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Compensation: Ever Changing

By Rob Chrisman, Senior Advisor

In the first quarter of 2023 the Mortgage Bankers Association reported that total loan production expenses (commissions, compensation, occupancy, equipment, and other production expenses and corporate allocations) hit $13,171 per loan. After cramming years’ worth of volume and income in 2020 and 2021, in 2022 and 2023 lenders (and vendors) have been reducing, cutting, slashing, and every other synonym you can think of, their expenses in an effort to keep up with the decline in volumes. Some efforts are more successful than others.

The largest expense for most companies isn’t the new loan origination system, or marketing campaigns. It is compensation. The STRATMOR Group recently completed its spring Compensation Connection® Study and the numbers are of interest to any lender’s management.

In the retail sales sector, overall total compensation is down across all roles surveyed due to a decrease in production driven incentive. And the loan officer (LO) comp was hardest hit: average commission income dropped 47 percent between 2021 and 2022.

Digging deeper into the numbers, STRATMOR’s data collection 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 have fallen to $91,000 in 2022 given the dramatic decline in volume.

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.

Of course, loan officers aren’t the only ones impacted. Processors, underwriters, and closers (the “big three” in fulfillment) saw a decrease in overall compensation year over year, with a steep decline in overtime from reduced pipelines. Incentive followed suit. But base salaries were up 5-10 percent across these positions. Processors, per the STRATMOR report, had a total comp in 2022 of $71,000, underwriters $113,000, and closers $68,000. Compared to 2021 their pay was down seven percent, 18 percent, and four percent, respectively. Overtime has vanished, which is also a factor in lower compensation for fulfillment positions.

We’re halfway through 2023. Cutbacks have taken place, staff trimmed, and the mindset of, “We’ll be happy to break even for 2023” is everywhere. In fact, the Mortgage Bankers Association calculates independent mortgage banks (IMBs), and mortgage subsidiaries of chartered banks reported a net loss of $1,972 on each loan they originated in the first quarter of 2023. Yes, you read that correctly.

STRATMOR has been evaluating expenses and trends in retail sales, fulfillment, and production support with an eye on helping lenders manage toward break-even levels. Loan officers are paid primarily on basis points 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.

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, but the current market is quite different. A good article for reference was written by STRATMOR Partner Jim Cameron in the July 2022 Insights Report.

Compensation and technological efficiency are impactful on the bottom line. Information is critical for lenders seeking to cut expenses in 2023 to match the falloff in volume and margins. 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. But no one wants to be “the first penguin in the water” when it comes to cutting LO commissions.

Can an independent lender lower its sales expenses to compete with banks that pay MLOs 50-80 basis points? 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.

Independent mortgage bankers must deliver a great “tool kit” to their mortgage loan originators (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. There are lenders who raise minimum production levels and reduce compensation basis points, but simultaneously are improving pricing, the quality of leads, providing impactful training, and improving turn times & back-office efficiency to add value. LOs that make less per loan but close more loans, and the lender is in better financial shape. What is your company’s highest priority?

For more information on STRATMOR Group’s Compensation Connection® Study, email the Compensation Connection team.

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