Loan Officer Compensation Hurts Lenders

By
Services for Real Estate Pros with Liberty Mutual

The State of Florida is suing Countrywide for misreprenting loan programs and aggressively approving subprime borrowers. "It is unthinkable that a company would try to take advantage of someone's dream of homeownership," Florida Attorney General Bill McCollum said in a statement.

I was taught in Journalism School to follow the money. If something stinks, follow the money and you'll probably find the source of the smell.

Human beings originate loans and those humans can have ethics and morals below were we'd hope them to be. It sounds like CW management pushed deals that shouldn't be done. Again, humans making mistakes. But let's follow the money...

Management and shareholders make money when the company closes loans - thus the short sighted desire to push deals through. (most Underwriters with tenure were probably provided stock or were provided the opportunity to purchase discounted stock - thus the were shareholders)

Loan Officers are paid to originate and close loans. They are paid one time on that loan based on merely closing it, not on its performance. Get them to close and don't worry about it. It isn't your problem after closing. Not exactly a good model for keeping customers in a safe loan and therefore shareholders long term interest at heart.

Why not pay the loan officer based on performance of the loan? The insurance industry pays for new policies as well as those that renew. Why not pay the originator at closing as well as an annual fee if the loan is still in good standing. That would be an incentive to write good loans and remove the pressure to check ethics at the door.

I bet that bank shareholders would be interested in such a plan.

Comments (8)

Highland Beach Condos David Serle
RE/MAX Services - Highland Beach, FL
Boca Raton Agent David Serle

Good post.  I think before long a lot of executives at Countrywide are going to see some jail time.  They were giving bonuses to those who would sell the option arms, negative am loans, but the bonuses would escalate if you sold the borrower on a larger margin.  In other words the borrower did not care as the payment was the same, but when he received the notice after a year that his margin was 5 or 6, and his mortgage payment quadrupled he did mind.  Countrywide is not the only company that did this, but very deceptive loan practices.

Jul 01, 2008 07:38 AM
Ken Land
Fairway Independent Mortgage - Weddington, NC
NMLS#108157

Interesting idea on the "performance" pay plan.  Would clean out the people looking for a quick buck in this industry. 

 

Jul 01, 2008 07:38 AM
Kevin Michelson
Liberty Mutual - Nashville, TN
MBA, Nashville Insurance

Ken-

I'd guess that anyone looking for a quick buck is pretty much gone! Back to selling used cars and running numbers.

David-

I should note that I was at Countrywide for a brief period of time. I can't comment on their practices as I signed documentation stating that I wouldn't. Most lenders gave an incentive to sell what appeared to be a more profitable loan at origination. In many cases that profit on that loan was eliminated after month 3 of missed payments. Very short sighted practice.

Jul 01, 2008 08:16 AM
Paul McFadden
Responsive Pest Control - Seattle, WA
Pest Control, Seattle, WA.

Hi Kevin: If an LO is ethical there is no problem. Regulating our industry too much I think is a bad idea. Ultimately the market correction that is currently going on is weeding out all the greedy folk anyway. Take care.

Jul 01, 2008 02:28 PM
Nancy Larson
I am a licensed referral agent in NJ - Hutchinson Island, FL

I agree with Paul. Those who were greedy are no longer around. And looking for other get quick schemes.

Jul 01, 2008 03:09 PM
Richard Byron Smith, NMLS #184479
Mortgage Loan Officer, Fairway Independent Mortgage Corporation NMLS #2289 - Chattanooga, TN
Mortgage Loan Officer

The thing about the option arms was that the LO's got paid significantly more to put high adjustment margins, when they could have sold a significantly lower margin.

The borrowers would not have even realized this. Even savy borrowers could have never known about this steering. The margin and its impact would have been hidden until the neg am started building and the min payments started increasing.

The suit should put some focus on the sales of high margins on this risky loan, and maybe track down the LO's that snuck them on their unsuspecting customers, and have the LO's repay the premiums paid for the higher margin.

There was no way for a consumer to know to shop the margin in those loans.

Richard

Jul 01, 2008 11:50 PM
Kevin Michelson
Liberty Mutual - Nashville, TN
MBA, Nashville Insurance

Nancy and Paul-

Most of the greedy ones are gone - but there will always be someone making desicions for their benefit and not the client. Not us, but they are always going to be out there.

 

Richard-

We have a huge problem in that borrowers believe the only thing they should focus on is rate. Some know enough to shop rate and fees. But nearly every one of them believes that if they make that payment 360 times they'll own their home. Scary in the case of the Neg Ams - but that's the type of responsibility that we have - make sure they understand if the loan is not a conforming fixed product.

Jul 02, 2008 05:36 AM
Ken Land
Fairway Independent Mortgage - Weddington, NC
NMLS#108157

Kevin - I am with you.  It is our responsibility to make sure that borrowers truly do understand the products they are getting into.  On the option arm, one of the most important focusses should have been the margin and that is what the client should shop around on.  I liked the product for certain situations.  There is/was a niche for it.  There were several companies/brokers though that felt everyone should be in the loan - not the case.

I also explained to them how putting the PPP on them affected the loan.  It could be used to buy down the margin for them because it added so much yield spread to the loan.  (Granted most people probably used it to make 3pts). 

 

 

Jul 02, 2008 05:49 AM