At least 5 times per week I get asked how I would run a mortgage business in todays market, or something to that effect…there’s a million ways to ask the same question. So, in the spirit of why I started blogging (because I really do not like repeating myself) and in Twitter like fashion, Ill start running my fingers against the keyboard and impress my thoughts accordingly…
This will be a few part series on how I think a mortgage business (brokerage et. al) should be (re) run in todays market, going forward. I’m shooting from the hip here, in rapid type mode, so excuse the lack of linkage.
Step One. Fire everyone, reduce the size of your current office space, and buy new computers if they are 3+ years old.
Step Two. Toss your antiquated compensation plan. Antiquated means:
A) Any model that pays some ’split’ of gross commissions between the originator and the business.
B) Pays employee’s for loans the closed within the past 30 days, since doing so is a terrible way of managing cash-flow.
Step Three. Figure out a new compensation plan for your two ‘new’ originators (see below)…preferably one that pays them a fixed $ amount per loan closed, regardless of loan amount. This gets them focused on volume and away from the biggest, closest donut on the plate, as well as better aligns the interests of all parties involved: originator, wholesaler, and consumer. Adjust your compensation payment schedules (payroll) to remit the average of the three previous months gross commission total. For example:
Joe closed 4 loans at $400/per in month one ($1600 Gross), 12 loans in month two ($4800), and 8 in month three ($3200). Add the 3 months gross commissions and divide by 3. $1600+$4800+$3200 = $9600/3 = $3200 gross to Joe at the end of month three.
Next month if Joe closes 15 loans, the oldest month’s commission figure falls off ($1600), the next two back up and the newest months gross commission amount of $6000 is figured in…and Joe takes home a check for $4666.66.
This strategy, called a 3 month moving average (or 3 MMA), allows the business to manage cash flow better, avoiding the feast or famine dynamic that exists in too many mortgage offices.
Step Four. Rehire your two most seasoned mortgage originators. Benchmark test for a seasoned originator: They must be able to look at a 1003/1008, a Tri-Merge credit bureau and within 60 seconds know where the holes are (if any) and identify which 3 wholesale lenders are most likely to buy the deal.
Step Five. Rehire (and/or acquire) and overpay for at least 2 good processors. Good processors, the uber-organized people who actually turn mortgage files into loans are worth far more than a sales monkey, especially in 2008.
Step Six. Trash the ridiculous used car salesman marketing pitches. Open your Kimono and be honest with potential clients. Tell them how this business works, how you make money, how much you make…keep your pitch that simple. Then tell the potential client you won’t do business with them until they shop you against 3 other mortgage outfits, with one disclaimer…they can’t tell the next three mortgage pimps what you just disclosed to them, and then let them decide who they want to do business with. If they call back, they’re yours for life, if they don’t, you didn’t want them in the first place…
Dave...Interesting last name ;)
The amount of money I would pay a mortgage originator (speaking as the proprietor of a mortgage company) under these conditions and what the company charges (as a whole) to originate and close a loan for clients are different. Don't know if that part was crystal clear in the post. Im not suggesting that the company (only) charge $400/closed loan...that would be economically impractical.
I think it is funny that people won't work for the same money averaged over three months that they would get in separate months. (Did I say that right? I don't think I did)...
It's the same money, just smoother.
And Joe is being paid what prior to the $3200 check at the end of month 3?
Your take on compensation leaves a lot to be desired.
Based on your example, the originator who busted his hump in month 4 gets screwed out of $1333 and has now averaged only $366 per loan and not $400. Do you actually believe this is fair?
Also, what are you assuming the average gross profit to be per loan? Taking California and a $400,000 loan for example, you're probably talking about $6,000 or more. A $400 commission would be less than 7% - are you kidding me? At a $3,000 gross the LO's take would still only be 13%.
If you are looking for a way to drive everyone out of the business, this would do it. I'm waiting for you to do a follow saying you were only joking. You were weren't you?
Sorry its taken me so long to respond Mike...I was looking for your comment on my home blog and thought it was mistakenly deleted...
I'm opining from the platform of business owner, not originator...so my suggestions are bound to be slanted accordingly, and no I'm not joking.
Mortgage salesmanship is dead. IMHO a consumer qualifies for what they qualify for. An LO's job has been (is being) reduced to pure 'paper pushsing', and require a good processor to master this task. I believe a flat fee, independent of loan amount, more in tune with documentation (and thus labor intensive) requirements is the way the cost to originate a mortgage should be charged.
For more reasoning, please read my early posts and my home blog @ www.thexbroker.com...There is quite a bit of method to my madness...
Jeff I truly belieive you are out of your mind. Good luck finding Originators that will work for peanuts.Good processors huh. Well I have only had the pleasure of working with one. They are few of those and they make over 100k a year and drive Mercedes. In this day and age most Loan officers wind up processing better than 75% of a loan. Jeff what you are looking for are Order Takers, Desk Jocky's that nether take the time to educate themselves or take the time to meet with their clients. After all there is no incentive. Originators will be nothing more than a Customer Service Rep. I've seen more than my share of greedy owners of Mortgage Companies but you and anyone that thinks the Originator is dead are a menace to the public at large.