In its latest report, STRATMOR suggests ways lenders can tame sales costs, which represent more than half of the cost to originate a mortgage loan.

With the cost to originate a mortgage at an all-time high, it’s time for lenders to revisit their compensation plans. That’s the conclusion STRATMOR Group Senior Partner Garth Graham reached in his article in the July issue of STRATMOR’s monthly Insights Report titled “Sales Compensation: Do You Get What You Pay For?”

 “Invariably, the first thing I hear when the high cost to originate comes up is a promise to cut costs … in the back office,” Graham said. “Loan fulfillment — processing, underwriting, closing and other direct costs to manufacture the loan — costs the average lender about 22 percent of their cost to originate. Nonetheless, this is where the industry has traditionally gone to cut costs. Meanwhile, 55 percent of their expenses are on the sales side.”

According to STRATMOR’s Compensation Connection study, the most common compensation structures in place today pay basis points (bps) of the loan amount rather than flat dollars per loan. But Graham questions whether this is really aligned with mortgage lenders’ goals.

And he understands compensation from a loan officer’s (LO) point of view: he started his career as an LO more than 30 years ago.

After the Dodd-Frank Act passed in 2010, the only term lenders could use to base compensation on was the loan amount. Without that, the industry would have likely paid based on unit production. In 2010, the average bps payment structure generated an LO commission of $1,672 per loan. Currently, it’s doubled to $3,194 per loan, Graham wrote.

 Basing compensation on a fixed rate and then adjusting it for certain elements may make more sense, he said. For example, lenders could consider paying less for refinance loans and more for a high customer satisfaction score. Or, bonuses could be tied to repeat customers, average pull-through, and better loan files going into underwriting.

 “Many of these compensation structures are ignored in most plans today because the only thing we focus on is the loan amount,” Graham said. “How can we expect our sales professionals to give us what we need to grow stronger businesses if it’s not built into their comp plans?”

 Graham says it’s understandable that lenders may be hesitant about changes that could cost them their top originators. He says there are reasons lenders may not want to approach this issue, but he maintains that the leading companies will.

“If the lender is free to take other factors into consideration, it naturally opens up a discussion of the lender's overall costs. With profitability in the tank and volume down, this is the perfect time for that analysis,” Graham said. “Make your changes now and make sure they benefit your institution over the long haul by paying for behaviors you want to see out of your professional sales staff.”

 Graham offers lenders two places to start: the consumer direct channel and new LOs coming into the business. The former is down so much in the current environment that any changes made would almost go unnoticed but still have a huge impact on their business when the market comes back.

 “A lender could also start by leaving their veteran originators on their existing comp plan and change it for the new rookies that are hired. As the older generation ages out, they can pass their wisdom along to the younger LOs, who can then carry on under the new comp plan,” he said.

 “As for new LOs, they have no experience with any other kind of compensation plan, so the changes will mean nothing to them, he says. If the lender assures experienced loan officers that the changes won’t affect them, they may be more likely to help the new LOs come up to speed,” Graham added.