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Banker to Broker

Andy W. Harris
Feb 10, 2014

“What we see depends mainly on what we look for.”—John Lubbock Yes, you read that title correctly. I’ll get back to that, but let’s focus on strategies for 2014 first. Failing to plan is planning to fail. This famous Benjamin Franklin quote comes in many different versions, but they essentially mean the same thing. You better have a plan or you’re simply setting yourself up for failure through your own negligence. What I find shocking is that many, many people in our industry are presently doing just that. It’s not necessarily that they are failing to have a plan entirely, but that their plan is extremely void of self-directed research and education about the realities facing the future of the mortgage industry and too much focus is on the job rather than the career. I personally believe what I share in the following text is some of the most important material a mortgage professional can take in as we approach 2014. I believe most mortgage professionals think they have a plan and vision. What they don’t realize is that their plan and vision can been skewed and crafted primarily by outer influences and not by self-education, research and math. It’s like walking around holding a pair of binoculars backwards. This tunnel vision is not a good position for anyone and certainly can cause someone to focus primarily on one thing rather than on the big picture. If you want a full view and vision of the future you must first learn how to turn the binoculars around. Starting down the wrong path in 2014 with a limited vantage point could be destructive to your career. When reading this try to “clean the slate” in your mind. Forget about what you’ve heard and forget about what you’ve been told to believe or sell if you’ve drank too much of the corporate juice. Let’s simply discuss the specifics about the very broad mortgage industry without the special interests. The new era of recruiting If you originate mortgage loans for a living, you likely understand how intense recruiting is in our industry. At the end of 2013 and during the first portion of 2014, I believe we will see the heaviest and most aggressive recruiting in our history. Don’t get caught up in it and slow down. With rates rising and volume dwindling, many creditors have already begun showing losses the last quarter of 2013 and these trends will continue. In addition, the only primary source of revenue in this transactional-based industry is through closing loans. The time span between 2012 and early 2013 was a party for many, but those not drinking enough reality water or expanding too aggressively using unsustainable volume data will certainly have a hangover in 2014. Regulatory requirements, risks and costs to creditors will be greater than ever when entering 2014. We will unfortunately see many mergers, acquisitions and companies going out of business next year as they simply will not be able to adapt to the losses they face through restricted transactional revenue and margins. As always, the strong will always survive, but only strategically and with planning. It’s extremely important that the originators in our industry make very careful and educated decisions when considering job offers or career-altering changes. Mortgage originators will really need to research the company, the vision, the financial stability and compliance. If you’re considering starting your own business, talk with successful colleagues about the expectations, requirements, and challenges. Compensation and regulation There is no greater culprit than compensation to mimic “greener grass” or motivate originators to jump around to different companies. Many times this can come in the form of a signing bonus or short-term incentive, but these short-term views will turn your career into a job. Unfortunately, many have been pushing the envelope on the compensation rules and the originator assumes the employer is in compliance. Make no mistake that the Consumer Financial Protection Bureau (CFPB) has been clear that those individuals who play the naïve card and rely on their employers following compensation rules will also be held accountable personally should violations exist. Understand the rules and regulations! It’s amazing to me to see lenders are now making changes before 2014, acting as though the Fed revision to compensation hasn’t already been in place since 2011. Do you really think this past data is omitted in an audit? Another thing to remember on compensation is good old math. The higher your compensation, the higher your rate sheet to the borrower. This compensation margin is in addition to the padding applied by the employer to cover overhead and all costs and profits associated with running a retail mortgage company. When revenue goes down, overhead doesn’t. Pricing will be relevant to the creditor, but no doubt you need to find balance and know your competition. It’s realistic to expect “fair” compensation with good pricing for your target of gaining new educated consumers. Pricing does matter and “selling service” in today’s market lacks common sense. Everyone must execute well and have excellent service and experience in today’s primary mortgage market. Pricing will always be a factor to educated borrowers, just not to a disconnected non-originating sales manager that needs that margin. I try my hardest not to pass judgment, but I have been very disappointed and shocked by the lack of understanding most of my colleagues have on current and future regulations that significantly impact their clients as well as the future of our industry. I am very surprised by the questions people ask when it comes to items within Dodd-Frank such as the Qualified Mortgage (QM), ability-to-repay, three percent cap calculation for points and fees, APOR test, etc. Everyone must understand these things in order to effectively communicate with clients, real estate agents and others. It is our responsibility if we are communicating with the public. Just being average doesn’t cut it in 2014. Make no mistake, being well-educated about the industry will result in more authority and respect from others, resulting in more referrals. Save your money Always expect the best, but plan for the worst. We’re in a volatile industry and you cannot allow your balance sheet to negatively impact your decision-making or emotions. Save as much as you can and try to build enough reserves to be comfortable in any market. Consider also deleveraging any debt other than your primary mortgage or those used for investment purposes to limit the monthly obligations that our industry does not always match as it pertains to accounting. This is very simple, but a huge reminder and security we all need that can significantly improve our lifestyles, behaviors and attitudes. The new wholesale lending channel aka “brokering” (as they so call it) I’ve said it time and time again that the terms “broker” and “banker” are comical. We’re all third-party originators to the primary agencies that buy, insure or guarantee mortgage loans (Fannie Mae, Freddie Mac and Ginnie Mae). Even portfolio and jumbo lending exists on all channels making these titles outdated and unwarranted going forward. Temporary funding or a line of credit to the same agencies will not make someone different than another. While I understand we’re too brainwashed to remove these titles, I’ll go with it for now. Yes, wholesale lending is still here as it has always been and continues to be an important and active origination channel that is growing again. Only those who have been influenced by others with a financial stake in this artificial view have been impacted. The other inaccurate assumption is the one that comes from these that think they broker loans, but in reality really don’t the way it’s meant to be done. Those with correspondent lines interfering with their margins and product offerings “can” broker, but credit line influence removes all the benefits and true picture of wholesale execution and pricing. Priority for most programs will always fall on the credit lines when employed by a creditor. I consider myself a high-producing, experienced, analytical and detail-oriented mortgage originator. I am also a small business owner. I embrace confidence, but despise arrogance. I have reviewed all regulations, data, math and trends over the years to confirm that being a mortgage brokerage exclusively is the best position for my clients, our employees, and my business. If operated correctly, there is nothing like comparing lenders who compete for business on pricing, overlays and execution. I can tell you that we’re dominant in our marketplace when the time comes for competitor comparison with an educated consumer. I love being a mortgage broker and it is the best time in history to embrace the wholesale channel. Do not count out being a mortgage broker or working for one if you have not recently or feel you’re in the corporate roller coaster, I mean a true mortgage broker. As a broker, any bad lender experience for any reason can be removed immediately with unlimited resources on investors to compare. If run properly, it is truly the only channel in which you work exclusively for your borrower and their interests by shopping without steering or special interests, period. For those considering or those already pure brokers, just make sure your margins are identically set and you’re following all compensation, fair lending, and anti-steering policies just as all channels should be. Any origination channel can be a good channel to place your license if you are happy, but never discredit wholesale operations or what you don’t understand. If you work “for” a lender and have a bad experience or a change is made, you’re in a pickle. If you work “with” 25 lenders and have a bad experience, you have 24 other options. Think about it. Mortgage brokers: Just say no to mini-core Lenders selling this, we’re fed up. Just as we were fed up with the net branch fear-based recruiting of brokers in 2009 that has backfired for those that gave up their businesses, we are also fed up with the mini-correspondent talk as it pertains to QM (the qualified mortgage) come Jan. 10, 2014. Good mortgage brokers will not be impacted by the three percent points and fees test. These salespeople pushing mini-core don’t even understand the analytics, nor do the majority of brokers they are talking to. If a broker is making this change to try and work-around these rules then they need to seek another profession, period. As indicated, this work-around will not work. In addition, the CFPB is very clear some are attempting this and they will be held accountable. Mortgage broker transactions that are table-funded are not secondary market transactions. They do not consider these bona fide warehouse lines and certainly will pull the data to determine why these lines were set up to bypass rules established for higher compensation and steering. See paragraph (b)(7) in section 1024.5 of the Real Estate Settlement and Procedures Act (RESPA) effective Jan. 10, 2014 for bona fide transfer of loan obligation. There is also tremendous buy-back and other risks to those funding on a What’s worse is that the sales people pitching this simply see an opportunity in the market for volume, using QM as fear and not discussing risk. This is ludicrous and very bad for our industry. You have to be all in or all out of wholesale or correspondent and make a decision as to how you operate your retail business in the future. Why would you eliminate every benefit you have as a mortgage broker by adding a line to steer your borrowers toward higher rates and limited products, purely for an assumed financial gain with significant risk? You lose all the benefits of being a broker I just mentioned, and this is truly an unacceptable practice in my opinion as an actual originator working with consumers daily. Wholesale is an excellent source, but it must be operated properly to avoid issues for our industry in the future. The good news There is always good news and opportunities always exist. The good news is that I am not sharing sales tips and marketing ideas for 2014. The good news is that I am not giving you 10 more ways to get realtor referrals. The good news is that I am not sharing the top ways to market to your database. The good news is that I am not a self-proclaimed guru selling coaching in a Webinar, seminar or class. The real good news is that I am an experienced colleague in the thick of the mortgage origination process, and I am showing you how to turn your binoculars around without special interests or influences motivating me to do so. You must understand the analytics and trends to see the big picture. You must have a solid foundation, built by a vision, to grow your career. Education is the new marketing.  Education will help you predict the future. Education will allow you to use math and data to the benefit your business. If rates rise or applications drop, there is always someone needing financing to buy a home. You must position yourself to capture new clients long-term without inconsistency. If you want the best business-building and marketing ideas for 2014, look past your nose and look toward wholesale. Andy W. Harris, CRMS is president and owner of Lake Oswego, Ore.-based Vantage Mortgage Group Inc. and 2010-2011 president of the Oregon Association of Mortgage Professionals. He may be reached by phone at (877) 496-0431, e-mail [email protected] or visit
Feb 10, 2014