Show Me the Money: The False Allure of High BPS Payout

Recruiting sales talent has reached a crazy level in mortgage banking. From retail to TPO, originators are being enticed with ever-increasing bps payouts to join new firms. It is a good time to be an originator and a bad time to be a lender.

Competition for talent and production has intensified because of leadership’s failure to develop and train new talent; and lack of consistent effort to develop current managers and originators. As the Baby Boomers retire, recruiting superior originators is expected to become even more challenging in the years to come. While this is a terrific time for originators, the decision to join a new firm should be based on a careful analysis of the new company vs. who is offering the highest bps.

How absurd has the marketplace become? Two recent conversations I had with executives provide some insight. One manager discussed how difficult it is to recruit originators when their company is only paying 125 bps and many firms are offering 200 bps per loan. A manager on the TPO side of the business commented that they have a similar problem as some competitors are paying guarantees that are $20,000 a month for new account reps for 12- and 18-month time frames.

The money is obscene compared to a few years ago but that is the real world today in mortgage sales recruiting. It’s no wonder that the insanity has impacted average originators who are demanding more when the rest of the field is being overpaid. Similar to what is seen in sports when the best are receiving high compensation — it lifts others to an outrageously high level too. Case in point: If Stephan Curry can receive $200 million for a new contract then a bench player is a bargain at $10 million when he used to be paid $1 million. This same rationalization is prevalent in mortgage banking and raises questions about the financial soundness of many companies when they play the game of overpaying for originators and failing to invest in developing their current employees.

As an ex-secondary marketing manager, I come from the school of thought that there is a finite amount of revenue per loan and how it is shared with employees reflects management’s long-term view. When compensation is way above market or not financially sound, this invariably is a short-term strategy to pump volume. Many times the strategy is based on aggressively valuing their company’s servicing rights to enhance their financial condition. But at some point, the piper needs to be paid and there is only so much income in a given loan which is largely determined by third parties. As we all know, investors can change their view on a dime depending on world and domestic events. Brexit is a perfect example of changing valuations that impacted loan rates.

What should originators do when being recruited today?

I believe originators need to proceed with caution before making a move to another lender. In my opinion, here are eight issues originators should consider:

  1. When moving from lender A to lender B, an originator will lose roughly 50% of their referral sources and customers. This percentage has been well established by a variety of studies conducted at Harvard Business School. Top producers know this and it is one of the reasons that they are so hard to move. The reality is that not all customers will follow a salesperson to a new company. What will the new company do to help you regain your client base?
  2. When a lender is paying over the market bps to an originator, that usually translates into having a high interest rate at the point of sale. High payouts and great pricing are not compatible. The numbers just don’t add up. If this situation exists, the company will not be in business long so move to another lender.
  3. Originators who have a niche product and are recruited by a new lender who wants to add the product is not a good match. All discussions by originators and lenders need to be based on what currently exists at the lender, not on what they would like to add at some point in the future. If an originator’s business model does not match what a lender is currently doing, run the other way.
  4. Closely look at the senior leadership team of the new company. Do they talk about the future and where they want to take the company or are they only focused on today? If the originator has 20 years left in mortgage banking, how many years does the senior management team have? If senior leaders have a short time left, rarely do they make investments in the business as they should. Certainly some companies do but most do not.
  5. If the new lender isn’t actively investing in rookies and technology, their horizon is only about short-term issues. Long-term investments tend to coincide with companies that are trying to build a sustainable business over time.
  6. If sales and operations are at odds, this is another indication of a dysfunctional team and a company that is not moving forward. Ask questions about who each one of the business lines report to and what sales says about ops.
  7. Companies who recruit without a structured hiring process is another sign of mediocrity and that leadership is not committed to moving forward in our constantly changing marketplace.
  8. With many private equity firms entering the mortgage business, a great question to ask is what is the company’s exit strategy? Private equity firms are rarely long-term investors of companies. Their goal is to get the most for their investors and sell the company once they have made an investment.

Jumping to a new lender is a critical decision for any originator and asking the right questions before making a change is a smart strategy.