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The Personal Touch

By Rob Chrisman, Senior Advisor
Rob Chrisman

For decades, loan officers (LOs) and brokers around the nation have been wondering about the future of their livelihood. As we wrap up 2021, 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-real estate agent relationships could become much less important. Others say that the pandemic has reminded us that borrowers prefer a personal touch, even if in-person meetings were held in open air venues rather than traditional offices.

All indications point to an uptick in purchase business for 2022 but a decrease in refinancing. LOs will be focused on 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 an upfront checklist nearly doubled borrower satisfaction), communicating with the borrower (STRATMOR studies show that two of every three borrowers receive updates by email now), and attending the closing.

As we end 2021, LOs are primarily paid in basis points. Interestingly there is a trend away from tiered compensation structures and toward flat commissions. And while lenders like the idea of paying on quality, or other metrics, it is not common because these metrics are hard to measure and track especially when it comes to compensation. In STRATMOR’s polling, less than one percent of LO compensation is based on non-volume factors such as quality or loans “staying on the books” for an extended period of time.

Per STRATMOR’s Compensation Connection®, 22 percent of retail and 40 percent of consumer direct (CD) participants indicated a difference in commission payout based on purchase versus refinance (less for refinance). Expect this to change with the expected role in volume that purchases will play in 2022. The average commission is still roughly 100 bps, slightly less in low volume markets and slightly higher in more aggressive markets. For example, STRATMOR saw an average of about 93 bps in 2019 and 103 bps in 2020, and general basis points have been relatively steady in recent years.

What may directly impact the job, and therefore the compensation, of loan officers? “Digital” mortgages (which arguably improve productivity) and minimal, possibly negative, 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 LOs that have an established book of business. Loan officers have always competed with all-cash buyers, and 2022 will be no exception especially if parents are in a position to assist their first-time home buyer children.

In 2020 and 2021, borrowers increasingly had a true mortgage pre-approval in hand before they talked to a real estate agent, contingent only on the downstream appraisal of the home they contracted to buy. Fortunately, the bidding wars have quieted down in most parts of the United States due to inventory entering the market, seasonality, and mortgage rates ticking up. In addition, buyers have balked at certain price points. How much upside is there in buying a 2-bedroom, 2-bath condominium in San Francisco for $1.8 million with $1,500 per month in HOA fees?

The last few years have shown us that in areas where inventory is tight, purchase volume migrated 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.

STRATMOR Senior Partner Jim Cameron reminds us that LOs who have leads supplied to them are paid differently than originators who find their own. “The highest pay goes to originators who completely generate their own leads from third party referral sources like Realtors®, financial advisors, personal contacts, etc. The classic example is the Independent Mortgage Banker (IMB) loan officer. The next level down in compensation is for bank affiliated LOs who rely in whole or in part on referrals from the bank. While they may generate a percentage of their own leads, a meaningful amount of their business comes from bank referrals.

“Then you have originators who work for builder or realtor captives. In those cases, the LOs do not generate any of their own leads and their compensation levels are typically lower than IMB and bank LOs. Finally, consumer direct originators who work in a call center receive a steady stream of leads from a variety of lead sources (e.g., lead purchases from aggregators, bank rate tables, media advertisements, etc.). CD originators’ pay is typically the lowest per transaction, but they have the potential to originate a large number of units and therefore earn a solid living.”

Incentivizing purchase business may help offset the overall drop in production. Many more lenders are going to be thinking about making this change in 2022. Regardless of lead source, companies facing low margins in 2022 will have a renewed focus on LO productivity. It is less costly to improve an existing LO’s performance than to pay a large signing bonus to an originator or branch that must be trained on the policies and procedures at a new lender. If the number of loans per LO increases, and the total volume of nationwide production is steady, or declining as expected, we will need fewer (but more productive) loan officers. According to STRATMOR’s most recent study, retention and incentive bonuses were being offered at the producing branch manager, LO, and LOA levels in the retail channel. Almost no action in the CD channel for these bonuses.

In normal markets, LO success has always been based primarily on sales skills. In 2022, 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. Compensation plan components will be a hot topic as 2022 budgets are finalized. Compensation plan retooling may be in the works for organizations taking some cost savings measures going into 2022.

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?” With an eye on regulations regarding LO compensation and avoiding steering, don’t be surprised to see more segmentation based on lead source, purchase versus refinance, and attempts made to tie comp to customer service or loan quality. After all, customer satisfaction will be paramount in 2022 and beyond.

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