Effective April 1, 2011, residential mortgage originators will be required to follow the Fed’s new rules on how they can be compensated (unless the pending lawsuits or Congress is successful in delaying this). You can follow #LOComp on Twitter to see the dialogue that has been taking place across the industry. In many ways, the new plan will be good for mortgage originators. Our new comp plan was revealed today and after it was announced that out of our office, I was one of the “cheapest” LOs, I discovered that I’m getting a slight raise. Many LOs who like to charge less or to help absorb costs for their clients, will no longer be allowed to do this with the new rule. LOs who were used to making more on loans may find themselves getting a paycut, if not now, then when Frank Dodd’s plans kick in this summer.
I thought to illustrate what is happening, it might be helpful to review an actual transaction I closed a few months ago. It was a rate-term refinance, however, this scenario could happen with a purchase too.
These borrowers selected me to help them with their mortgage after I had been pricing rates for them for months waiting for rates to reach a certain point for their jumbo mortgage. We locked in their rate at zero points (origination or discount) in mid-October. During that time, we were in a refi boom and therefore refi’s were taking longer to close and it was a jumbo (which can also take longer to process) so I priced the rate with a 60 day lock.
The loan was locked with the lender who offered the best pricing at that moment based on their scenario for that time period. Although we’re correspondent with this bank-lender, they do not allow us to underwrite non-conforming loans AND we have to use THEIR AMC. There was a slight time delay (eats into the lock period) where the appraiser had difficulty connecting with the borrowers who had been traveling for a week and forgot to mention this to us.
The appraisal came back slightly lower than we had estimated however, the loan to value came in just slightly under 80% which made no impact to how their loan was priced. We submitted the loan to the bank for full underwriting with the bank’s AMC appraisal. The (out of state) bank underwriter determined that this home was too nice for the Seattle neighborhood and declined this “perfect transaction”.
By now it’s November and we’re dealing with the holidays…which also impacts the lock period…which is getting close to expiring. After much contemplating, the borrowers decide they would like to proceed with a second appraisal to support the value of the first appraisal…but first we have to wait for the bank to confirm they’ll consider…the lock continues to tick down towards expiration… the banks gives us the green light and we decide to try one more time with a 30 day extension to allow time for the 2nd bank appraisal and 2nd bank underwriting, 3 day right of rescission, the holidays… you name it. The cost for the 30 day extension is 0.5% of the loan amount. I decide that I’m going to split this amount with them. This means that it’s costing me 0.25% of my commission to close this loan. I also agreed to pay for half of the second appraisal if the bank approves the loan. The transaction, for my very patient clients, did close.
Effective April 1, 2011 – I will not be allowed to pay for anything on behalf of my clients.
As a mortgage originator, I will no longer be allowed to:
- pay for extension fees, or
- pay to cure items (for example, mistakes made on a good faith estimate that are beyond the allowed tolerances)’
- help pay for a 442 re-inspection;
- reduce my commission to help pay for closing cost.
This means that mortgage companies have to factor this new “cost of business” with how they will be pricing rates. This is going to cost the consumer, mortgage companies and possibly real estate agents when it’s down to the wire and and the mortgage originator is forbidden by the Fed to chip in for the cost to extend a loan. Many in the industry anticipate that rates will be slightly increased at the retail level in order for various types of mortgage companies, including banks, to deal with these costs which were commonly the responsibility of the mortgage originator.
NOTE: I’m not a mortgage broker – I work for a correspondent lender so the rules we follow are far different than those of a broker. I wish we all had the same rules to live by as “mortgage originators” regardless of the type of institution we work for…you’ll have to ask your elected officials back at Congress why this isn’t so.
It’s going to be interesting to see how our system is revised for pricing loans. I will automatically be paid a set amount which is based on the loan amount (allowed per the Fed). Consumers that I work with will be able to see real time pricing and decide what rate at what price they want based on what is available at that moment they elect to lock. My pay is out of the picture–and I do like that part HOWEVER, I do believe that if I want to chip in to help a borrower or reduce my commission because I know a transaction is a going to be a piece of cake, I feel I should have the freedom to do so.
My clients above would have to had either walked away from their transaction or have paid 0.5% of their jumbo loan amount to keep that rate…my hands would have been tied.
There’s so much more to this rule by the Fed but I just wanted to share one example of how I feel this rule is not going to do consumers any favors.
In my opinion, this smacks of HVCC and the 2010 Good Faith Estimate… great intentions from our government and clueless of the unintended consequences to the consumer…and our housing market.
UPDATE MARCH 28, 2011: NAMB is reporting via Twitter they have been successful in obtaining a temporary restraining order hearing for tomorrow morning.
UPDATE MARCH 29, 2011: Reading on Twitter that the Judge will rule before April 1, 2011 (by Thursday)…and that the Judge asked great questions and requested NAMB not file their temporary restraining order.
UPDATE 6:30 p.m. MARCH 29, 2011: NAMB and NAIHP feel pretty hopeful that LO Comp may be delayed until July for Frank Dodd. A note from NAMB that’s posted in Facebook is in my comments below.
UPDATE MARCH 30, 2011: The Judge rules against the temporary restraining order. View the Judge’s opinion by clicking here.