The largest expense for most companies isn’t the new loan origination system, marketing campaigns, or even rent. It’s compensation, whether you’re a lender or a vendor. Compensation and technological efficiency impact the bottom line, and information about them is critical for lenders seeking to cut expenses as we wrap up 2024 and head into 2025. STRATMOR 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 and beyond, and vendors can glean some information about the compensation trends of their clients.
The residential lending environment has changed since 2023 when companies were cutting margins and pricing loans aggressively to keep production up and attract loan originators. 2023 was one of the worst years on record for companies from a loss perspective, especially for companies not holding any servicing rights. The year saw losses for several originators who were slow to adjust their pricing. Today, as margins remain compressed due to a combination of relatively high interest rates, fewer refis, and overcapacity in the workforce, mortgage executives continue to examine loan officer (LO) compensation as a potential source of savings, but things have stabilized, and the MBA’s recent survey showed an overall profitable second quarter in 2024.
Loan officers, whether at an IMB (Independent Mortgage Bank), credit union, bank, or broker shop, are paid primarily on basis points with the majority being on a tiered schedule, sometimes with a base salary. The rampant use of signing bonuses has subsided from 2022, but 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.” Throughout 2022 and 2023 many originators found that the “grass is not greener” and stories of litigation over compensation were plentiful.
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 and brokerages 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.
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 basis points (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 and even further in 2023 given the decline in volume. (For more information on the next STRATMOR Group’s Compensation Connection® Study, email the Compensation Connection team.)
While Retail LO incentive has bounced between 90 and 100 the past several years, one thing lenders need to keep in mind is the cost of the sales hierarchy. A lot of planning goes into LO compensation, but how does the cost of the management stack add up? When thinking about the retail sales hierarchy, STRATMOR’s Compensation Connection Study attempts to cover most roles up to the head of the channel including the divisional, regional, area, and producing/non-producing branch managers.
When looking at the total compensation cost of the sales hierarchy from the Spring 2024 study, it landed at 85.7 bps of production. This includes base and incentive overrides. It is important to balance the hierarchy in line with other efforts to control costs and maintain a level of efficiency in tepid markets. STRATMOR’s study showed non-producing branch managers earning 24 bps, producing branch managers earning 27 bps, area managers 15 bps, regional managers 12 bps, divisional managers 4 bps, and senior production executives earning just 3 bps. Managing the effectiveness and cost of this middle management has preoccupied many owners and CEOs in recent years. 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 during a given time.
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.
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 and credit unions that pay 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 have realized it and most have adjusted compensation. Analysts believe that massive changes aren’t necessarily needed, but there are reports of branches and regions accepting lower compensation structures for lower / more competitive pricing, increased advertising budgets, or servicing portfolio retention efforts.
Arguably IMBs 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. CEOs and owners are evaluating their highest priority.
STRATMOR’s Compensation Connection Study has a revamped benefits module for 2024. Overall compensation is exacerbated by the benefits portion of the pay package from an employer perspective. While lenders can cut costs, adjust salaries, and tinker with incentives, the benefit costs seem to just go up. Lenders have the additional cost and then must decide if employees should cover more of the premium to counterbalance the increases.
From the 2024 benefits module, 40% of lenders had a high deductible health plan as their most popular option for health insurance. Higher deductible plans can lessen the burden in monthly premiums (for both lender and employee), and backload those costs behind the higher deductible if needed. The average total monthly cost of a PPO premium (employee-only – no dependents/family) was $801. For the high deductible plan that was $667. The employer subsidy (what the employer picks up in relation to the total monthly premium) was almost 80% for the overall study average.
Interestingly, 30% of lenders indicated employees contribute to premiums based on salary thresholds: the more the employee earns, the more they subsidize their own premiums. This is an effective way for lenders to control their benefits costs, while lessening the impact on lower earnings.
As the ability to “dive into the numbers” has increased, lenders and vendors are in a better position to examine costs and have increased the transparency of margins and structures. Experienced LOs and sales management 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. This will continue toward 2025 and beyond.
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