Now that the Fed has gotten rid of the Mortgage Broker, the Loan Officer is next.

by 23 Mar 2011
Now that the Fed has gotten rid of the Mortgage Broker, the Loan Officer is next.

We used to love loan officers.  When volume is high and pipelines are plush, it is easy to applaud the talent of the sales staff.  When volume dips, the sales staff gets blamed.  The role of the sales professional is a thankless job.  
The expectation is always positive with little room for things to drop off.  In the perception of the consumer, there is only one thing worse than a loan officer, and that is a mortgage broker.  It is clear that the legislation in 2009 and 2010 were aimed at Mortgage Brokers, and for the most part, this dismantled this market segment to less than 10 percent of all loan origination volume in 2010 ($1.4B). 
2011’s focus is not on the mortgage broker as much as it is on the loan officer.  It is worth noting, the Broker however is not off the hook.  With the end of the mini Eagle, increased net worth requirements, and the ever increasing number of disclosure requirements, the broker’s role is being siphoned off. 
With continued broker attrition estimated at around 10-15 percent by Access Mortgage Research, the effects of the 2009 regulatory conditions are continuing to take their toll on this segment.  (Writer’s note:  It is worth noting, opinions vary regarding the future of the mortgage broker. 
Estimates are conservative around 10 percent to more aggressive at a 20-25 percent drop off in the number of licensed broker.  As has been written in several preceding articles, my forecasts have brokers losing significant ground to fewer than 10,000 licensees.  This, in my estimation, is another 25 -28 percent through 2011). 

With the ABA and the banking lobby as powerful as they are in DC, loan officers for non-depository institutions are being brought to the wood shed by their elder brothers, or the ‘real bankers’ as they like to call themselves.  This irony is clear for anyone who understands the cash flow and revenues for a depository with a growing mortgage division. 

As they watched mortgage brokers and mortgage bankers expand highly profitable businesses, the very service and product instruments they heavily criticized between 2004-2007 (e.g. Mortgage lending by non-depositories) are now the largest and most profitable departments to many of the same banks.  In my M&A work with Depositories and Mortgage Operations, it is not uncommon to realize a 10:1 gain on revenues from your mortgage division versus traditional income channels from within the ‘bank.’  

The mortgage division is a cash cow for depositories and even more so, a margin gain for the following reasons:  Traditional compensation sales structures for their sales staff; little cost to Marketing and a very low Cost of Sales.  What made working for a depository institution unattractive was a $35,000 year job with little commissionable earning potential. 

Now that non-depository mortgage lending makes up less than 20 percent of lending volume, and further regulatory constraints leave depository institutions exempt (e.g. licensing) from administrative burdens, the market (and its margins) is being pushed toward this poorly compensated culture of lending.   

Why pay sales people more than is needed when you have sizable base of customers?  Well, the new compensation rules effectively follow HUD’s recommendation in December of 2009 regarding Loan Officer Compensation to pay them hourly or a salary like most employees in a bank.  It is clear bringing loan officer’s compensation into alignment is clearly the agenda, just how much will depend on future modifications and/or amendments to Dodd-Frank.

Changes in Compensation Impacts Technology Vendors

The impact on compensation trickles down the industry.  It is not just the mortgage operation that is impacted but the technology vendor.  Occasionally, I will receive emails from technology executives saying, “Rick, you spend a lot of time on market dynamics and not enough time on technology.”  My response to this is clear:  technology vendors do not understand the intricacies of how to do a mortgage. 

Even the largest technology vendors whose brands many of you have used for years, don’t have mortgage experts on their staff – they lack a compliance officer and they consistently miss the target in how the market is evolving.  An understanding of the market, leads the technologist to prioritize, and even forecast, what the technical priorities need to be, then to leverage current and future technologies to meet those needs.  

Newer technologies simply make the computing calls that are much more efficient and enable deeper 3rd party integrations to support other concurrent solutions operating within your organization.  The challenge is the following:  The older technology firms (in business for 10+ years), for the most part do not have the money or the talent to innovate.  And, the technology firms that do, are too new or undercapitalized (or both) to really make a difference.  There are exceptions to this – Optimal Blue, Ellie Mae, A la Mode etc.  

However, there is a capital crisis in mortgage technology. Therefore, it will be a test of time and investor patience to see if the undercapitalized or under performing companies have the staying power to make a difference.  For as long as the mortgage industry continues in its lulls and the economy at large remains uncertain, investor confidence in mortgage technology is going to remain flat.  In my prediction, it will not peak interest until the market grows back to $2.0T  (over 10M units). 

To support an increase of nearly 4,000,000 mortgages, there needs to be stable and sustainable (and gradual) economic growth on the supply side (stable job creation, low unemployment etc) and a rise in the international appetite for mortgage back securities. This may take 4 or more years of steady job growth and let’s hope so – my oldest will be looking at colleges and given the rate of college tuition, I think I will need this assumed economic growth. 

The point is the following:  real disruptive innovation in mortgage technology that has a meaningful impact (in terms of market adoption) is several years away.   Brad Eaton from A la Mode ( wrote a great article regarding the 10 year anniversary of ESIGN; 10 years!?

Real innovation takes time in any industry but especially in banking when most practices are at least 6-8 years behind mainstream adoptive consumer driven technologies.  (Ex.  When I got my Master’s degree in Technology Management, I esigned for my student loans back in 1999) Today, a student esigns on what often amounts to be over $220,000 worth of student debt, right around the national average for a home.  So why is this so difficult?  It is about capital, market sizing and market incentives.  It will not be until all three converge when innovative change takes its hold on mortgage technology. 

There are examples of a few mortgage technology firms who meet these three market opportunities, but most do not.  Your job in the mortgage firm is to carefully select who they are and it is from people like me and others, who help firms accomplish this.

What does this have to do with compensation changes in 2011?  A great deal.  Technology firms are scrambling to come up with a flexible enough framework to accommodate this important mandate.  In the first Quarter, we will have some tools available to manage commissions however much of this will depend upon the resources of the tech firm.  When tech firms are confronted with this – they sell:  what they have, or the vision of what they will have.  Be very careful in investing in a technology companies ‘vision.’  There are some organizations who have been selling vision for the last 5-10 years and have produced little in this regard. 

2011 Tech Trends Taking Shape: 7 Strategies for the Successful Mortgage Company

There are several interesting trends taking shape already in 2011 mortgage origination.  Mortgage companies are panicked to adjust their operation from focusing on refinance and streamlines to new purchase originations. 

The focus (again) is retail, new purchase business.  Several Wholesale Operations are converting their A.E.s to focus on retail recruiting.  With the wholesale channel in serious decline, their only chance to maintain volume is to grow their own native retail channel.  The industry is being forced to cannibalize itself and its volume. 

The competition will not be easy and for those mortgage companies who think it will be are mistaken.  The Federal Government slowed down the Housing / Mortgage industries to the lowest point nearly 12 years.   As Jacob Gaffney recently wrote, “the western regulation may kill everything in mortgage finance the bailout tried to stimulate.”  This is an interesting point.  

Banking is largely about managing risk and making (or losing) a great deal of money on managing this risk correctly.  The federal and state regulatory trends have attempted to dissipate the risk in mortgage lending and as a result, demand declined erasing nearly a 12years of production growth. 

As I indicated in December’s issue, we are at 1997 / 1998 levels of mortgage production.  With the prospect of another 30 percent decline in mortgage origination (across all channels), this reality, albeit slowly is sending shock waves across mortgage banking and brokerage firms across the country. 

One large Mortgage Lender who closed a company record setting month of over $500M in November of 2010 met this mark with a celebratory fear since over 60% of this volume was refinance business.  On one hand they are preparing their organization (and setting expectations with the board) to return to $300M levels in 2011, and attempting to come up with creative strategies to gain market share in 2011. 

So to help, here is the 2011 roadmap for the successful mortgage operation.  I outlined the key points for the mortgage executive and the corresponding questions for technology they should be asking.  They are:  

  1. Cost Reduction - Production costs must be below 50-60bps on every loan- how can your use of technology eliminate cycle times, compliance costs and manual touch points on the file?   Ultimately this will mean head count reduction and the need to reduce your staff by 10-20 percent. 
  2. Minimize physical file touch points – this is worth a separate bullet; does your technology automate your process?  Is there ‘hands off’ quality and compliance controls and verifications?  
  3. Centralize all of your information as soon as possible - Manage, Report and customize this information in the most flexible LOS solution you can afford.  Technology, Automation and stability of the company are key factors in selecting a vendor.  Has the company been around for longer than 5 years and has more than 1,000 clients?  Can the vendor afford to lose 30-40% of their clients as many mortgage companies will lose 30% of volume?   If the company has been around, have they struggled to innovate? What is their reputation?  Have they lost market share? 
  4. Invest in a Compliance Officer and a Chief Information Officer - The right people in these roles are vital to the growth and success of your mortgage operation.  The Chief Information Office is not a ‘techie’ but a technologist; one who can match key operational goals with the right technologies available in the marketplace.  The key is the planning and execution of these solutions internally in order to realize these goals.  I am always surprised at the number of mortgage operations who originate $70M-$120M/month who do not have either of these positions filled; yes this is true!  It is amazing and it is prevalent.
  5. Remove Overlays:  2011 is the rise of subprime - With volume declining and mortgage companies embracing compliance driven technologies, there is growing appetite to lend to 580 or 600 borrowers.  Why not?  The average of FICO of the American Consumer is below a 640.  There are many borrowers with stable employment, who pay their bills but have a low FICO because of a catastrophic event (e.g. divorce, short sales, negative equity etc).  2011 and 2012 is the year for these borrowers to buy a home.  Those who have good credit have already purchased and refinance (as a national trend) their home; so now, it is time we open up the products in a responsible manner in order to assist in the eligibility and options of consumers.
  6. Consumer Direct - Go consumer direct; it is critical to get to the consumer first before your competitor does.  My goal in working with mortgage companies is to get them to get to the consumer before the consumer goes to the real estate agent.  The goal for the mortgage company is to be the referral source to the Real Estate agent and not the other way around.  There are a number of ways to accomplish this and I will write about this in future articles.  What technologies build a relationship that transcends the mortgage transaction between the loan officer, your organization and the consumer? 
  7. Lending Centers- Focus on 10-15 lending centers in key markets around the country.  Grow those operations organically.  It is much easier to grow 10 lending centers to $50M/month than it is to grow 300 branches that are largely left to themselves for their growth.

Rick Roque

Rick Roque, former Management Team member at Calyx Software & non-operating owner of Menlo Company.  If you have any comments on this article, feel free to call Rick at 408.914.5895 or by email:


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