The Garrett Watts Report

Originator Comp Debate: Minimum Wage Labor Laws

C.M. "Corky" Watts, CMB — Fri, 06 May 2011 15:41:12 GMT

As Dodd-Frank loan officer compensation regulations became a reality in early April, I started seeing new pay practices emerge in my reviews. Several large retail mortgage bankers are now offering a minimum wage to outside referral based loan officers, not just call center originators.

Here are some key components of the plans:

Minimum wage that ranges from $8 to 12 depending on the loan officer's monthly volume
Basis point paid on volume and credited against the minimum wage. The minimum wage is not a draw.
Some performance and/or quality piece that is paid quarterly

Two such companies have in-house counsel and have worked with labor attorneys in determining whether or not they're at risk of violating any labor laws by not paying their referral-based originators a minimum wage. I’m not an expert on labor laws, but this growing practice mirrors comments I heard several years ago that all loan officers were entitled to a minimum wage...

I was attending a mortgage banking production conference that covered an array topics from loan officer agreements to marketing strategies and employment laws. One of the speakers was a labor attorney who provided a presentation on originator compensation practices. The essence of his thesis was that 90% of mortgage lenders were in violation of current labor laws as it relates to loan officer compensation. At the time, call center loan officers and referral based outside loan officers were being paid commission only. He stated that all loan officers needed to be paid minimum wage, including overtime.

Today most call center lenders pay their loan officers minimum wage and calculate overtime based on the total compensation paid (minimum wage and commissions earned). But most referral based originators are still paid commission only. What we’ve learned in recent years is our industry is being scrutinized from every direction and every angle. From credit, compliance, national licensing and compensation, Congress and regulators have us in their cross-hairs. Is this another area we might have to address? If so, what might be the consequences?

I’d like to hear from readers and especially from a labor attorney on this growing practice. Does the Department of Labor require all loan officers be paid minimum wage? Have these companies interpreted the labor laws accurately?

From a dollars and cents point of view, many operators don’t view loan officers as a fixed expense because they're paid a commission on the income they generate. Some of these companies have 100 or more loan officers working in various branches. If mortgage brokers or bankers are required to pay a minimum wage to all loan officers, this would add a BIG expense. Here is yet another potential game changing threat to the industry.

...(read more)

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Running a Loan Shop: Preparation Leads to Performance

C.M. "Corky" Watts, CMB — Wed, 23 Feb 2011 17:51:24 GMT

I'm winding down a two week trip to the Mid-West where I've been performing warehouse lender audits. Something that's really stood out to me lately is the correlation between financial performance and the preparations taken before a scheduled audit.

The relationship is really quite simple though. When management prepares well for an audit, their operations tend to report much better financial results than companies that don't prepare. These high performers understand the risks associated with being a mortgage banker and have taken the steps necessary to mitigate those risks by constantly staying ahead. Here are some observations I've noted when auditing unprepared companies:

Complaining about the information that is required by the auditor prior the onsite visit
Not providing the information required by an auditor
Not being truthful during the onsite visit. This includes providing misinformation
Not providing accurate financial statement and updated metrics
Not providing information requested after the auditors onsite visit
Not addressing or explaining issues noted in the written audit report
Responding to audit issues with corrective actions, but not implementing them

In my opinion, loan level performance is an indication of management's involvement in the production cycle. Does management understand the risks associated with operating a mortgage bank? Do they understand the ramifications that might follow the announcement of new policies? Have they implement procedures to manage potentially unexpected influences? Areas of risks include credit, compliance, collateral, interest rate,and counterparty.

There are no trees to hide behind. Audits are going to be a part of every mortgage banker's routine in the not-so-distant future. Audits will be required by HUD, the GSEs, warehouse lenders, secondary market investors as well as state regulators. Some will focus on loan level issues; others will focus on management strategy.

Operating your lending shop in a safe and sound manner means putting processes in place to manage risk and ensure compliance with the guidelines of loan investors, the covenants of warehouse lenders, and the regulations of state and federal agencies. Preparing for an audit and addressing the deficiencies discovered in that audit will give operators a leg up when it comes to better managing risks. Better financial results will surely follow.

...(read more)

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Managing Counterparty Risk: Multiple Warehouse Lines Needed

C.M. "Corky" Watts, CMB — Thu, 20 Jan 2011 17:48:00 GMT

What is Counterparty Risk? A counterparty is a company that agrees to perform a transaction or service with or for another company. Counterparty risk is the fallout that would occur in the event one party fails to hold up their end of the deal. Mortgage bankers do business with various counterparties and have a large amount of counterparty risk. Let’s look at some of those relationships... Warehouse Lender: Mortgage bankers rely on warehouse banks to finance their loans until the paper is paid for by the loan investor in the secondary market. Warehouse agreements describe the terms and conditions that allow a mortgage banker to obtain advances from their warehouse facility. Mortgages originators write loans and provide commitments based on the assumption that when their loans are ready...(read more)

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Mortgage Darwinism: Do You Have a Plan B for 2011?

C.M. "Corky" Watts, CMB — Thu, 13 Jan 2011 16:39:10 GMT

Many of the mortgage bankers we visited last quarter were projecting an uptick in loan volume in 2011. They realized origination volumes in general would probably decline in 2011, but most were planning to pick up a few new branches and loan officers to offset the industry-wide forecast for a production slowdown. I suppose some companies will find success in their attempts to hire more originators, but not every operation will be able to add production simply by bringing on new loan officers. There just isn't enough business to go around. When the music stops, someone will be left without a chair to sit in. After mortgage rates spiked in November and December, most companies have already experienced a sharp drop off in production. Making matters worse, some economic forecasters are predicting...(read more)

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Poor Pull-Through Ratios Hurt Entire Operation. Protect Your Pipeline from Fallout

C.M. "Corky" Watts, CMB — Tue, 04 Jan 2011 20:32:58 GMT

One of the key metrics wholesaler and correspondent lenders monitor on a regular basis is their clients' pull-through ratios. A pull-through ratio reference the number of loans that come into a lenders pipeline vs. the number of loans they actually close. Lenders would prefer their third party originator clients maintain high pull-through ratios. A high pull-through ratio in conjunction with other strong performance metrics is a positive for all parties involved as it can lead to better loan pricing incentives and faster turn times for the TPO originator as well as increased productivity and cheaper hedging costs for the lender. From that perspective, it makes sense that lenders would provide additional privileges to customers with high pull-through ratios. A mortgage banker who actively manages...(read more)

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Do High Volume Loan Originators Cost Companies More in the Long Run?

C.M. "Corky" Watts, CMB — Tue, 21 Dec 2010 16:26:00 GMT

One of my favorite one liners comes from the movie Jerry Maguire when Cuba Gooding, Jr. tells Tom Cruise to "Show Me the Money" . I've heard over and over again from owner/operators that they've built an infrastructure to support their monthly production projections, yet for some reason they seldom hit those targets. These numbers are pie in the sky. Operation owners and managers of mortgage companies preach about loan production, branch expansions and proformas rather than focusing on improving productivity to...drum roll please...MAKE MORE MONEY! Making money is not all about producing loans. It's about running the business efficiently. Don't get me wrong, loan production is a very very important part of the process, but that production needs to be profitable. During interviews we ask clients...(read more)

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Multiple Strategies Exist When Battling Investor Repurchase Demands

C.M. "Corky" Watts, CMB — Wed, 08 Dec 2010 20:45:00 GMT

“Can’t see the forest from the trees…” a phrase that describes someone’s inability to see the big picture, someon who makes decisions based on short-term consequences without considering long-term implications. Investor repurchase demands and “make-whole” claims continue to nag most mortgage bankers, especially those who have originated stated income loans in the past five years. Real estate values keep dropping and foreclosure inventory continues to increase. Any time there is a foreclosure and an investor is asked to make the GSEs whole for it, the originating mortgage banker is eventually contacted by the pass-through investor in the form of a repurchase demand. Investors’ loss mitigation departments are doing everything they can to reduce...(read more)

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Industry Professionals Share Input on State of Mortgage Market

C.M. "Corky" Watts, CMB — Mon, 29 Nov 2010 19:34:00 GMT

A little over a week ago Garrett, Watts & Co held its annual client appreciation dinner in San Francisco. The event took place at the Palace Hotel. A diverse group of industry professionals were in attendance including bankers, independent mortgage originators, warehouse lenders, loan investors and various third party service providers. This year we conducted a round table discussion on various issues facing our industry. Discussion topics included: Loan officer Compensation Non-Agency LoanSecuritization Warehouse Lending Capacity Retaining Loan Servicing Internet Originations Merger and Acquisitions Here is a recap of the feedback we received... Loan Officer Compensation Several participants went to the recent MBA conference in hopes of grasping a better understanding of new originator...(read more)

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Using Scorecards to Protect Your Loan Origination Operation

C.M. "Corky" Watts, CMB — Thu, 18 Nov 2010 17:40:39 GMT

What is an FHA Scorecard? HUD describes the FHA Scorecard as such... "The FHA TOTAL Scorecard was developed by HUD to evaluate the credit risk of FHA loans that are submitted to an automated underwriting system. To underwrite an FHA loan electronically, a mortgagee must process the request through an automated underwriting system that can communicate with the FHA TOTAL Scorecard. FHA was interested in developing our own scorecard for a number of reasons. The FHA TOTAL Scorecard will ensure that applicants for FHA loan insurance are evaluated by the same scoring process regardless of the AUS vendor submitting the loan. Second, TOTAL will enhance FHA's ability to assess and manage risk. FHA systems will capture TOTAL Scorecard data and allow us to study and analyze trends and make policy...(read more)

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Running Your Own Loan Shop: Timely Financial Controls Needed

C.M. "Corky" Watts, CMB — Fri, 12 Nov 2010 17:35:18 GMT

In our visits to mortgage shops we always inquire about the company's policies and procedures on financial controls, reporting and accounting. Without accurate and timely financial reports, managing the affairs of the company can be extra challenging. Let’s take a look at a few examples of troubling practices. Delaying the Generation of Financial Statements We often find companies generating financial statements quarterly rather than monthly. In some cases financial statements are even generated 30 days after the close of each quarter. Major delays in generating financial statements can be disastrous. Management is basically running blind when they decide to put off financial position and performance reporting. Operating losses or depletion of cash may result in warehouse lender covenant...(read more)

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Sell Direct to the GSEs. Avoid Additional LLPAs and Credit Overlays

C.M. "Corky" Watts, CMB — Wed, 03 Nov 2010 15:43:04 GMT

Our mortgage banking clients continue to experience delays in the loan purchasing process. This issue reflects an increase in refinance application volume. The uptick in production activity combined with heightened compliance requirements and a greater number of investor overlays has clogged back shop operations. There is a way around this though, sell direct to the GSEs. We've discussed this subject in the past , but I wanted to expand on the underlying logic for anyone considering the idea of obtaining GSE approvals and selling loans servicing retained. There are a couple of caveats that everyone must be aware of first... You must have a net worth of $2.5M and be profitable for the last 4 quarters. This doesn't include the pending interpretation of risk retention reforms created by the Dodd...(read more)

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A Road Map to Successful Loan Operation Management

C.M. "Corky" Watts, CMB — Wed, 27 Oct 2010 18:42:00 GMT

One of the first questions we ask senior management during our FOCIS and FOICS-plus reviews is if they have a strategic business plan. In response we usually get a blank stare. More recently some managers have indicated they haven't put together a plan because they are waiting for more clarity on new regulatory reforms. My partner, Joe Garrett, often says that one would not go on a long road trip without a map or at least an idea of what they wanted to see. Without a road map, one could get lost, waste time or maybe never even find the place they set out to visit. A strong plan has the following components: Key Objectives Strategies to meet the objectives Action plans to implement the strategies Measurements to ensure the action plans and strategies are working Review of the plan and contingencies...(read more)

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Reforms Aimed at Broker Business. Deploying Capital to the Right Origination Channel

C.M. "Corky" Watts, CMB — Fri, 22 Oct 2010 14:28:00 GMT

Everywhere I go these days mortgage bankers are asking the same question: “What’s the future of the wholesale channel and will brokers go extinct? Congress and regulators are focused on the origination practices of mortgage brokers. Whether it is licensing, disclosure of fees, selecting appraisals or compensation, most changes seem to be aimed at brokers. The flexibility brokers once had has diminished over the past 2 years. It appears the retail loan officer, especially one working for a national bank, has an advantage over the independent broker. Still, I believe the mortgage broker plays an important role in the mortgage origination process and will survive the current “witch hunt”. Here are some thoughts based on my recent discussions with clients and contemporaries...(read more)

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Cutting Origination Costs by Staffing the Operations Center with Contractors

C.M. "Corky" Watts, CMB — Tue, 19 Oct 2010 18:01:00 GMT

What does "thinking outside the box" mean? Thinking outside the box means approaching an issue or problem from a new perspective. Recently I came across a practice that was what I would consider "thinking outside the box". The Practice : One shop I recently visited staffs their entire operations department with 100% independent contractors After 3 years and about 150 shops, this is the first time I have ever seen the entire operations department staffed by independent contractors. From our perspective, mortgage operations cover loan processing through loan purchase. We've seen processor outsourcing and contract underwriters, but never an entire operations staff. When we review the productivity of a lender, we take the total number of operations staff and divide that number by the total number...(read more)

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Plan B: How the Lending Environment Might Evolve if Mortgage Rates Rise

C.M. "Corky" Watts, CMB — Fri, 15 Oct 2010 15:49:16 GMT

I'm not a naysayer and just like everybody else I've been rejuvenated by the stellar year the industry is having. Most of our clients are making boatloads of money on refinances today, but rates will eventually rise from these historic lows and mortgage bankers will once again become the proverbial “deer in the headlights”. We’ve all been down this road before but I think we need to remind ourselves what happened in the past so we're prepared for a potential shift in business models. Let’s take a look at how the environment might shift.... If history repeats itself, the first thing to happen will be tighter primary/secondary loan pricing spreads. Lenders will deploy aggressive pricing to help maintain current production levels. Without thinking about margins...(read more)

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