What the Cost-to-Originate Numbers Tell Us

In recent conversations with mortgage executives, it is clear that many are concerned about how out of whack compensation has gotten for originators today. One major accounting firm that has tracked compensation over the years has said point blank that two thirds of the cost to originate is originator compensation — not a sustainable rate for mortgage companies. Recruiters also tell me that what they see today in the marketplace are companies paying 125 bps or higher per loan to originators. These numbers just don’t work anymore if you want your company to profitable.

Why? Companies are being asked to assume more risk for the life of the loan; the cost to capture consumers’ attention is higher; and originators are being paid significantly more than they were in the past. This all adds up to bad news for a company’s bottom line.

From my discussions with managers at the MBA convention in San Diego, I think that it is a telling sign that the number one hiring strategy is still “let’s hire branches.” With this strategy goes the assumption that if we pay them more, branch managers will make the jump to a new lender. But interestingly enough, when I speak to corporate recruiters, they tell me that producing branch managers will often say that when they are doing $1 million a month of personal volume that translates to having a floor of $125,000; when they add their override and bonuses they are making $250,000 and they can have a nice lifestyle. Why would they move to another lender? This has turned into free agency approach used in football but without the TV revenues.

So how do senior managers address this issue? They ante up the money and extend the length of guarantees. Executives feel they have no choice but to play this game because they need volume today. They do have a machine to run as we all know. Certainly, it is understandable, but the net result is an unsustainable business model that cannot be profitable in the long run. The reality is there is only so much money to pay all the parties in origination. With the majority of money going to the originator, not much is left to invest in technology, training originators or implementing rookie programs.

The good news now is that some senior managers are starting to voice the issue. This is especially true in my experience if the manager has 20 or more years left in his or her career. The five years and out crowd are not interested in changing the equation for obvious reasons. The present system has been very good for them so why rock the boat? This is another reason that senior management at corporate needs to recruit younger executives.

It is clear to me that origination needs a new sales and pay model if the industry will survive. Does this mean that it will be a call center model similar to Quicken? Or that mortgage origination will be a DIY technology-driven business similar to what Amazon has done in the retail space and customers pick what loan they want over their smart phone? Maybe. Personally, I think it will be some hybrid model since we are talking about the largest investment an individual will make in his or her lifetime. Also, I don’t believe it will be a purely technological business without sales people because there is a large role still needed to influence “on the fence “consumers. The technology world has made that pitch before and the data shows that we need sales people now more than ever.

Anyway, the one thing I do know is that the present compensation payouts cannot continue with companies trying to outbid each other. I also think that the quality of originator needs to be improved dramatically. This all costs money. So something has to give. The financial numbers just do not work anymore. Just look at what the Wall Street firms did back in the 1980s when they switched to a non-100% commission pay structure. If the smartest people in financial services saw the issue of the company assuming all the risk and the employee reaping all the benefits, I think the mortgage industry would be smart to follow them. The truth is a variable pay model does not make financial sense anymore.