For all the talk about putting people in homes, protecting borrowers from foreclosure and complying with government mandates, the home finance business is still primarily engaged — like any other business — in making money.
Judging from the conversations I've had this year with mortgage professionals, I am sure that industry folk understand this. I'm not so sure about regulators.
I took out a mortgage to buy my home, and I send in my check every month. As a consumer, I don't want to get ripped off on my next mortgage any more than the next guy does. But that doesn't mean that I think it is OK for people in this industry to work without being fairly compensated. So when I read that the Federal Reserve
is busy making rules about how loan officers can be compensated in our industry but not providing enough specifics for lenders to know what is acceptable and what is not, it tells me there's a serious disconnect.
It didn't surprise me much to learn that loan brokers are considering filing a lawsuit against the Fed over its rule. Granted, these guys have had much of their trade group support yanked out from under them during the downturn and may not actually have the resources required to have much of an impact, but I sense that their frustration level is at an all-time high.
It will get worse if John Courson, president and CEO of the Mortgage Bankers Association
, is right and mortgage lenders pull way back on loan officer compensation in order to mitigate the risk of noncompliance. And Courson is probably right. Bankers are — as I've pointed out many times — risk managers and they excel at mitigation. They'll err on the side of caution if necessary, much to the chagrin of their loan officers.
We are already seeing some innovative wholesale lenders tightening the screws on third-party originators in order to get the loans they need with as little risk as possible. That's translating into lower pay for front-line originators.
The government seems to want to spell out the compensation up front so that borrowers know what they're getting into before they sign the deal. I have no problem with that. I also think it's a great idea to kill compensation platforms that pay originators more for originating riskier loans. But why can't loan officers make more money for originating higher quality loans?
It amazes me that we have a financial services industry that can slice up risk in a million ways in order to find innovative ways to sell it, but they can't seem to slice up the resulting revenue off a loan in a way that can fairly compensate a loan officer or lender that originated the loan. Risk is a subjective measurement. You don't know if it's really there or not until you realize the loss. Revenue, on the other hand, is guaranteed, at least after a check clears the servicer's account.
This is going to be important in 2011 because next year the nation's biggest banks are going to have to admit (again) that they are not in a position to form or maintain the kinds of relationships that lead to steady originations across a national marketplace and wholesale lending will come back with a vengeance. The only question I have is this: Will there be any quality loan originators in the marketplace if the government continues to make it difficult and dangerous for lenders to compensate them?
Rick Grant is veteran journalist covering mortgage technology and the financial industry.
Follow him on Twitter: @NYRickGrant