“Reward your kid's good behavior. Be as creative as you like with your reward system. Spell out the types of behavior and chores that will be rewarded. Don't forget about your reward system or it won't work. As your children grow up and House Rules evolve, so can the rewards. “  -Nickelodeon Parents Connect

What do rewarding a child and mortgage lending have in common?

Let’s see where I am going with this...

Client segmentation has been a popular topic of discussion amongst our clients lately.  Most correspondent investors are already segmenting their customers based on profitability, quality, pull through, and paying their bills on time.  Citi Mortgage has its Star Performance Rating System.  Bank of America, formally Countywide Funding, has always had customer segmentation and provides benifits to customer based on various behavior and historical performance.   Customers with the highest score get rewards:  better pricing and better service.

Many of our clients are now analyzing third party originators (TPO), branch offices, and loan officers to get a better idea on the overall value they receive from doing business with them.   As noted above, the value includes profitability and other key measurements.  As with correspondent investors, better customers are getting rewards:  better pricing for TPO customers and better commissions for loan officers.

As a top producing loan officer, I would want to work for a company that had this type of reward system in place that would help me generate higher commissions and therefore profits for myself. 

Let’s look at the current business environment to see what the drivers and behavior might be to help increase loan officer rewards:

  1. Originating government loans: It doesn’t take a rocket scientist to figure out that government loans generate much more secondary market gain-on-sale than GSE loans.  If you are focused on FHA loans, your loans have much more value than a GSE loan. 
  2. Pull through: A high pull through lowers hedging costs for the secondary marketing manager.  If you deliver a high percentage of your locked loans, that helps reduce hedge costs and improve profits. 
  3. Funding Rate:  As in number 2 above, high funding rate lowers hedge but it also lowers operational costs.  Set up and loan underwriting occur on all loans whether they fund or not.  Regardless if the loan funds or not, there is still the cost.   If your funding rate is higher, you are assisting the company in increasing its productivity and lowering the cost of origination.
  4. Loan Repurchase Requests, Early Payment Defaults (EPD) and Early Payoffs (EPOs):  Losses resulting from one loan repurchase can wipe out the profits on 50 closed loans.  If you don’t have a history of these sorts of events, you provide cost saving value to your company.

Here’s the bottom line:  If you are a loan officer that meets the four behavior drivers above, you should be talking to your manager or owner about a better deal.  Your behavior, practices and loan products have a high value to your employer.  You should be rewarded for your behavior.  If you are missing some of the behavior drivers above and want to get higher commissions, start working on these now. 

With children, we reward for good behavior.  With loan offices and TPO customers, we should expect rewards for our good behavior.