It seems that the damn government just can’t keep their hands off the economy. Of course, with such a great track record, can you blame them? The bureaucrats love to believe that they can micromanage any aspect of any industry but in reality there’s no getting around the laws of economics or the law of unintended consequences.
I was corresponding with Russ Martin of Perl Mortgage a while back and he enlightened me on the extent to which the government has gotten into his underwear. In a nutshell Russ says that “the Fed instituted compensation rules to prevent loan officers, who largely are no longer in the business, from putting consumers, who couldn’t qualify for a regular mortgage, into products that no longer exist.” Yep, that sounds like the government. Here is the rest of what Russ had to say on the subject.
The Federal Reserve fixed loan officer compensation by dictating it must be the same percentage on every deal. It went into effect in April. We used to have total control over what we made but some how the Fed decided that loan officers where gouging consumers (of course, they don’t have a shred of proof that was the case). To be honest, it was down right frightening to listen to some of the bureaucrats at the Fed during discussions regarding mortgage lender compensation and other rules. Excuse my French, but these people have NO FREAKING CLUE how the mortgage market works. None whatsoever.
It was mostly done to remove some of the temptation of loan officers to put borrowers in loan products based purely on compensation and not what is best for them. During the boom, Option ARMs paid pretty much the most of any loan product so obviously a lot of boiler room places were pushing Option ARMs because that is what Wall Street wanted. The problem wasn’t as wide spread as they make it out to be though. FHA and VA also paid exorbitant commissions too, in fact, in many cases more than Option ARMs, yet FHA didn’t see the same boom that option arms did. The real reason was Option ARMS also had lower qualification standards (stated income, stated assets, etc, higher loan-to-values etc…) which was the real reason a lot of those products were used, not the commissions – otherwise you would have seen the same growth in FHA which, at the time, could pay up to 5% in commissions.
They essentially removed any compensation risk from the loan officer and moved it to the employer under the rule. I get paid the same percentage regardless, just like a Realtor. In the past, loan officers could fork over commission to correct mistakes, do favors, pay closing costs, etc or whatever to save a deal (in some cases do a deal for ZERO). Now we can’t. The loan officer’s company has to do it. As a result, rates are up across the board because the company has to take more risk. So if a deal needs an extension for example due to a delay in closing, I no longer can just absorb it in my commission. The borrower has to pay it or the company has to absorb it. Therefore, all prices are higher to compensate for those deals where the company will have to make less while paying the loan officer a consistent percentage – deal only makes 1% profit, but they still have to pay me 1.5%. So now every deal is priced at say 2% when before it would be priced at 1.5% and if it made less, it meant I made less. The company has to bank that .5% margin on every deal to make up for the losses on that one deal that gets screwed up since the loan officer can no longer bear the cost of it directly. I would guess rates are .125-.25% higher than where they would be without this rule.
People with larger loans are paying more than they should while people with smaller deals are paying less than they should because we can’t adjust based on loan size either. I closed a $3 million dollar deal last year. I would normally say take a commission of .75% on it which is more than adequate. Now I would literally have to charge that guy 1.5%. At the same time, if someone had a $100k loan I would normally price it with a 2.5- 3% commission otherwise it really isn’t worth the time and headache. Now, that $100k deal has to get done for 1.5%. Of course, a lot of good loan officers rather just not do it so we just refer those deals out to the big banks as they can absorb the loss that will result on the small loans or loans that require substantial extra effort beyond what is normally required since we can’t be compensated fairly on those deals.
A lot of loan officers were complaining early on since we don’t like not being in control of pricing as much, but at the end of the day I got a raise I didn’t ask for so I guess I can’t complain.
Russ closes by saying that if his loan volume this year had remained the same as it was last year he would be making a ton more money.
Thank you government for increasing the cost of buying a home!