
This is from IMMAAG (a service I subscribe to):
“The Dodd-Frank bill will almost certainly become law and in the very near future. But unless someone from National Mortgage News or K&L Gates can dispute the language about the effective dates, IMMAAG wants to point out to its registered users and subscribers that we do not concur with the effective date assessment offered in this article and we believe some fact-based information about the impact of the bill on mortgage products may be off base, too.
Title XIV, which contains most all of the mortgage language and certainly all of the compensation language is clear that its effective date is tied to the date selected for the transfer of functions to the new Bureau of Consumer Financial Protection, which per Title X can not occur for at least 6 months, probably 8 months since 8 Director level bureaucrats are given 60 days just to decide the date. After that date the regulators may take up to 18 months to finalize the regulations and Title XIV is clear that only when that happens do the provisions of that title become effective, then there is another 12 months allowed for implementation.”
Hi Rhonda,
Thanks for that update! Let the lawyer interpretation battles begin!
Hi Russ,
I thought of an example from my own life that might be helpful. Several years ago I had to make a decision whether or not to pursue legal remedies against a person. I had ample evidence to support my position. I paid my attorney by the hour to help me figure out what to do. She laid out all the possible consequences of each decision including a detailed explaination of her compensation. Based on her experience it was her legal opinion that I not hire her to sue that person. She talked me OUT of paying her a very large fee because, all things considered, it was not in my best interest to do so, even though I would have likely won the case. Sometimes there are more important things in life to consider besides winning, such as being able to collect the judgement.
If loan originators only want to be paid to sell a product, then I agree with you. Let’s just leave loan originators in the classification as retail salesmen and their compensation really doesn’t matter all that much.
If loan originators want to be paid to counsel, then let’s pay LOs for their time. (this is what I support!)
If loan originators don’t want to be paid to counsel, then let’s pay them like a retail salesperson.
In my class today I met a loan originator who simply takes applications. He does not do anything else. The loan app is handed to the processor who does everything: Processor completes the GFE and TIL, takes responsibility for mailing out all disclosures and redisclosures, talks to the customer, gathers the info, sends the loan to closing. This LO makes $285 per file.
A bank would love this set up because the bank can control and fix origination costs and keep the extra profit for itself.
Wow. Now David’s customer, Joe the Plumber could shop for a mortgage and select the lowest APR. It’s possible that my student’s company would be able to quote the lowest APR since origination costs have been sliced to match the value of the service provided by my student.
Unfortunately, lowest APR doesn’t necessarily mean that a customer is well served.
Here’s another example. Same class different student.
Student has refinanced 8 times during the past 7 years. Why? Because his mortgage loan originator said rates keep going down and each time he refinanced he was able to lower his monthly payment.
(Recall Russ, that one of the things I keep hearing you say, please correct me if I’m wrong, is that customers only seems to care about their rate and monthly payment because that’s what the customer sees every month when they write their mortgage checks.)
He said that each time he refinanced, the loan originator said it was a “no cost” refinance. He said the refinance was not costing him anything! He was thrilled because his payment went down each time.
Please tell me how this consumer did not benefit from a more complete, accurate and honest explanation of loan originator compensation as well as the “costs” to refinance 8 times.
Please consider the equity the homeowner would have achieved if he would have simply paid down the initial 30 year mortgage to a point where only 22 years were remaining on the initial loan…or perhaps the non-negative equity outcome.
Thank you Jillyanne once again for getting to the heart of the matter. Russ, you have absolutely no right to my money, none what so ever. This is not a matter of retail sales, it’s a 30 year obligation to pay for the use of money.
The fact you are side stepping that language is the reason for this change. The consumer is using the money to finance a business plan. The goal is to pay off the mortgage.
The only question your consumers should be asking is what the retrun will be on the investment in your product. Your product is financing an asset in the family portfolio.
More importantly, that asset is the security for billions, if not trillions of dollars, of investment dollar profits. We are now seeing how worthless those securities are.
The news today is that foreclosures hit a million. That will be a drop in the bucket. Banks are holding REO sales at about 20% of first position loan value. That will go out the window in the next two years.
All that “due to B.S. technical underwriting problems, not because the borrower isn’t qualified” are just window dressing. Underwriting should be made to explain value of the asset as opposed to promise to pay. Securities are the equity, and in today’s market place there is no equity.
Those loans you have pumped out in the past two years are without equity position. You have generated promises to pay. The only equity that these people will have in the next five years, ten years, is the reduction of principle balance.
The higher probablity is that most of those loans, in the past four years, will default.
What happened to my picture? Shouldn’t my Face Book picture show in my comments?
@ David:
I think you are confused as to how mortgages are originated and the primary function of an LO. If a bank chooses to pay loan originators for a loan, what business is that of yours? Do you care about the terms of the loan or who the bank is paying? The two don’t go hand in hand which is the point that you and Jillayne keep missing.
The biggest cost associated with mortgages is actually finding consumers. It is cheaper for a bank to pay an LO to bring in business than for the bank to do it themselves. It is very expensive for banks to advertise, etc. This is why banks that do a lot of advertising are hardly ever cheaper than simply going to a referral based LO who can generate business more efficiently.
This goes back to my point that an LO at a bank making less than half of what I typically make per deal, still can’t offer as competitive terms as I can selling the loan back to that bank. Good LOs can generate tens of millions of dollars in loans with very little overhead and cost relative to the banks trying to do it themselves. This is why that YSP/SRP spread is there for the LO.
Middle men are often cheaper than going direct. Every industry does not benefit from cutting out the middle men…
@ Jillayne:
Your example of the attorney is not a direct comparison. When dealing with an attorney, you do not have a tangible product. You are paying for that attorney’s knowledge and expertise. The end result is generally the same. You win the case or you lose the case.
With an LO, the consumer may be getting knowledge and expertise, but the end result is a tangible product which is the mortgage terms of the loan. Ultimately, the consumer cares about their loan terms because that is what they are stuck with for the life of the loan. This is why all the other stuff by in large winds up being irrelevant because it isn’t a huge part of the decision making process.
Loan A is either better than Loan B or it isn’t. No where does SRP/YSP disclosure change that fact or come into the decision making logic.
Hi Russ,
“This is why that YSP/SRP spread is there for the LO.”
Fascinating that some loan originators still hold the belief that the yield spread premium is there for the loan originator.
You know, I’ve met many loan originators who hold the opposite belief. They work at banks, credit unions, consumer finance companies, mortgage banks, and broker shops. They believe that YSP or a bank LO’s overage is there for the consumer.
(SRP is definitely not the same as ysp or a bank LO’s “overage.” I am just talking about profit earned at the close of escrow not secondary marketing profit.)
Hi Russ,
By the way, thank you for having this fun conversation on the blog with us. I definitely enjoy talking with you because I always learn things from you.
“Loan A is either better than Loan B or it isn’t. No where does SRP/YSP disclosure change that fact or come into the decision making logic.”
I see your point. If LOs are only selling a product, your compensation isn’t important…..and LOs should be prepared to watch their compensation go down, their responsibilities go down, and their duties to their clients go down.
If LOs are providing a service, their compensation will go UP, like other classes of professionals. The LO’s duties and responsibilites will also go up….we are seeing the latter….including a duty of disclosure of compensation. We start with third party LOs and broker YSP disclosure on the new GFE. Soon bank LO “overage” will also need to be disclosed. Watch it happen.
@ jillayne:
Further, serial refinancing has nothing to do with the YSP/SRP of the LO. Yes, the borrower is concerned about the terms of their loan. Where the LO fell down along with the borrower is that they weren’t educated about benefits of shorter amortizations which again is a separate issue.
What you keep failing to understand is that LO Compensation/SRP/YSP is not consistent and fixed across the industry nor is it 100% related to the final terms of the product. Therefore, you cannot use it as a proxy for evaluating the most beneficial mortgage terms.
A borrower attempting to negotiate what they THINK the bank or LO is making is simply a fools game and takes their eye off the ball which is the terms of the loan.
Here is a good article on it why it doesn’t work:
http://www.searchlightcrusade.net/2009/02/just_because_compensation_for_1.html
Jillayne:
YSP is simply a profit margin. Where banks shot themselves in the foot is not calling it that but instead using YSP so it sounds a lot more nefarious. Profit is there for the company, not the consumer. Remember, wholesale rate plus YSP/SRP = retail rate. The concept isn’t that hard.
LOs would be disintermediated if getting a mortgage were a lot easier. In fact, I would argue we were on our way before the bubble burst. As u/w became more lax, the value of the LO was dimenished because it didn’t take much to qualify and knowledge of guidelines, etc was not important. Just needed a FICO score and down payment (not even that in many cases). This is where the consumer’s focus on rate stems from because the mortgage was truly becoming a commodity and there was no way to distinguish between different LOs and banks becuase the end result would be the same – a mortgage at terms the consumer wanted.
However, in the current market, a mortgage is a still a commodity, but the process of getting one is not. As a result, the LO is much more valued because “phone officers” don’t have the skills necessarty to get a file from app to closing for $250/file nor can they cheaply and efficiently bring in business which is ultimately the value proposition of the LO to the brokerage/bank. The lowly compensated LO model simply does not work because the indirect costs associatd with lowly paid LOs is too high and runs them out of business.
Take my company for example. We have 100 LOs. The top 10 LOs probably close close $500 million in loans. Most of us make pretty hefty incomes because we generate a lot of business. In addition, those loans cost very little by way of marketing because the LOs have the relationships with the consumers/realtors and other referral partners. It would take an ARMY of $250/file LOs to replace the top 10 guys, not to mention the huge amount of cost that we don’t have now just to make the phone ring at the same level we do. This doesn’t even factor in the increased operational cost of having back office staff work on crappy files that the “phone officers” are too stupid to know have no chance in hell of closing since they don’t know guidelines from their elbows.
This is why all those boiler room shops went out of business so quickly while established LOs keep on trucking.
Yes, Russ, I do care. After reading these comments I most certainly want an accounting of how Loan Originators have been paid.
You seem to be confused about the function of investment in Real Property. You side stepped the issue of the security for our financial markets entirely, while concentrating on how much money you make. You make a lot of money.
Mortgages are extremely suspect. It will take decades to sort it out, but in the mean time I want to see much more government intervention, over sight, and regulation of the industry.
let’s try this.
I had a comment but after spending a half hour crafting it Raincityguide.com won’t let it post. What’s up with that?
This happens to me a lot here. What I took to doing is saving the cooment to Word before submitting, then I cut and paste the comment back into the reply field. Some times that doesn’t work, but if I do two comments. instead of one long one, it will submit in two parts.
I also noticed that you, like I have your profile set to facebook as your user name. I did not chose this for myself, it’s done by the system here. That may be a part of it also.
Yup, I linked it to my Facebook when it asked me too. I don’t know if that’s the issue or not. And it Raincity won’t let me change it now, either.
Cory, I tried to find your comment to see if it wound up in moderation (first time comments often do) or spam…I’m not finding it. I’m sorry.
Hopefully this works.
Discussed in this post was the fact that loan officers don’t make 100% of their commission, that is it split with the brokerage. That is true and something many don’t know. They just look at the figure and think the LO is making this ton of money.
Something that isn’t addressed though is how that money is used. An independent loan officer is a small businessperson. Unlike a salary plus commission loan officer at a bank, the independent loan officer must pay for all their marketing to attract clients, just like the sandwich shop owner down the street. This includes websites, direct mail, advertising in home buyer magazines, business cards, courting Realtors through lunches, golf, etc.
(…cont) I have found that sometimes my marketing budget runs as high as $500 per closed loan.
And unlike banks, 99% of brokerages don’t pay for the loan officer’s advertising and marketing efforts. An independent loan officer doesn’t even get free business cards with most brokerages. Many brokerages don’t even offer desk space unless the loan officer is a top producer. So on top of marketing costs many LO’s have to pay for basic office services like a fax machine, extra phone line for the fax machine, their own laptop, paper and other office supplies out of the commissions they earn.
The being “paid a flat rate per file” model would only work if like banks, independent lenders and brokerages paid for all the above items that an independent loan officer must pay out of their own pocket.
Seriously, Cory, how many people do you think want to pay you so you can go to lunch with a Realtor? That’s why when lenders want to take me to lunch…I say no…no need. A cup of coffee so we can talk for a bit, yes. Lunch? Why?
The entire basis for your (or anyone) being hired, should simply be that you are very good at what you do. There are still some markets that work “the old fashioned way”…but Seattle isn’t, or doesn’t need to be, one of them.
Hi Cory,
Thanks for stopping by. To paraphrase, it sounds like it’s important for you that we know an independent LO has a “cost of doing business” that’s built in to the loan origination fee.
Okay, that’s fair. Yes, I get it.
I’m not arguing that there are no costs of doing business.
If a loan originator wants to charge fee X, then just explain why your fee is X to your clients.
Have that conversation.
“Mr and Mrs. Smith, my loan origination fee is X. Out of this fee, I pay the following expenses:
Split to my broker
lunches with Realtors
Golf outings with Realtors
Postcard mailings
business cards
marketing flyers
my laptop
my fax machine
my scanner
my software
…and so forth
the net income to me personally, before taxes is as follows.”
If a customer hears all that, I’m guessing they really won’t want to pay for the Realtor’s golf game or the postcard mailings. If you’re writing a fair number of loans, the only real big cost in the above list would be the split to the broker which is easy to explain.
$500 seems pretty steep. That sounds like a fee an LO would pay to “buy” that lead/customer. Nothing wrong with explaining to that customer that you have to pay the company who sold you that lead and if they come to you directly next time your fee would be $500 less.
There will always be customers who will want the lowest rate and also the lowest origination fee.
The independent loan originator who figures out how to stay in business with the lowest overhead will win those customers.
Is $500 steep? A direct mail campaign to 1,000 potential customers can cost $800 – $1000. Response from direct mail runs 1% to 2%. So from that $1,000 spent a loan officer may get 10 to 20 phone calls and maybe 3 of those will turn into closed loans. If after split with the loan officer’s employer they make $6000 income their marketing expense was 17% of revenue, or $330 per closed loan. That really isn’t out of line with the marketing budgets of any business, which usually are between 10% and 15% of their revenue.
As far as lunch or gold with Realtors, is that really any different than any salesperson does to woo clients? Realtors are sources of client leads. They bring the LO business.
Lets look at a rep for an electrical supply company. For him, taking electrical contractors to lunch or inviting them to play golf or go fishing and picking-up the tab for it is part of getting that client’s business in purchasing electrical supplies and components from them.
Courting business through personal relationships IS the old fashioned way of getting business.
In explaining where the fee goes, lets apply this to your business: When I buy your 20 Hour SAFE Pre-Licensing and Exam Prep course will you justify your fee by breaking down and explaining to me what expenses my $495 will pay for?
Real Estate agents have extremely high over head. Many agents have $2K in hard dollar costs to retain a listing, or they agree to concessions, such as staging, up front.
Here’s the problem that we have globally. Mortgages are secured debt. The mortgage person who is talking about the time spent with getting people to promise to pay seems to be bypassing the investor who put up the money for a secured loan. The asset is now priced up to 30% less than the promise to pay, maybe even less than that.
Now where is the responsibility to the investor? Your loan was sold to a secondary market with the very slightest promise to pay. How about the people who invested thier life savings in a Brokerage that only dealt with secured loans because they were more fiscally conservative?
You see mortgages are secured loans. Those promises to pay are on a secured asset. How much disclosure did loan originators do when the market was over heated? How about the loans that are made today?
The price of Real Estate will decline by at least another 30%. It’s a no brainer. Once the government stops buying up these worthless loans where will the investor pool be?
Those loans you wrote today will be in default within three years. Did you disclose the nature of the global market place while you had these people signing papers? No, it’s not your job to know the financial market place? or is it?
Yes it is. You are the front line to ensure the investor is getting what they are paying for. You have the appraisal, underwriting, work orders, and any type of other request a lender can make. How about a gaurantee of value?
We need to get all of you out of the mortgage business because it went sideways. Bankers are charged with knowing the global financial markets. We trust them with our financial well being.
Bankers stole our money by creating worthless Notes based on assets they knew were over priced. We are all paying for mortgage brokers with tax dollars. It’s now just an extension of the welfare system.
Hi Cory,
I’d be happy to explain to anyone how my expenses are broken down from mandatory government fees that go right back to the NMLS to room rental fees to photocopies, and so forth.
Cory,
It sounds like you’re doing fine with spending $300 to $500 per closed loan in marketing expenses.