Consumer-direct cuts can save top producers: Stratmor

Lenders shaving costs don't have to antagonize their top performers. Instead, a new expert perspective suggests an efficient, low-impact cut to companies' consumer-direct teams.

That channel's focus on total marketing cost per unit over basis point compensation makes it a ripe target for cuts, wrote Garth Graham, a senior partner at Stratmor Group. Reductions there would allow lenders to preserve their top loan officers typically responsible for the bulk of production.

"Their business is down so much in this environment that any changes they make would almost go unnoticed but have a huge impact on their business when the market comes back," wrote Graham. 

The market for consumer-direct loan officers is weak, and they likely won't depart for another firm, Graham added. The analysis comes ahead of many lenders' second quarter earnings reports, which aren't likely to report significant gains amid a continued lack of mortgage demand. Many companies shed excess capacity last year, but are still reckoning with ultra-high production costs. 

Lenders reported a 68 basis point loss per loan originated in the first quarter this year, according to the Mortgage Bankers Association. That amounts to an average net loss of $1,972 per origination, with combined commissions, compensation and expenses reaching $13,171 per loan. 

Research by the MBA and Stratmor puts sales expenses at 55% of a fully-loaded production cost, followed by 22% in fulfillment obligations. Loan officers today get $3,194 per loan, according to Stratmor. 

The firm also found 83% of production coming from the top 40% of loan officers, in addition to competitive recruiting efforts. The nation's top originators last year didn't cross the $1 billion threshold, but still put up big numbers despite the market's slowdown. 

"Lenders have two ways to deal with this: fire the bottom 60%, or change the compensation model so that lower-performing loan officers will get paid less and perhaps push themselves out of the business," wrote Graham.

Experts late last year warned lenders not to get too creative around loan officer compensation despite the lack of regulation in almost a decade. Regulators took note this year as the Consumer Financial Protection Bureau in March sought comments around policies affecting originator pay.

In lieu of relying solely on compensation based on a loan amount, lenders can make several changes, from paying less for refinances, bonuses for excellent pull-throughs and clean underwriting submissions or bonuses for loan milestones, the firm suggested. 

The assessment comes at a time when overall nonbank mortgage jobs are rebounding from the tens of thousands of layoffs last year. Companies hesitant to let go of lower-performing loan officers can also change their compensation plan only for new, less experienced loan officers, Graham said. 

"Introducing at least some elements of unit-based compensation may be a catalyst to change the culture of the company," he wrote.