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Adjusting Loan Officer Compensation to Improve Profitability

By Rob Chrisman, Senior Advisor

The largest expense for most companies isn’t the new loan origination system, marketing campaigns, or rent. It is compensation. Compensation and technological efficiency are impactful on the bottom line, and information about them is critical for lenders seeking to cut expenses further in 2024 to match any falloff in volume and margins. STRATMOR Group has been evaluating expenses and trends in retail sales, fulfillment, and production support through the years with an eye on helping lenders manage toward break-even levels.

In a bid to gain market share as industry volume dropped, in 2023, some of the biggest mortgage originators priced loans aggressively to keep production up and attract loan originators. It led to losses for many originators, who were slow to adjust their pricing. Today, as margins remain compressed due to a combination of relatively high interest rates, fewer refinances, and overcapacity in the workforce, mortgage executives are continuing to adjust loan officer (LO) compensation.

LO Compensation Structure and Trends

Loan officers are paid primarily on basis points (bps) with the majority being on a tiered schedule. And although the use of signing bonuses has dropped from the rarified days of 2022, they’re still being paid by a few large, well-known lenders. Signing bonuses have their own set of problems for both sides, and they are certainly not as enticing as they sound given the claw back periods and invisible handcuffs. Many loan officers have found the “grass is not greener.”

Signing bonuses do not match up well with the typical depository bank culture, possibly because banks have multiple sources of revenue and expenses to consider. IMBs are more likely to ramp up and down aggressively as market conditions ebb and flow, but banks don’t like to operate with an easy come, easy go, hire and fire mentality.

Recent Compensation Connection® Study data collected by STRATMOR showed that average retail LO commissions in basis points of production have been somewhat steady in the range of 92 to 103 bps. Average annual LO incomes, as one might expect, peaked at over $170,000 in 2020 and 2021 but fell to $91,000 in 2022 given the dramatic decline in volume. (For more information on the next STRATMOR Group Compensation Connection Study, email the Compensation Connection team).

The feast or famine in this industry is nowhere more apparent than in the Consumer Direct (CD) channel. CD LO commissions in basis points peaked at over 60 bps in the white-hot markets of 2020 and 2021 but dropped to 48 bps in 2022 as volumes dropped. Average incomes dropped from $179,000 in 2021 to only $59,000 in 2022 (a 67% decline!) due to the massive drop in refinance transactions.

Since the LO’s license number is now attached to fundings, there is a wealth of data available to better understand important considerations such as purchase versus refinance mix, product mix and production volume trends. STRATMOR data shows how signing bonuses are easy to justify in a market with wide profit margins and high volume. Lenders paid large signing bonuses in 2020 and 2021 (a good article for reference was written by STRATMOR Senior Partner Jim Cameron in the July 2022 Insights Report), but as 2023 progressed the economics were quite different.

STRATMOR workshops showed that leading “pain points” included the achievement of breakeven profitability and appropriate staffing given the reduced volumes. When the bottom line is at stake, knowing how much to pay employees, and why, is a major piece of the puzzle.

LOs Value More than Just Money

Can an independent lender lower its sales expenses to compete with banks and credit unions that pay mortgage loan originators (MLOs) 50-80 basis points plus a salary? The data and analytics are there for management to evaluate branches, either in recruiting new sites or putting up a fight in keeping existing sites being recruited by other companies. The key driver here is high sales expense. Lenders are beginning to realize it and are adjusting compensation. Analysts believe that massive changes aren’t necessarily needed, but there are reports of branches and regions accepting lower comp structures for lower/more competitive pricing, increased advertising budgets, or servicing portfolio retention efforts.

Arguably IMBs deliver a great “tool kit” to their MLOs. Sure, originators will often favor a better comp plan in deciding where to work, but management can do their utmost to create an environment where that decision isn’t purely based on compensation. LOs want better leads, for example, good back-office efficiency, and above-average pricing. They also want to work for a company that drives high levels of customer satisfaction, so that they can be more likely to see referrals in the future (a good article for reference was written by STRATMOR Customer Experience Director Mike Seminari in his August 2023 Customer Experience Tip). There are lenders who raise minimum production levels and reduce compensation basis points, but simultaneously are improving pricing and the quality of leads, providing impactful training, and improving turn times and back-office efficiency to add value. LOs make less per loan but close more loans, and the lender is in better financial shape. What is your company’s highest priority?

Timing and Transparency Are Key

Industry veterans knew that the heady days of 2020 and 2021 wouldn’t last forever as “trees don’t grow on the moon.” Volume declined in 2022 and again in 2023, and along with it refinance volume and margins. Some lenders held on too long without reducing margins or non-productive originators, creating morale issues within companies, while others used the tools available to them to monitor pricing, compensation, and profitability. Regional and divisional managers were either cut or held accountable while keeping an eye on the competitive landscape given the higher cost structure relative to the number of units a lender was able to produce in a given time.

No lender wants to be “the first penguin in the water” in terms of reducing LO compensation, although many IMBs eye bank and credit union structures with envy. It’s hard to go to loan officers and tell them they’ve got to reduce their commissions, even in exchange for more marketing dollars or aggressive pricing. Some lenders implement dollar minimums and maximums with everyone, increasing the competitiveness on larger loans. Others put in an LO comp structure where a worker receives a typical base salary plus a bonus during a busy time. When the market slows, they’ll go back to their typical levels.

As STRATMOR Senior Partner Garth Graham cites in his July 2023 Sales Compensation article, “Lender compensation should be more aligned with the actual objective – to help families get a new home (purchase) or better manage their monthly mortgage expense (refinance), and not solely the mortgage amount. Introducing at least some elements of unit-based compensation may be a catalyst to change the culture of the company.” Graham believes that lenders who hope to stay in the game over the long term, and to be wildly more successful when the cycle turns and the business comes back, should be working on sales compensation structures now.

Lenders have increased the transparency of margins and structures. Experienced LOs know that it is expensive to run a company, especially with repurchases, concessions, early pay off penalties, health care costs, underwriting, and so on, and appreciate knowing the costs of running the business, targets, and margins. Stronger use of analytics platforms helps guide mortgage executives to determine how many concessions their LOs should be offering and determine which LOs and branches are profitable with their compensation structure. And this will continue in 2024 and beyond.

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