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   ARTICLE   |   From Scotsman Guide Residential Edition   |   November 2011

Adapt to Beat the Odds

Changing your focus to work with new rules can save your business and your bottom line

It’s not easy being a mortgage broker in 2011. Years of regulatory scrutiny, public misperception and widespread accountability for the actions of a malignant few culminated in the Federal Reserve Board’s new loan-officer compensation rule this past April. The result has been staggering for most independent loan originators. Many have fled the profession, which at one time was the source of almost two-thirds of all new originations.

For the determined and the hardworking brokers who remain, however, there is hope. More important, there are still ways to profit despite the obstacles. There are no magic bullets, but there are a few positives that can be exploited by savvy third-party originators.

"The key to beating the odds against the mortgage broker is a renewed focus on profitability."

First, mortgage lenders always will need the help of independent loan officers, brokers and small correspondent lenders. Their services are too cost-effective to ignore, and they provide a powerful source of new business that no marketing campaign could duplicate. Second, consolidation within the industry means less competition. Yes, there are fewer originations taking place, but there are also fewer competitors battling for those loans.

The key to beating the odds against the mortgage broker is a renewed focus on profitability. The challenge is maintaining the role of trusted adviser to your client base while finding a way to improve your margins. That is not necessarily easy in light of the developments of the past five years, but it is possible.

Still here, still profitable?

Contrary to popular expectation, there are still third-party originators in the market today. Like all originators, they’re working harder to make less, but they are still alive and some are even profitable. How could that be?

The answers may be found in product mix and margins. Refinance is no longer the workhorse product in the industry and may not be again for many years. Savvy brokers are providing the products that are in demand, however, like Federal Housing Administration (FHA) 203(k) loans or similar renovation products, manufactured-housing loans and, where possible, any mortgages relating to real estate owned (REO) or short-sale transactions. Government-based products may not be easy to win, but they can be sold. What’s more, these loans allow for a better margin and better profitability. Many mortgage lenders are finally accepting that technology is necessary to be profitable, and brokers are benefiting from this.

The strategy for successful businesses in any industry in any down cycle is to focus upon margin, improve efficiency and strategically zig when others zag. The key is to go where the business is, and that starts with the glut of default and foreclosure actions. Savvy brokers will go there as well and use their advantage as trusted advisers to win business. With this, they are winning repeat and referral business, long the staples of any successful mortgage broker’s business plan.

Change as an advantage

The loan-officer compensation rule may be onerous. It may be imposing unintended (or perhaps intended) consequences. But it is the law of the land today, and mortgage professionals must work within its framework.

Surprisingly, the new rule provides a bit of an advantage to the independent broker. Under the rule, large, nonbank mortgage lenders must compensate their in-house loan officers the same percentage on each deal. No longer can the size of the deal or the borrower’s interest rate be part of the payment formula.

For example, let us assume that an in-house loan officer offers borrowers a vanilla, FHA, A-paper loan at a 4.6 percentage rate with no points. The borrowers then agree to lock in the rate. Near the time of closing, however, the borrowers change their minds, having been offered a 4.45 percent mortgage elsewhere.

Before the new rule came into being, loan officers might consider crediting some of their compensation back to the consumer to save the deal and, more important, the relationship. With the new rule, however, this is no longer possible.

Warehouse lenders may compensate their independent loan officers or brokers in two ways. The lender-paid broker today receives the same compensation, essentially, for each transaction. In this example, the independent loan officer is bound by the rate sheet and likely will lose this customer to a competitor. The borrower-paid broker, however, may only be paid a W-2 salary rather than commission and may only be compensated once. The former yield-spread premium is now credited from the lender directly to the borrower, which allows that broker the latitude to negotiate up or down with the borrower by offering the consumer a credit.

Most brokers will agree that keeping a customer is one of the most-important ways to maintain a business. Under the new rule, as draconian as it can be, independent brokers do maintain this important advantage and at least one element of flexibility.

• • •

The bottom line for mortgage brokers is that there is still profit to be had. To make that profit, however, brokers must be sophisticated about which lenders they partner with. Does the lender offer competitive rates? Are the lender’s underwriting standards realistic? Is the lender responsive to broker inquiries? Does the lender have efficiencies (technology, streamlined processes) that allow you to spend less time processing and more time selling?

Brokers should review their own operations and streamline every way possible. Use technology where you can. Review your product mix for profitability and fit it to the market. These are the realities of today. Even though change is upon us, profits are still possible.


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