Restoring Integrity to the Mortgage Industry: A New Paradigm in Originator Compensation
There has been very little clarity provided by our government leaders, regulators, legislators, and even our own trade associations on where the mortgage industry is heading and the pathway we must take to survive regulatory overhauls. What do we do? Sit still and continue to be reactive or look forward and become proactive in our approach to the future of housing and mortgage finance?
Domestic and international investors alike have been quite clear on what they feel is the single most important aspect of housing finance reform; the RMBS securitization process must provide enough transparency to allow for effective pricing and management of risk.
This mandate represents a stake in ground where we must begin rebuilding our industry. All mortgage bankers and brokers will play a role in re-establishing our profession as an honorable one, populated by men and women with high ethical standards whose main mission is to provide Americans with the tools necessary to realize their dreams of sustainable homeownership.
I propose a four pronged approach to the rebuilding process:
- Put into practice a new paradigm of loan officer compensation that keeps "skin in the game"
- Implement quality control tools that effectively increase transparency and ensure data integrity;
- Promote proper business ethics in all stages of the origination process
- Attract investor capital based on an industrywide brand of excellence
Step One: Implement a New Paradigm of Loan Officer Compensation
Mortgage originators have long been compensated just for getting loan applicants to the closing table. After funding many mortgage originators simply lose interest in the borrower's financial situation until they see another opportunity for origination income. The insurance industry dealt with this issue long ago. Today every insurance agent is tied to his/her client with a golden rope...
Most insurance companies do not fully compensate independent agents at the time of sale like the mortgage industry. Instead agents are partially compensated at the time of sale while the remainder of their income is paid out at a later date depending on the performance of the insurance policy they sold. This compensation practice is called "contingent commission" and it creates an incentive for every agent to act in the insurer's best interests because if they don't, they won't be paid.
Let me share an example. There are two active groups of golfers at my club; mortgage originators and insurance agents. These two groups have very similar economic profiles, they are all high net worth income earners and they all constantly manage their book of business. There is one big difference in the way these two groups maintain their lifestyles though; the mortgage originators are highly dependent on landing new deals while the insurance agents are dependent on the long-term performace of the deals they've already written. This forces insurance agents to fully understand the risk profile of their clients before they close the deal and it also forces agents to maintain contact with their book of business.
The independent insurance agent has “Skin in the Game”, their financial future is dependent on the quality of the policies they originate. The time has come for us to take the same tack with our industry.
Let’s provide our originators with an incentive to originate loans that will stand the test of time by tying a portion of their income to the long term performance of the loans they originate. This seems like one way to address the stigma that surrounds our industry, which in the process would represent a giant step toward restoring investor confidence.
Step Two will be further discussed once I return from the Mortgage Bankers' Conference...