Long one this weekend but actually an important post so if you are having difficulty sleeping, by all means, enjoy!!
Financial Markets
Another strong monthly unemployment report rolled out, this time the private sector added 230,000 jobs while the public sector cut 14,000 jobs, for a net gain of 216,000. National unemployment dropped to 8.8%, its lowest level since March 2009. For those of you that actually read my updates, by now you know what I am about to say: Stocks up, (56 pts for the day, 156 pts for the week) bonds down, mortgage rates up.
Below is a link to an article on cnbc.com in which an analyst predicts unemployment will drop to the low 8’s and expects a significant improvement in housing.
FINREG Dodd-Frank Bill and What this means for your Home Buyers
FinReg Frank/Dobb bill is a massively expansive bill that affects Wall Street, banks, mortgage companies, credit card companies, essentially any company that is involved with financing. Many of you may have heard about one of the most significant changes to the mortgage industry in 30- 40 yrs, but may not understand how this bill that went into effect on April 1st, 2011, so I wanted to take a moment to provide clarity on the bullet points of the bill as well as offer my thoughts on how it affects your clients.
Up until last week, for the past 40 years, mortgage loan officers were compensated off of profitability (imagine that?). Meaning, if the loan officer locked the consumer in at a higher rate, the loan officer would be compensated more than if he locked the consumer in at a lower rate. What prevents the loan officer from locking in the consumer into the most profitable rate possible is no different than any other industry that sells goods and services, the open market. The consumer shops for the mortgage just like they would shop for the best deal on a television, bread at a grocery store, and yes, a car! (I am not oblivious to the fact that many draw parallels from buying a car to getting a home loan). On the other end of the spectrum, it gave the loan officer the ability to “deep dive” or provide a below par rate to the consumer to retain their business. The loan officer in this instance is compensated less.
Fast forward to the future, FinReg 2011 provides the game changer all mortgage loan officers and mortgage companies feared. Under the new laws, the loan officer must be compensated the same regardless of profitability. This goes against every fiber of capitalism. At first glance, this may seem that it could benefit the consumer. The incentive for the loan officer to up-sell the consumer to a higher rate no longer exists. If we drill down a little further, it is my opinion that like a rising tide in the ocean, the cost of getting a mortgage will increase for the consumer, for two primary reasons:
1) The mortgage company has to compensate the loan officer the same regardless of profitability, so most companies are going to take the loan officer’s ability to “deep dive” away. The company simply can’t afford to offer the consumer a lower than par rate and compensate the loan officer for an “above par” rate. The company literally loses money in this instance
2) Some products are more profitable than others (State Bond or conventional loans less so, FHA loans more so), yet the loan officer will get paid the same regardless. The mortgage company has no way to predict how many loans the loan officer will close of the less profitable vs. the more profitable yet he has to receive the same compensation either way. In an effort to assure profitability, the mortgage companies will have to increase fees and rates to account for the unpredictability.
Mortgage companies are struggling with offering a compensation plan that will attract quality mortgage loan officers, be competitive with pricing in the market place, and provide adequate fulfillment teams to actually process and close the loan. Right up to April 1st, the actual commencement of the bill, many mortgage companies still had not committed to loan officer compensation plans.
Some tips on figuring out what mortgage company you should refer your clients to:
There are essentially two models evolving in the market place as we speak. We have the big bank model which essentially compensates the loan officer at lower amount, but is able to offer slightly more aggressive pricing for the consumer. The other, primarily being utilized by the smaller mortgage companies, offering a higher compensation plan, but fees to the consumer will be higher. Essentially, the bigger the gap between compensation plans, the bigger the gap in pricing to the consumer.
No brainer, right? Refer your client to the big bank? Not so fast. The classic saying applies, “You get what you pay for”. Like any other industry, talent gravitates to the higher compensation plan. This is certainly just my opinion, but the more skilled and talented loan officers will be with the smaller mortgage companies. A mortgage is a mortgage right? Theoretically, if the buyer qualifies with a big bank, they should qualify with a smaller mortgage company, right?..Also, big banks often struggle to staff appropriately with sudden shifts in volume where as the smaller companies have the maneuverability to react to sudden market shifts, so often the smaller companies are able to secure the loan quicker and provide a smoother process to the customer.
I recently met with a client who’s loan application was declined by a large bank, 30 days after application, on about the day they were suppose to close on her home. Her file was unique (aren’t they all?) and it was critical to run the scenario by my underwriter before moving forward, as opposed to just assuming the underwriter would be comfortable with the unique circumstance. My fees were about $500 more than the bank. She asked why that was. Without really thinking about it, I informed her that the underwriter that gave me the green light to move forward with her file sits one office away from me. She is a phenomenal underwriter, and she is not cheap. I refuse to work at a mortgage company that does not have accessibility to an underwriter because we now see so many unique circumstances. Primary Residential Mortgage has taken more of a middle ground approach, not big bank, and not the most aggressive compensation plan to the loan officer, because it directly comes out of the consumer’s pocket in that instance, at the same time insure that the fulfillment team is in place to provide phenomenal service you to and your client. If you have made it this far, I congratulate you and thank you for your time. The bill is not all bad, it simply changes the landscape yet again, and those ready and willing to adapt the fastest will thrive.
