Mortgage Industry Gets a Makeover

Compensation for residential loan originators isn’t what it used to be.

The legislated changes that took effect April 1 mark the latest in a line of makeovers for the national home-lending industry. And more change is planned, if the federal government gets its way.

Driving the alterations is a desire to end the greedy abuses that helped fuel the real estate meltdown. But that noble intention is coming at a price, according to Gene Holman, mortgage division president for Little Rock’s Bank of the Ozarks.

“The consumer will spend more money for a loan, and the lender will make less money on a loan,” he said. “It’s a lose-lose situation.”

Justin Moore, president of the Mortgage Bankers Association of Arkansas, estimated the changes instituted so far could increase home loan costs to borrowers by as much as $700.

“The changes are intended to protect the consumer, but it really hasn’t done that,” said Moore, mortgage manager of Northwest Arkansas for Metropolitan National Bank.

“Loan processing fees and underwriting fees have increased. It takes twice as many people to process loans, and overhead has gone up. Regulatory changes can cause delays for borrowers and closings, which can cost consumers more money as well.”

The additional costs to lenders wrought by mandated changes in the appraisal process and more from earlier modifications in the home-lending rules are passed through to borrowers. The pass-through arrangement is no different for loan originator compensation, but the new formulas could be viewed as cost-neutral to consumers.

The April Fool’s Day change in compensation dates back to August 2010, when the Federal Reserve unveiled an amended version of Reg Z of the Truth in Lending Act.

The revised regulation attempts to standardize compensation and eliminate dual compensation arrangements that were common in the mortgage brokerage business.

Commissions and fees now are supposed to be linked exclusively to the loan amount, severing any compensation ties to the interest rate or other terms of the funding agreement.

Before the change, loan originators could receive more than just front-end compensation on a home mortgage. They also could collect money from the lender in the form of a yield-spread premium.

That fee was based on a percentage of the interest rate spread between the mortgage and the lender’s prevailing rate. The arrangement motivated some loan originators to serve up above-market rate loans to unsophisticated but credit-worthy borrowers who would have been eligible for lower interest rates.

Such dual compensation arrangements now are forbidden.

A mortgage broker now has to disclose all compensation up front, and all compensation must be paid by the borrower at closing. As of Jan. 1, 2010, all compensation is required to be listed on Line 1 of the standard Good Faith Estimate.

The intent is to make it easier for consumers to understand the costs of a home loan and make it less complicated to shop for the best deal. But if a consumer doesn’t shop and compare, the change amounts to so much paper shuffling.

The compensation change is more open-ended for loan originators working for a lender than their mortgage broker brethren.

Are lender-employed loan originators still independent contractors working strictly on commission? Salaried staff with a base pay supplemented by commission?

Or viewed as hourly wage earners subject to overtime pay?

“That topic still has a lot of grayness,” Holman said. “There’s a groundswell among originators who are very independent. Most don’t want to be on the clock. How all this shakes out, that’s still up in the air.”

The historical commission-only compensation for mortgage brokers apparently will remain the norm. The compensation change was preceded by a dramatic shakeout in the number of licensed mortgage brokers in Arkansas.

At year-end 2008, 120 were registered with the Arkansas Securities Department. When 2010 ended, there were 74. Those numbers reflect an attrition rate of more than 38 percent.

“We’re really not as affected as the mortgage brokers,” Moore said. “They will be more affected by this than community bank lenders.

“We will just have to redefine policy and procedures for compensation.” 

 

Broker’s Opinion: Federal Disconnect Damaging Economy

Luther Reed, branch manager for Premier Mortgage in Fort Smith, doesn’t mince words when assessing the changing landscape of his industry.

“I’ve been in this business since 1965 and seen many ups and downs,” said the veteran mortgage broker. “But I’ve never seen the kind of stupidity that’s coming out of Washington now.

“I’m going to survive and continue doing business. But it just doesn’t make good sense to do what they’re doing.”

Reed believes that, intended or not, the legislative prescription will force doses of consolidation on the industry. That will lead to less competition, which won’t be good for consumers.

“This is going to put most mortgage brokers out of business,” he said. “There’s going to be a lot of small banks that will be hard- pressed, too.

“Arkansas is going to be extremely hard-hit because of the way the pricing is done. I really can’t do a $50,000 to $75,000 mortgage.

“I’ve run my numbers, and I can’t do them unless it’s for someone I’m doing a lot of business with. For me, it would be a loss leader.

“I’ve got my pricing model all ready to go. But the people who put this together have no knowledge of what happens in small towns and rural America.”

Reed is confident his financial flexibility will allow him to continue to compete successfully despite the changes put in motion by Congress.

“That’s the advantage of being a mortgage broker,” he said. “I can find a program to fit some borrowers that banks can’t. I work with about 70 investors, and I can find a home loan for someone with a credit score down to 580, if the circumstances are right, like someone with previously good credit who recently battled through some medical bills.”

Chasing unscrupulous mortgage lenders out of business largely was achieved by market forces and more conservative underwriting standards long before regulatory intervention, Reed said.

“That’s already happened,” he said. “It’s long gone. That’s the wisdom of our legislature — a day late and a dollar short.”

— George Waldon