To any and all interested: I am a mortgage broker (MB) in Cincinnati, Ohio and want to begin dialogue with other MB's as it relates to the direction of the MB business model; given the new compensation rules right around the corner. We can use this thread to contribute ideas of how to move forward, share research on the compensation and business model topic, and point each other toward creative lending sources who enable MB's to maximize compensation. This should be a forward looking thread covering all things MB in relationship to the looming April 1st changes and how best to proceed as a business model.

I'll start with this: Should traditional Table-Funded mortgage brokers take any and all necessary steps to become correspondent lenders? How would this provide an advantage to the business and individual loan officers? It seems the new Fed rule will prohibit MB’s from paying LO’s incentives, production bonuses, profit-sharing, etc. Will Correspondent lenders be exempt from this pattern? If so, we can evaluate the benefits of the correspondent lending business model. If not, will correspondent lending provide another form of compensation such as an ownership interest in the company? Based on the research I’ve conducted I believe MB’s are going to be classified as LO’s (for compensation purposes), thus eliminating the opportunity to increase revenue/profit distribution of ownership as MB’s will not be classified as creditors. While the lack of guidance and information dissemination is frustrating at this point, what have you found on this topic?

Greg,

Quick question: Are you referring to obtaining a lender license in your company's name along with te applicable warehouse funding OR are you talking about joining forces with a larger and for lack of a better word "net branch" type of operation like Open Mortgage or Network Funding? 

I am a broker here in NC and I am not "doom gloom" regarding this legislation. Just as i did not think the 2009 RESPA GFE would kill this model i also don't believe the comp changes will kill the business.  I've tossed around the idea of obtaining my lender's license for some time now, and, after reading a lot of commentary on this legislation, i don't think our business model or how we pay or employees is going to change any more than a lender.  Some even aruge (on this site) that it will essentially be "business as usual" for the broker model.  See, we've only been making "origination fees" on our HUDS since the ineception of the the new RESPA law and this would seem to just be in line with that law and it is now bringing the bankers in line as well.  I am definitely open for discussion and i can assure you that a banker lender willl give you one view and a broker will give you another, and probably poloar opposite view, which would be similiar to the discussion we all had a year ago regarding the GFE.  A "knee jerk" run to become a lender or correspodent without knowing the ramifications is not something i am willing to do.  Of course, it all depends on your business model, your need for complete autonomy (something you will not have as a true correspondent/net branch type of app), and ability to be inovative in the way you pay your employees.  I have a lot of peers that work for mortgage banks and they are equally concerned about their comp changes. They are used to getting paid YSP, SRP, and origination fees which was a huge draw to work for those operations over the last couple of years.  In NC, we have strict high cost laws and, since SRP is not included, loan officers at mortgage banking operations can make signficantly more on loans (especially FHA) than a broker, I can argue until i'm blue in the face about the fairness of this, but the comp changes effectively end their ability to pay so much more on these loans. 

My decision was to wait and see how all the lenders decide to pay us and how that affects my profit margin and my ability to retain/find talent. Their simply is not enough info, or clarity of the info that we do have, out there at this time to make an informed decision.  Again, and i know this may not be a perfect comparison, but before the GFE came out, i heard things like "death blow to the broker" "end of the world to the broker" and made absolutely NO negative impact on my company's ability to compete with a lender and, on the contrary, we actually spin it to our advantage.

...those are my thoughts....

@Roger, I am referring to obtaining the lender license and warehouse line in the company’s present name. As of now I’m not interested in joining a bank or net branch.

Like you, I too am of the impression the 2010 GFE took YSP out of the equation for MB’s and we now earn all of out compensation directly from the consumer (per the origination charges block on the GFE), not the creditor. However, based on my research I fear this not the consensus understanding or implementation of the new Fed rule.

A business model I will begin considering is one which allows me, the MB, to obtain a lender license, open a WH Line, be deemed a creditor in the eyes of the new Fed rule, and maintain autonomy from the lenders I sell the loans to. Ideally this will not handcuff me to a lender and allow me to sell loans through a traditional table funded format to my local lenders who may demand we continue to table fund (use their u/w, appraisers, etc.).

Fortunately we should all have had a good enough year in 2010 to allow us to navigate through what could be some difficult times immediately following April 1^st. Q2 will very telling as to the direction of our industry. Industry wide changes like this have the likelihood of causing a temporary downturn in productivity. In Q1 2010 our pipeline (industry wide and locally here) dried up like the Mohave Desert.

Greg,

I am a small mortgage broker operating in the Washington DC, MD, Virginia marketplace and my partner and I are trying to anticipate this new ruling and decide how to move forward.  We have been very successful for many years in our model- no loan officers and one processor that we share, expense wise.  We hire a file auditor (for State of MD guy) to come in an review our files on a quarterly basis for compliance.  He suggested that we might take on the model that you suggest in seeking out a warehouse line and table funding our loans.  We are reluctant to take on any additional risk in this wickedly fast changing underwriting environment but think that if we can have the files "pre underwritten" by the investor this might work.  I was curious as your take on this aspect of being a mortgage lender.  There is also the net worth aspect of becoming a lender and the requirement to have a larger net worth requirement in the business.  Putting that much of our personal assets in the company may be too high of a price to pay as well.  I would welcome your thoughts on this as well.  

Since 2010 Respa, my opinion is that we are paid by fees that we charge the customer.  If there is a credit for the interest rate it is used to reduce the overall costs of doing the loan.  IMO, 2011 respa (what I'm calling it) will slightly change that.  In the old days, to make 1 front, 1 back, you charged 1, and got 1 from the lender.  Period.  In 2010 respa, you charged 2 front, and got 1 from the lender that essentially reduced your borrowers portion of your fee to 1...but the LO still got paid 2.   In 2011 respa, you charged 2 on the front, (by the way, your processing fee is in that 2 percent...but we're rounding anyways) and then all the other closing costs are charged to the client (title, appraisal, lender fees, prepaid interest, impounds), Now if there is any YSP on this loan, it had better not be more than the total sum of all those other closing costs, because I can guarantee that the bank will keep any overage for themselves......gasp, it would be illegal to pay it to anyone else!  Once again, BIG BANK is the real winner in this conversation.

Now, if you previously liked to price your loans with only .50 orig fee and make 1.5% on the back....you need to reprice all your loans, because you will not be allowed to get paid from both sides of the fence.

Don't confuse any of the ysp with what you used to use to pay borrowers closing costs anymore.  Brokers don't pay other peoples closing costs anymore...the credit comes from the bank...not you.

Just one more thing we lose control of as a true broker.  HVCC took the appraisal out of our hands.  FHA no longer allows us to order case #'s.  Now we don't pay borrowers costs for them, the banks do.    Just one more way for BIG BANK to marginalize the role of the broker.

NOW, how do I as a broker capitalize on this change?  It's all in presentation to your client.  Most people don't trust banks anymore in the post-bailout era.  BIG BANKS approval rating is as low as Nancy Pelosi's.  Brokers have always provided superior service to what you find in a bank, and in my experience and in my opinion,  are more professional, better educated, and care about their clients more than banker-LO's do.  WHY?  Brokers work for their clients.  Banker-LO's work for their bank.

For those Banker-LO's that are on this board....you are all excluded from the above generalization because you obviously care enough about your career and seek to improve yourself by hanging out on MND.

More later.........

Attempts to "get around" the legisilation will carry a heavy penalty. This is it for YSP's and big bucks in the mortgage business as a small independent player.

Most banks do not allow "overage" of any kind at this point.  The loan officers make around 50 bps. More or less depending on volume.

The big banks are scared to death and abide to the letter with RESPA. This is what the government is after. A smaller group of players that they can control and who will be so fearful of repercussions for non-compliance that they will pretty much police themselves.

The government has decided that the process is to complicated for the average consumer to understand and that stiff legisilation is needed to protect consumers from their own ingnorance in the mortgage process. It also looks good poltically. Like they are "doing something" about all the big bad mortgage folks who have hurt everyone (I dont agree...but that is how the average person thinks).

Right or wrong.......that is where we are.  Standing around scratching your head trying to figure out ways "around"  the new rules is a time waster.  I guess I agree that it is probably wise to sort of wait and see how things shake out in the real world......but I think that is entirely possible that only big players will survive in the years to come.

Higher rates and the continued decline in values (inevitable) will also help the big players while killing the smaller guys.

I wish it was not so...and perhaps I am wrong.....but that is certainly how it looks.....and it is exactly what the government is after.

As the owner of a mortgage broker company, I’ve done a lot of due diligence and have set down and talked individually with most of my lenders regarding compensation.  To be honest, I am not concerned. Of course, a banker will certainly be of the opposing opinion and, who knows, you quite possibly could be right.  If you run a good company, know how to market and bring in good leads as well as find solid, talented individuals, you will be fine.  Also, if you are a loan officer, either with a bank/lender or a broker, or you are an independent broker that relies on a small amount of deals for a large amount of profit, things are going to get a lot more difficult, If you've ran a business that relies on volume/number of transactions and a fee structure in the 1.25%-2% per deal range, things are going to be just fine irrespective of lender vs. broker.  I've looked at Wells comp plan and it is essentially "business as usual" for us. Considering Wells essentially owns the market, i believe other lenders will follow their lead and price things similarly. If that is the case, the broker community will have to make some changes/tweaks, but the "death of the broker" will absolutely not be the result- it is more of just a change in how you propose the deal to the client but bankers will run into the same challenges.  I'm not saying nothing is changing, but for either party to suggest that the other party is "toast" or to suggest that the lending world in general is over is simply wrong and you are not correctly informed.