Wells Fargo's mortgage business, the largest in the U.S., is looking to halt a revenue slump by sweetening the payoff for employees amid a shift to new home purchases.
Loan officers' top commission rate rose to 70 basis points, or 0.7 percentage points, from 63 basis points, according to a copy of the policy obtained by Bloomberg News. The new plan also merges two lower tiers into one that pays 65 basis points rather than 48 or 58. The rates, which took effect July 1, apply to employees' total monthly loan volume.
"By adjusting those tiers we created a lot of desire for the loan officers to go out and get that extra production," Franklin Codel, who oversees mortgage origination for San Francisco-based Wells Fargo, said in an interview. "This creates that little extra incentive."
Banks, facing the end of a refinancing surge that once propelled earnings, are now vying to fund new home purchases, a business that typically requires more effort, close ties to real-estate agents and a referral network. Large lenders have seen loan officers defect to smaller firms that offer more attractive pay packages and promise shorter turnaround times for closing deals.
While Wells Fargo adjusted its pay plan earlier this year, the more recent change is intended to recruit and retain staff, particularly for above-average producers, Codel said.
"We thought the timing was right," he said.
The new pay strategy contrasts with other types of banking, such as securities trading, where a slump in revenue more often triggers bonus cuts.
Mortgage refinancings that once fueled Well Fargo's record annual profits are now dwindling as interest rates climb. Loans to refinance existing debts may slide to $96 billion in this year's fourth quarter, about 75 percent less than in the first three months of 2013, according to estimates from the Mortgage Bankers Association.
Mortgages for new home purchases are increasing. They may reach $195 billion by the third quarter of 2015, compared with $115 billion in this year's first quarter, according to the Washington-based trade group's forecasts.
That's putting more emphasis on loan officers who draw referrals from local real estate agents, home builders and even employees within their organization. The bank's plan increases the incentive for referrals from other Wells Fargo employees.
The largest mortgage lenders suffered an exodus of talent to smaller firms at the end of last year, according to Rob Chrisman, a 28-year mortgage-market veteran who now writes a newsletter chronicling personnel moves and market trends.
"If my contacts are primarily with realtors rather than bank depositors, I can take that business anywhere," Chrisman said. "Some of the guys who were purchase-oriented could make 50 to 60 basis points at Wells Fargo or 120 to 140 at an independent shop."
For Mike Rose, pay was a significant part of the decision to leave Wells Fargo in May. When refinancings surged, it was easy to make a living under the firm's compensation structure, the Atlanta, Georgia-based loan officer said in an interview. As those loans dried up, life got harder, he said. Sometimes, it also took longer to get approvals or complete deals, he said.
"People stay at the big banks because they have established business and it helps to have a big name behind you," he said. "With a smaller lender you are selling yourself first."
An earlier version of Wells Fargo's compensation plan sought to shorten processing times. In March 2013, the bank changed the policy to reward employees for submitting complete loan applications to processors and underwriters within five days. The incentive sought to speed loans at a time when the largest U.S. lenders faced criticism over delays.
The new plan is designed to apply through 2015, and the lender may make changes sooner if warranted, Codel said. Under the plan, employees qualify for commission tiers by handling a minimum amount of volume or number of loans. The dual nature appeals to loan officers doing business in hot housing markets where loan balances are high or other regions where staff may close more small loans, Codel said.
For loan officers to get paid at the top rate, they must complete or refer at least nine loans in a month, or bring in at least $1.6 million in loans. That's down from 11 loans under the old plan. To meet the middle tier, loan officers must handle four to eight loans, or $600,000 to $1.599 million in volume.
The changes mean an employee who closes $1.6 million in a month will earn a base commission of $11,200, up from $10,080. Loan officers who handle $600,000 would earn $3,900.
In April, the bank increased the top commission an employee can earn on a single loan to $12,500 from $10,000. The July version boosts the commission rate if employees garner top marks for customer satisfaction.
Loan officers "that deliver great service tend to grow their business," Codel said. "That's a significant part of compensation."