Keeping Them Down On the Cube Farm

WE’RE HEARING that in 2012 the industry experienced a better-than-expected year, buoyed by very high revenue per loan. These high margins have outpaced the higher costs associated with producing a loan, and companies are feeling pretty good overall.

Many of our clients have experienced high profits, but that may be masking what will be a very tough environment when volume drops or margins compress, especially if the companies continue to have higher production costs for each loan.

Like most businesses, the highest component of cost is labor, and the mortgage industry is no exception. When thinking about costs, executives often focus on the high sales costs—the loan officer compensation—as a driver of that cost. However, when volumes contract, few companies will pay their loan officers less per loan, since those that produce are even more valuable when business is scarce.

However, there are many costs also embedded in the operations—the rows of cubes and staff that process, underwrite and close loans. And paying for performance in this area is more important than ever, in an environment where quality and regulatory compliance are so critical. So, what exactly is the industry paying for all those cube dwellers, and what are they getting for the money?

Last week, I introduced the concept that simple recruiting was not enough to build a high-performing team. You also need to be sure you are getting what you pay for, and are not overpaying for what you get.

I gave the example of underwriter pay which was increasing while efficiency was dropping. I got a lot of emails about last week’s column, especially about the difficulty of hiring underwriters and the fact that their costs are so high and their efficiency is so low.

Underwriters are not outliers in our Stratmor survey of industry compensation. In fact, processor pay has increased 25% in the past three years as well, with most of that pay in base salary. So, those positions are not “self-adjusting” in a lower market, since adjusting base pay is difficult unless you plan to have high turnover and perhaps low morale—“Thanks for the effort in 2012, we have cut your pay to reward you in 2013!”

Obviously, paying more for lower performance is not a good strategy. In fact, it’s more critical now than ever to know compensation numbers and see how you stack up compared to your peers. Fortunately, there is a significant amount of data available that can tell you the pay and performance of the sales and operations staff at many positions in the mortgage operation.

Stratmor completes anannual survey of compensation levels across a wide range of positions and is actively in the process of compiling results for 2012 and expects to have over 50 lenders participating. The survey includes an analysis of 40 critical functions, including executive roles, and a wide range of operations positions. These data also filters for retail and consumer direct, so you can see the differences between the channels. Data such as this allow the best lenders to know how much to pay and what to expect from their HR investment.

Further, these data can provide some strategic insight. For example, in 2011, compensation for executives who managed fulfillment were made up of approximately 70% base salary and 30% incentive compensation. Nearly two-thirds of a typical company’s incentives plan was based on profits. That type of compensation plan worked very well in 2012, when margins were high, but how will employees fare in a tighter margin environment? There is also a wide range of compensation plans for midlevel operations managers, where focus on quality and compliance has increased. Stratmor is seeing more plans that are based on not just “getting it done” but getting it done right. Often team productivity becomes a key metric, although companies measure and incent this activity differently.

Next week I will continue my pursuit of uncovering other trends in cube dweller compensation, and will discuss some of the differences in compensation structure for consumer-direct lenders and their sales and operations.

Garth Graham is a partner with Stratmor Group, and has over 25 years of mortgage experience, from Fortune 500 companies to startups, including management of two of the most successful mortgage e-commerce platforms. He was formerly with Chase Manhattan Mortgage and ABN Amro, where he was a senior executive during the sale of its mortgage group to Citigroup.