Changes in the Role of the LO…and Their Comp
No one wants to be told they’re losing their job in two weeks, two months, or ever. No one wants to be told their line of work is fading away, like video store employees, file clerks and travel agents, among others. It’s this way for loan officers and brokers, and I receive questions nearly every day from concerned LOs and brokers around the nation asking for thoughts on the future of their livelihood. Many believe that LOs are here to stay but see them increasingly working in either real or virtual call centers, and as purchase leads move upstream of real estate agents, the LO-realtor relationships could become much less important.
What does an LO do? What jumps to mind is lead generation (real estate agents, financial planners, small builders, and so on), selecting the best loan program for the client, overseeing the collection of the required documentation (a STRATMOR study showed that providing borrowers with upfront checklists nearly doubled borrower satisfaction), communicating with the borrower (yes, STRATMOR studies showed that the LO using the telephone is still the best way), and attending the closing.
And what is the current thinking about what will directly impact the job, and therefore the compensation, of loan officers? “Digital” mortgages (which arguably improve productivity) and minimal mortgage industry growth. Slow growth is a negative for all LOs but particularly for the less productive LOs who will increasingly find themselves competing head-to-head for business with heavy hitters. There will be no easy sales gained by merely showing up.
In many markets, borrowers increasingly have a true mortgage pre-approval in hand before they talk to a real estate agent, contingent only on the downstream appraisal of the home they contract to buy. In effect, more and more homebuyers will look like cash-buyers with the loan officer already in their corner.
In areas where inventory is tight, purchase volume will likely migrate more towards consumer direct (involving either a real or virtual call center or both) that pays LOs lower commissions but provides higher closed loan volume per month per LO. The industry has already seen a segmentation among inside LOs (LOs who feed off lender-provided referrals), outside LOs (LOs who generate their own leads), and hybrid LOs (LOs who split their originations between lender-provided leads and their own leads). Inside LOs tend to work in real or virtual call centers and hybrid LOs tend to be located in retail branches and, to the extent they work lender provided leads, are like virtual call center LOs.
Companies facing low margins have a renewed focus on LO productivity. LOs that work lender provided leads need to work such leads quickly and aggressively or have them pulled and reassigned to another LO. Many LOs who work in a real or virtual call-center environment receive a high percentage of their leads from the lender for which they get paid a lower commission. But those LOs originate more closed loans per month. And it is logical that if the number of loans per LO increases, and the total volume of nationwide production is steady, we need fewer (but more productive) loan officers.
Average LO commissions may drop significantly. To the extent that lenders allocate a higher percentage of lender-generated leads to LOs with high lead-to-application conversion rates, top performing LOs may see their income increase despite lower average commissions.
A good question for a loan officer, in an interview or after a drink or two, is, “Would you rather earn much lower commissions but have much higher closed loan productivity, or high commissions but have lower productivity?” In normal markets, LO success has always been based primarily on sales skills. In the future, LO success may depend as much on the ability to convert lender-provided leads to applications as it is on developing and maintaining the referral partner relationships that generate leads today.