How We Got Here!

Not a day goes by that you don’t see one industry authority or another remarking on the ugly state the residential real estate mortgage lending industry is in. We see the reason(s) for this are the exotic loans, fraud, reckless underwriting, thinly capitalized lenders, wholesale funding sources consolidating or simply closing their doors, Congressional hearings being scheduled … it truly is a mess … and like the old saying goes, industry wide everybody has an opinion on WHY? Here’s mine:

Today’s LO’s & AE’s are commission salesmen at heart and that is the core problem. Back when I was a young broker, we were institutionally trained to help the public and do the right thing for them. Today, an originator is focused on making the almighty commission check. It puts their interests above that of the client. Most people don’t understand that commissions are actually a new payroll structure for LO’s and AE’s that first came into being nine years ago. Before that, these mortgage professionals were paid salary with small bonuses for achieving their production goals. Some industries focus on “closing sales,” but our business should focus on fixing the lives of customers; as a by product, we earn a living wage and maybe sometimes a handsome one - the pay is a by-product of the activity. After the subprime industry nearly collapsed in the Fall of 1998 and there were thousand of people unemployed, those weaken but still standing organizations (frightened to offer bigger salaries yet eager to pick up some good people, began this “commission” concept); once property values soared and rates plunged for several years following, those commissioned people had the surprising opportunity to earn big dollars – it was 'easy money' for many. This new business paradigm (commissions) went full force and has been at the core of the subsequently developing problems.

Once the hearings and etc. have all been completed, the Loan Officer & Broker force decreases significantly, and the lending consolidation and failures slow and all the blame’s been handed out – it will be time for industry leaders to determine how to fix this mess so it doesn’t happen again.

The remedy is to get back to what worked for decades before - remove the big gagging commissions from the ranks of the LO’s and AE’s. Paying the origination side of this business big commissions cannot help but attract the wrong type of individuals, and corrupt even the most honorable people. The commission approach tends to suggest that the origination force is, or should be, a SALES function, which is absolutely incorrect. The job description of AE’s and LO’s are actually a customer service type of position, not a sales/closer type of job for as far back as I can remember prior to the beginning of this last industry cycle. With this adjustment, the money saved by the owner operators will help to suitably capitalize their diluted ranks again.

The payroll structure I talk about here, is what my first employer did for the 45+ years before I started with them, and the way I did it in my own company for the next four decades. Since I was there as an employer for a long while, and have seen the effect, both before and after, this change to commissions, I have a perspective different than many.

As more owner operators revert back to this business model, there are any number of significant positive improvements which flow from it. The biggest one, is a more confident healthier attitude of the employer. And, since they already know getting a mortgage is the largest single financial transaction most Americans make in their entire life, they come to realize leaving such an important life changing event up to a “salesmen” LO who, just last week was selling used cars, etc. has been a momentous mistake. Actually showing up to a commercial office to work, will produce a better appearance/image both for their employees and the industry as a whole; no more mortgage ‘professionals’ working at home in their Jammies with the Bunny feet. One thing of course, is that since a 'salary' will be offered to new hires, employers are more sensible about who they hire/invest in, and the degree and intensity to which they'll train them; consequently personnel quality becomes far superior and more productive then previously. This also results in no more ‘work at home loan officers’ because now they’re W-2ed employees who will work in the employer’s premise where their activities can be properly supervised and monitored. Formerly, being at home, they surely violated The GLB Act daily in many ways as well.