Mortgage Manager Community Blog

Consumer Credit Counseling

Not everyone with a lot of debt ends up declaring bankruptcy. Some of them aren't eligible to do so. Others feel strongly that declaring bankruptcy is not the morally correct thing to do - they feel that they should make every effort to pay their debts.

Some of these people turn to consumer credit counseling. Non-profit credit counseling organizations do not lend money to the person in debt. Rather, they work with the debtor's creditors to try to work out a reduced payment plan, a consolidation of debt, or a reduction of interest rates or late fees - thus making it possible for the debtor to repay his or her debts over a period of three to five years. The debtor makes a single payment to the counseling service, and the counseling service makes payments to the creditors.

Non-profit credit counseling services were "invented by" some of the major credit card companies and are funded by donations from creditors. The creditors realize that they are better off working with debtors who want to pay them back rather than making it harder for them to do so. They count on the counseling services to teach people about debt management and budgeting.

The counseling services also relieve the creditors of the additional work necessary to collect debts. It's important to note that many creditors make a notation on the debtor's credit report indicating that the debt is being managed by credit counseling.

Consumer credit counseling services usually work well for the consumer, but sometimes there are problems. The consumer might be making payments to the credit counseling service on time, but the service isn't making payments to the creditors on time. This shows up on the consumer's credit report as late payments.

It is also possible that the credit counseling service is making the payments on time, but the creditors are not accepting the reduced payment amounts. This, too, would negatively affect the consumer's credit report.

However, the lender can get a printout from the service, indicating the date the consumer entered it, the creditor's listed, and the history of the consumer's payments. The lender can then piece together the information. If the consumer has been paying consumer credit counseling on time, but the creditors have been getting their payments late, then that's not the fault of the consumer and shouldn't reflect poorly on him or her.

How Do Lenders View Credit Counseling Services?

Some lenders look at use of credit counseling services as similar to a Chapter 13 bankruptcy, because both can entail a payment plan and re-negotiation of debt payments (in fact, some people who are using a credit counseling service do end up filing bankruptcy because they still don't have the income or money management skills to handle the payments.) So, in some cases use of such a service can be a negative.

However, many lenders recognize that if a person is attempting to handle debt responsibly, then that person probably takes financial commitments seriously. Again, the lender must look at the "big picture." In general, in order to get a mortgage the borrower must have a 12-month history of paying on time and a letter from the counseling service stating that purchasing a home will not interfere with the repayment plan.

-Brian Sacks

Brian Sacks is the foremost authority in the world in teaching mortgage profesionals how to close more loans, make more money, and have a life at the same time.  He travels all around the country and has been featured and written for numberous publications in our industry including Mortgage Originator Magazine.  He has been featured on every major television network and over 42 radio stations as an expert in our industry.

The Golden Rule of Management - Rule #6: Forget the annual review as we know it!

If you implement the first five rules correctly, the annual review takes on a different meaning entirely.

Dave Hershman is the leading author for the mortgage industry with eight books and several hundred articles to his credit. He is also head of OriginationPro Mortgage School and a top industry speaker. For more articles by Dave and free marketing materials and a schedule of classes, visit www.originationpro.com.

The Golden Rule of Management - Rule #5: Let the right people do their job!

This rule can also be referred to as delegation, empowerment or getting out of the way.

Dave Hershman is the leading author for the mortgage industry with eight books and several hundred articles to his credit. He is also head of OriginationPro Mortgage School and a top industry speaker. For more articles by Dave and free marketing materials and a schedule of classes, visit www.originationpro.com. 

The Golden Rule of Management - Rule #4: Give the right people the tools they need to do their jobs!

Once you have the right people in place, you can now support them in performing their jobs by providing them with tools such as training and communication.

Dave Hershman is the leading author for the mortgage industry with eight books and several hundred articles to his credit. He is also head of OriginationPro Mortgage School and a top industry speaker. For more articles by Dave and free marketing materials and a schedule of classes, visit www.originationpro.com. 

The Golden Rule of Management - Rule #3: Get specific about the job!

The most important thing you can do for the right people is to let them know specifically what their job responsibilities are.

Dave Hershman is the leading author for the mortgage industry with eight books and several hundred articles to his credit. He is also head of OriginationPro Mortgage School and a top industry speaker. For more articles by Dave and free marketing materials and a schedule of classes, visit www.originationpro.com.

The Golden Rules of Managment - Rule #2: Fire the wrong people!

The reason we don’t have time to recruit the right people is the fact that we are spending too much time supervising the wrong people. We do this because we won’t admit that we could have made a hiring mistake.

Dave Hershman is the leading author for the mortgage industry with eight books and several hundred articles to his credit. He is also head of OriginationPro Mortgage School and a top industry speaker. For more articles by Dave and free marketing materials and a schedule of classes, visit www.originationpro.com. 

Becoming a "WOW"

In ten years of training mortgage professionals, I've found there are basically two types of salespeople: WOWS and SHMUCKS (and the SHMUCKS well outnumber the WOWS)!  For all of us, that is actually good news.  Why? Because bring a stand-out isn't nearly as hard as we may have thought.  You see, there is not much competition out there if we simply focus on becoming a WOW!

In our business, almost regardless of price (rates, points, and fees), WOWS get the sale.  When it comes time for repeat business, WOWS get the sale.  When it comes to referrals, WOWS get the sale!  Why?  Because WOWs are DIFFERENT.  And because WOWS get the initial sale, the repeat sale and the referral sale, WOWS never worry about their income.  In fact, the best thing about being a WOW is that the only work that can describe their income is...WOW!

Now, consider this question.  If I surveyed your customers, how many of them would define you as a WOW?  If your answer was most or all, then you are either enjoying enormous success or you are in complete denial.  If your answer was some, few or none, then read on!

Every salesperson wants to be a WOW; however, few think they have what it takes.  And once they determine they do, even fewer do what is necessary to become one.  Well, I have great news for you – you already have what it takes to be a WOW, you just haven’t perfected it yet.  You see, - “God don’t make no junk!”

After having been blessed to work with literally thousands of WOWS during my twenty year career, I have identified four primary personal and professional traits that lead to their success.  In this edition I will cover the personal traits and characteristics that make up the foundation for every WOW (in the next edition I will cover the professional traits).

Trait #1 – Integrity

At the core of every WOW is unwavering integrity.  WOWS recognize that integrity and trust are at the core of success.  WOWS not only possess these traits, but they constantly guard them.  Our integrity is the one thing we control that no one can take from us. 

Our integrity determines our reputation; and our reputation determines our success.  Most importantly, integrity instantly separates us from other salespeople in our industry.  There is an old saying that “people buy form people they like.”  I believe that is only half true… “People buy from people they like and trust.”

Trait #2 – Attitude

WOWS are simply great people to be around.  They are positive, optimistic and enthusiastic.  They love life.  They realize that a positive attitude is the most desirable characteristic a person can portray.  They know that knowledge and experience mean nothing without a passionate, persuasive and positive attitude.  Like you, I’ve seen many knowledgeable and experienced people in our business who consistently fail.  Success is not about being smart or experienced.  Instead, it’s all about attitude at the end of the day.  As Zig Ziglar says, “Your attitude will determine your altitude.”

Trait #3 – Focus

There are two basic approaches to sales in the mortgage business; quality an quantity.  WOWS focus on quality, not quantity!  This is one of the core philosophies of every WOW I’ve ever met.  WOWS know that he quality of the application, relationship and advice they give their customers is far more important to achieving success than the quantity of calls or sales presentations they make.  More calls simply do not mean more loans.  Better calls mean more loans.  You’ve probably heard the expression “selling is a numbers game.”  And although that can be true, this approach never leads to long-term success.  Why?  Because that leads to a quantity approach to selling.  A quantity approach to selling creates three detrimental results: (1) increased rejection, (2) high failure, and (3) long hours.  Ultimately, these will develop low enthusiasm, poor confidence and burnout.  Simply put, throwing loans against the wall to see if they will stick never yields high volume.

Instead, WOWS take a quality approach.  They live by the philosophy that a “bird in the hand is better than two in the bush.”  They know that simply spending quality time with their clients results in higher conversion rates, more loans closed and less hours worked.  Instead of rushing every deal to get to the next one, they take their time with interested and qualified candidates to establish true value, relationship and trust. 

Trait #4 – Beliefs

WOWS have a simple belief: “Price doesn’t matter…value does!”  They know that price is only what you pay for something, but value is what you get…and it’s never what you pay that matters, but always what you get!  With this basic belief system, WOWS simply overcome price concerns and objections by creating value that transcends price.  And by truly believing that price doesn’t matter, they possess a confidence and conviction that leads borrowers to their way of thinking.

So do you want to do what everyone else does and get average results or do you want to be different and get stellar results?  If you really want to succeed, really stand out, and really separate yourself from your competition, then you have to be different!  You’ve got to become a WOW.  No basic philosophy is more central to your success. 

-Dale Vermillion

Dale Vermillion is a prominent international speaker, consultant and expert to the mortgage industry. He began his career in 1983 as a loan officer and, by age 30, was Executive Director for a national mortgage company of over 1,000 employees with responsibility for all aspects of sales, marketing and operations.

It’s that time again...

What is a manager to do when the market slows down at the beginning of the year and their originators seem to all be on vacation?  Well, for starters, it would be extremely advantageous for one to sit down and take this down time to create a rock-solid business plan for the rest of the year.  If you have never written a business plan, and you are a manager, it would be more profitable if you were lying in bed all day with the flu.  In other words, you may not understand now just how profitable you could be with some goals written down on paper, but when and once you do, you will regret all the time wasted up until you put your plan in order.

Why is this so important?  Let’s pretend I told you to drive to Bora Bora.  Your first question would be “Where in the world is that?’ and your second question would be “where can I find a map?’.  We use a road map for many purposes in life and your business should not lack one either.  A great way to start is to listen to the Business Plan Tele-Summit located on our “Originator Coaching > Originator Audio” section.  If you can’t do that for some reason, pick a goal, and put it on paper.  Write down 5 action steps you need to do in order to accomplish this goal and put in on your wall.  We wish you the best of luck in planning for your business!

Retaining Your Best People

We've all heard of "Relationship Selling." Relationship Selling is important if we want to keep life-long customers. This is a powerful way to get and retain customers over long periods of time. So, how can we apply increased relationships in other areas? How about "Relationship Managing?" The Wall Sreet Journal did a survey of the top CEOs in the United States. They found that 70 percent of the decisions that CEOs make are based on their relationships with friends. Their business decisions are based on input from their friends because of the relationship they have together. You don't always seek advice from a business associate, colleague, partner, customers, boss, or peers…you go to friends. We have all heard the old axiom, "It's not what you know, and it's whom you know." I believe that in order to survive in today's competitive environment, it is both – it's what you know and whom you know.

How many of you have ever had a loan processor quit because he or she was offered more money from another company? How many have ever had a loan originator quit for the same reason? My next question is; "What must we do to keep this from happening or at least minimize the damages?"

Relationship management is increasingly important in today's mortgage origination environment. Look at relationship management as insurance. If you invest some extra time building relationships with your team, the chance of them being recruited diminishes. This is an essential distinction that must be taken seriously to add some security to your business. When I hear managers talk about loan originators, it is usually in the negative. I hear managers say; "Those loan officers only care about themselves. Those loan officers will leave you for the slightest thing. Every loan officer is greedy. They will leave you for more money every time. Loan officers are all high ego sales people who only care about themselves." Do some of these comments sound familiar? All of these statements have been true at one time or another, but it is definitely not like this all the time. In fact, many managers tend to contribute to the problem of the "us and them" syndrome. Let's stop all this madness. Let me give you some key concepts on how we can improve our relationships and reputations with loan originators.



First, we must understand that all employees) not just loan officers) listen to radio station WII-FM (What's in it for me?") In fact, all human beings listen to this radio station most of the time. By realizing this simple fact, we can adjust the way we think about this issue. If we understand that all people are this way to a certain degree, it is easier to understand that one particular loan officer who is on our mind. Why shouldn't we ask our loan officers, "What's in it for you?" When we're recruiting loan officers, we always ask this. But as soon as we hire them, we find ourselves talking negative about them at our first manager's meeting.

Think about it – if our ongoing goal is to help them "be all they can be," we can't lose if we seek to understand them first. In Steven Covey's book, "Seven Habits of Highly Successful People," this is one of the habits. Seek first to understand, then to be understood. Sure, a few bad apples might stab you in the back, but if you treat them right, these incidences become rare. The bottom line is that most people will want to help you if they feel you really care. So let's start by refraining from saying negative things about loan officers and how they tend to be high-maintenance individuals who only care about themselves. Let's practice being positive more often. I don't care how smart a manager is; if you can't say something nice about your own people, don't say anything at all. I know you've heard that before. Maybe from your mother? Let's look at WII-FM as a positive and see how far we get. Zig Ziglar said it best, "If you help enough other people get what they want, then you'll get what you want."

Besides listening to WII-FM, it is also important to motivate your loan officers. Your ability to motivate other people will depend on how you answer these two questions. Can you motivate others? What environment are you creating? Let me give you the answers and we'll review this concept.

Can you motivate other people? The correct answer is no! You can't motivate others because they have to motivate themselves. You can motivate them short-term, but it's not going to last until they learn to motivate themselves. Have you ever been to a motivational seminar? Where you motivated and how long did the motivation last? Even if you went to see Zig Ziglar, one of the greatest motivational speakers of all time, your motivation doesn't usually last unless you yourself make it last. It doesn't last because someone else (other than you) is doing the motivating. You seek out and learn what motivates you personally. This is the only way to stay motivated over long periods of time. It's also the only way we can help others stay motivated. If you can't motivate yourself, how are you going to motivate other in your workplace? We don't have the ability to motivate other people long-term, however, we can learn what motivates them, and then support that. This is the key. This is a way that you can assist people in motivating themselves. Another reason for the difficulty in motivating others is that everyone is different. What motivates you may not motivate me at all. What motivates me may not motivate someone else. The most important thing in keeping good people at any position is to find out what motivates them and support whatever it is.

The second question is, "What environment are you creating?" I have consulted for several mortgage banking and mortgage brokerage firms; every time I walk into a mortgage office, I can tell how successful it is. If they have cheap furniture, I look around and say, "Wow, you must be profitable." But seriously, the successful branches have energy and life and it's evident when you walk in. The branches that are less successful don't have as much energy and life. When people go to work every day, they go to "an environment." Some environments are negative and some are positive. What environment do you walk into everyday? What can you do to improve your work environment? It all starts with the manager. As you go, so goes your team. As the manager goes, so goes the team. As the leader goes, so goes the team. Do you have energy? DO you walk and talk with purpose? Do you support your personal message with the way the office is decorated and furnished? Do you have positive affirmations posted around the office? Is your personal drive and focus to help you, or to help your loan officers, or both? These are empowering questions that you can ask yourself. Then you can find ways to improve on the answer to every question. Your officer should reflect your company culture and mission for being in business. Don't keep this a secret. People want to be a part of something! Let that be you and your organization.

Another way to improve your relationships with your people is to praise and appreciate them. Ken Blanchard, author of The One-Minute Manager, found that appreciation is the number one tool any manager could use for effectiveness. In fact, in all the surveys that I've read, the number one reason as to why people work is always "appreciation and contribution." Both of these come before money. As they say, if you are only working for a paycheck, that is all you'll ever get. All people want and need appreciation. Thank them for doing a good job, even though it is just their job. In other words, thank them for doing their job, but reward them for going above and beyond the call of duty. Dr. Steven Covey says that our relationships with others are like a bank account. If you make deposits in you bank account, you can make a withdrawal occasionally. Like relationships, if you make positive emotional deposits (like praise) in other people, you can afford an occasional withdrawal. But if you never make positive deposits, you bankrupt the account or the relationship. In marriage, we call that divorce. Moreover, we do not want to go there if we can help it, and we can!

When you praise loan officers for doing a good job, follow these guidelines:

·   Tell them what they did right and be specific. For example: "Mike, I want to thank you for doing such a great job on the Smith loan. I know that loan was a tough loan and not many loan officers would have been able to pull it off. Great job!
·   Tell them how you feel about it. For example: Mike, it makes me feel good to know that I can count on you to do a great job, even on the difficult loans such as the Smith loan. I really do appreciate working with you Mike.
·   Encourage more of the same and be sincere. For example: "I wish I could clone you Mike, keep up the great job!

If you tie these three steps together when you praise someone, you will be making a large, positive, emotional deposit for your future success. Turnover will go down and employee contentment will go up.

Finally, take the time to be with your loan officers. Look at them as people first, loan officers second. Always remember that people work for people first, causes second. Have them over for dinner. Do activities outside the workplace with them. Be proactive in building a solid relationship with your people. A survey recently conducted at a local middle school. The speaker asked the students, "How many of you have friends?" Ninety-five percent of the students raised their hands. Then he asked, "How many of you have good friends?" Only 75 percent of the students raised their hands. Then he asked, "How many of you have best friends?" Only 25 percent of the students raised their hands. Then he asked, "Is there anything better than a best friend?" Three girls in the back raised their hands and responded, "yes there is!" The girls said that a "true" friend is better than a best friend because no matter what secrets you tell a "true" friend, the will not repeat it to anyone else. Then the speaker asked the girls, "How long does it take to build a "true" friend?" The three girls responded by saying that they were "true" friends with each other and spend about six hours per day together. The point is that an investment of time is necessary for improving your relationships with your loan officers. One of the best investments you can make in your mortgage future is to take the time and make the time with helping your own team succeed. In measuring how much time you should spend with the people on your team depends on how successful they are or on how much desire they have. I have always invested a lot of time in my top performers as well as those people who had a burning desire to succeed. Use common sense here. You don't want to spend too much time with high maintenance/low producing people. Focusing on supporting your people because they are your internal customers is the key. It is a wonderful thing to be able to help someone with his or her career and make a friend in the process.

I'm not giving you a "Pollyanna" approach to your business and I am not saying you should go out and try to be best friends with all of your employees. What I am saying is to go out and deliberately find ways to improve the relationship you have with the people you work with. In addition to being good for your health, good relationships can have a profound effect on your business.

In summary, remember to manager effectively by finding ways to improve your relationships with your employees, always speak positively when referring to your loan officers and others, give them effective praise often, and make the time to get to know your people better. If you will help them get what they want, you'll get what you want.

Mike Baker
Mike@MikeBakerOnline.com
Click here to read Mike's bio

Mike Baker is a nationally recognized mortgage industry leader. He started his career as a loan officer in 1985 and quickly became one of the nation's top performers in personal loan production. His business model for building mortgage branches worked so well that he's experienced tremendous success in recruiting, hiring and retaining top performers in several states.

There is no more important component in the budget of a mortgage operation than the commission plan.  Commissions may range from 25 percent of the total expenses to 75 percent or even higher.  The basis of paying commissions may vary as well from a percentage of income to basis points.  In this section we will present some of the options and variables, as well as the sample components of such a plan.

Alignment of Goals

Before we get into the actual details of the plan, it is important to return to our organizational objectives so that the plan can be built in a way that it is more likely to support, rather than conflict with our goals. There are many examples we can present in this regard.

     · If the goal is quality and the plan rewards only production volume, the plan may actually hurt the achievement of quality objectives.
     · If our goal is the growth of the organization, how are the loan officers rewarded for helping the company grow?
     ·  If our goal includes the development of a long-term customer base, does the plan give incentives for repeat business or new customers?
     · Do you have a goal of reducing turnover?  Is there an incentive based upon seniority?

Percentage of Revenue vs. Basis Points

Many years ago before the growth of the mortgage brokerage industry, it was most common to pay loan officers a certain number of “basis points.”   More specifically, since the mortgage company’s main source of revenue was an origination fee (100 basis points), the loan officer was paid 50 basis points or half of that income. The mortgage company may have made other income such as sale of servicing, so the profit formula was to “lose” money on origination, but make money overall-

     -Origination Fee Income         100 basis points
     -Loan Office Income                50 basis points
     -Operational Expenses            75 basis points
     -Net loss on operations           25 basis points

Unit Model

Another model would pay the loan officer based upon units rather than basis points or percentage of revenue. This method will not make economic sense in most circumstances because units will not always be related to revenue. However, it is not uncommon to use this method in an “in-house” loan officer model. When the company provides leads they may pay their loan officers a small base salary plus commission which is a percentage of revenue, basis points or a certain number of dollars per unit. For example,

     --Base Salary     $30,000 per year
     --Incentive          $200 per loan

Defining the income

An important decision that must be made is identifying the income that is to be “commissionable.”
     * Brokers - For a mortgage broker, the income made is much more easily identified. This income will be points collected, yield spread received, and miscellaneous fees that are not passed through to vendors including the lenders (sometimes referred to as “junk fees”). The income that is “commissionable” would typically be comprised of points and yield spread but it would not be unusual for there to be a certain amount of fees upon which an originator is not paid commission.
     * Lenders or Bankers - The income issues with regard to bankers can be much more complex.  If you work for a bank and that bank is either retaining servicing or placing loans in its portfolio—the income may not be determined until well after a loan is closed. This is the reason why HUD requires brokers to disclose yield spreads on a good faith estimate and does not require the same for a banker.  In these cases, the commission system is more likely to be based upon a certain number of “basis points”, rather than a percentage of income.

Overages

The concept of overages typically occurs in a banking/lending environment.  In this case the “bank” is offering a rate to their sales force and giving them the ability to charge higher than that rate—

     Example - 7.0% with zero points

     Loan Officer is paid 50 basis points commission at that rate
     Loan Officer charges one point at 7.0%
     The overage is 100 basis points or 1.0%

In the above example, the mortgage company would allow the loan officer to “share” in the extra profits from this higher quote.  It would not be untypical for the loan officer to receive 50.0% of the overage, or in this case a total commission of 100 basis points or one percent.  In the “percentage of revenue” commission model, overages are not typically an issue because the loan officer receives a percentage of the total revenue.  On the other hand, if the company requires certain fees which are not commissionable, the question may be asked whether the loan officer can collect additional or larger fees and whether those “extras” may be included in the commissionable income.

Underage

If it is possible to exceed the bank’s published rates and points, then it may also be possible for a loan officer to quote something below the published rate.  Some lending companies may “split” underage with their loan officers, while others may ask the loan officers to reduce their commission by 100 percent of the value of the underage.  Again, in the percentage of fees model, if the loan officer does not collect required fees, this may be considered an underage.

Draw

Many mortgage companies are set up under plans that pay “100% commission” which means no base salary. However, it would not be unusual for lenders to pay a draw against commission. It is more likely that loan officers would be eligible for medical benefits with a “company contribution” with lenders, especially banks. Having a regular income allows the company to deduct the employee contribution.  Of course, having a draw against commission opens up other questions, such as how far a loan officer will be allowed to fall “in the hole” against their draw.  In addition, many companies may pay a guarantee for the first 60 to 90 days while the loan officer is building their pipeline.  An additional question may arise with regard to this guarantee—is the guarantee against commission or in addition to commission?  In most cases the guarantee would not accumulate like a draw, but it would be subtracted from commissions earned.

Variations

There are many variables that would cause one plan to vary from another. Here are some of the factors that may cause the variations:

     * Support - Certainly, it makes sense that there is a relationship between support and commissions. Generally, the higher the level of support, the lower the commission plan’s percentages paid out.  Here might be some typical examples:

          25% of revenue - Highest level of support includes provision of leads, training, processing, offices, software and more.
          50% of revenue - Provision of processing, software, some marketing support and an office.
          75% of revenue - Provides licensing and investor approvals, but no other support.  Perhaps loan officer works out of their home.

     * Volume - Some plans may be graduated based upon volume of loans and/or revenue produced.  For example:

          ·  50 basis points for up to $500,000 in month
          ·  60 basis points for over $500,000 and up to $1,000,000
          ·  70 basis points for over $1,000,0000

In the above example, it needs to be specified whether the higher levels will result in commissions “back to dollar one.”  In other words, if you go over $500,000, would you receive 60 basis points on all of the production or just on the production over $500,000?  A variation of the plan above would be quarterly commission levels.  Some plans may have higher levels on an annual basis.  These plans have the advantage of leveling out monthly variations.  A loan officer may be in the lower category five months in a row—but have one good month and move to 70 basis points under the monthly plan. This would not be possible with an annual plan.

    * Loan Types -Especially in the banking/lending world, certain loan types may be more profitable than others. Examples of how this variation might work:

          ·  50 basis points for conventional loans
          ·  65 basis points for FHA loans
          ·  70 basis points for sub prime loans
          ·  20 basis points for 2nd mortgages

     * Employee Status - The commission plan may vary in accordance with employee status. The loan officers may be either “W-2” employees or “1099” independent contractors. When the loan officers are employees, the plan must take into account paying the employer share of payroll taxes.  It should be noted that in many situations, the company does not have the ability to allow the loan officers to be independent contractors. This status is not allowed in certain states.  In addition, FHA requires loan officers to be “full-time employees of the mortgage company.”  Therefore, if the company and/or loan officer is originating FHA loans, a 1099 status would not be possible. 

     * Source of Leads - The compensation plan may vary by the source of the lead.  For example, if the originator is working for a builder-owned mortgage company, the company may pay more for independently generated leads as opposed to builder-deals obtained from the originator’s assigned site.  The logic for the disparity might include factors such as the extra cost for incentives to attract the builder business as well as the fact that this will be considered “incremental” business to the company.
     * Other Examples - The plan may include variable levels based upon other facts such as seniority or quality.  For example, there may be bonuses based upon lower fallout rates or loans approved with minimal conditions. Or, there may be an annual bonus based upon production and years of service.

Dave Hershman
dave@hershmangroup.com
Click here to read Dave's bio

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Commission Plans

There is no more important component in the budget of a mortgage operation than the commission plan.  Commissions may range from 25 percent of the total expenses to 75 percent or even higher.  The basis of paying commissions may vary as well from a percentage of income to basis points.  In this section we will present some of the options and variables, as well as the sample components of such a plan.

Alignment of Goals

Before we get into the actual details of the plan, it is important to return to our organizational objectives so that the plan can be built in a way that it is more likely to support, rather than conflict with our goals. There are many examples we can present in this regard.

     · If the goal is quality and the plan rewards only production volume, the plan may actually hurt the achievement of quality objectives.
     · If our goal is the growth of the organization, how are the loan officers rewarded for helping the company grow?
     ·  If our goal includes the development of a long-term customer base, does the plan give incentives for repeat business or new customers?
     · Do you have a goal of reducing turnover?  Is there an incentive based upon seniority?

Percentage of Revenue vs. Basis Points

Many years ago before the growth of the mortgage brokerage industry, it was most common to pay loan officers a certain number of “basis points.”   More specifically, since the mortgage company’s main source of revenue was an origination fee (100 basis points), the loan officer was paid 50 basis points or half of that income. The mortgage company may have made other income such as sale of servicing, so the profit formula was to “lose” money on origination, but make money overall-

     -Origination Fee Income         100 basis points
     -Loan Office Income                50 basis points
     -Operational Expenses            75 basis points
     -Net loss on operations           25 basis points

Unit Model

Another model would pay the loan officer based upon units rather than basis points or percentage of revenue. This method will not make economic sense in most circumstances because units will not always be related to revenue. However, it is not uncommon to use this method in an “in-house” loan officer model. When the company provides leads they may pay their loan officers a small base salary plus commission which is a percentage of revenue, basis points or a certain number of dollars per unit. For example,

     --Base Salary     $30,000 per year
     --Incentive          $200 per loan

Defining the income

An important decision that must be made is identifying the income that is to be “commissionable.”
     * Brokers - For a mortgage broker, the income made is much more easily identified. This income will be points collected, yield spread received, and miscellaneous fees that are not passed through to vendors including the lenders (sometimes referred to as “junk fees”). The income that is “commissionable” would typically be comprised of points and yield spread but it would not be unusual for there to be a certain amount of fees upon which an originator is not paid commission.
     * Lenders or Bankers - The income issues with regard to bankers can be much more complex.  If you work for a bank and that bank is either retaining servicing or placing loans in its portfolio—the income may not be determined until well after a loan is closed. This is the reason why HUD requires brokers to disclose yield spreads on a good faith estimate and does not require the same for a banker.  In these cases, the commission system is more likely to be based upon a certain number of “basis points”, rather than a percentage of income.

Overages

The concept of overages typically occurs in a banking/lending environment.  In this case the “bank” is offering a rate to their sales force and giving them the ability to charge higher than that rate—

     Example - 7.0% with zero points

     Loan Officer is paid 50 basis points commission at that rate
     Loan Officer charges one point at 7.0%
     The overage is 100 basis points or 1.0%

In the above example, the mortgage company would allow the loan officer to “share” in the extra profits from this higher quote.  It would not be untypical for the loan officer to receive 50.0% of the overage, or in this case a total commission of 100 basis points or one percent.  In the “percentage of revenue” commission model, overages are not typically an issue because the loan officer receives a percentage of the total revenue.  On the other hand, if the company requires certain fees which are not commissionable, the question may be asked whether the loan officer can collect additional or larger fees and whether those “extras” may be included in the commissionable income.

Underage

If it is possible to exceed the bank’s published rates and points, then it may also be possible for a loan officer to quote something below the published rate.  Some lending companies may “split” underage with their loan officers, while others may ask the loan officers to reduce their commission by 100 percent of the value of the underage.  Again, in the percentage of fees model, if the loan officer does not collect required fees, this may be considered an underage.

Draw

Many mortgage companies are set up under plans that pay “100% commission” which means no base salary. However, it would not be unusual for lenders to pay a draw against commission. It is more likely that loan officers would be eligible for medical benefits with a “company contribution” with lenders, especially banks. Having a regular income allows the company to deduct the employee contribution.  Of course, having a draw against commission opens up other questions, such as how far a loan officer will be allowed to fall “in the hole” against their draw.  In addition, many companies may pay a guarantee for the first 60 to 90 days while the loan officer is building their pipeline.  An additional question may arise with regard to this guarantee—is the guarantee against commission or in addition to commission?  In most cases the guarantee would not accumulate like a draw, but it would be subtracted from commissions earned.

Variations

There are many variables that would cause one plan to vary from another. Here are some of the factors that may cause the variations:

     * Support - Certainly, it makes sense that there is a relationship between support and commissions. Generally, the higher the level of support, the lower the commission plan’s percentages paid out.  Here might be some typical examples:

          25% of revenue - Highest level of support includes provision of leads, training, processing, offices, software and more.
          50% of revenue - Provision of processing, software, some marketing support and an office.
          75% of revenue - Provides licensing and investor approvals, but no other support.  Perhaps loan officer works out of their home.

     * Volume - Some plans may be graduated based upon volume of loans and/or revenue produced.  For example:

          ·  50 basis points for up to $500,000 in month
          ·  60 basis points for over $500,000 and up to $1,000,000
          ·  70 basis points for over $1,000,0000

In the above example, it needs to be specified whether the higher levels will result in commissions “back to dollar one.”  In other words, if you go over $500,000, would you receive 60 basis points on all of the production or just on the production over $500,000?  A variation of the plan above would be quarterly commission levels.  Some plans may have higher levels on an annual basis.  These plans have the advantage of leveling out monthly variations.  A loan officer may be in the lower category five months in a row—but have one good month and move to 70 basis points under the monthly plan. This would not be possible with an annual plan.

    * Loan Types -Especially in the banking/lending world, certain loan types may be more profitable than others. Examples of how this variation might work:

          ·  50 basis points for conventional loans
          ·  65 basis points for FHA loans
          ·  70 basis points for sub prime loans
          ·  20 basis points for 2nd mortgages

     * Employee Status - The commission plan may vary in accordance with employee status. The loan officers may be either “W-2” employees or “1099” independent contractors. When the loan officers are employees, the plan must take into account paying the employer share of payroll taxes.  It should be noted that in many situations, the company does not have the ability to allow the loan officers to be independent contractors. This status is not allowed in certain states.  In addition, FHA requires loan officers to be “full-time employees of the mortgage company.”  Therefore, if the company and/or loan officer is originating FHA loans, a 1099 status would not be possible. 

     * Source of Leads - The compensation plan may vary by the source of the lead.  For example, if the originator is working for a builder-owned mortgage company, the company may pay more for independently generated leads as opposed to builder-deals obtained from the originator’s assigned site.  The logic for the disparity might include factors such as the extra cost for incentives to attract the builder business as well as the fact that this will be considered “incremental” business to the company.
     * Other Examples - The plan may include variable levels based upon other facts such as seniority or quality.  For example, there may be bonuses based upon lower fallout rates or loans approved with minimal conditions. Or, there may be an annual bonus based upon production and years of service.

Dave Hershman
dave@hershmangroup.com
Click here to read Dave's bio

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