Killing An Elephant With A Bazooka
by Dean Hartman on March 17, 2011 ?

There's an old saying that talks about "killing a flea with an elephant gun". I think that may somewhat trivialize the issue at hand and I don't want to do that. The issue is a big one, a serious one. So, I modified the saying just a bit to establish that I understand the gravity of the situation. What is the issue? Those damn loan officers! What I mean is that regulators, politicians and the media have chosen to blame loan officers (LOs) for the economic meltdown.

Why did people take loans they couldn't afford? Their loan officer talked them into it! Why did they get approved for those loans? The loan officer pushed loan programs that ignored basic qualification items like income, credit and/or assets! How about those inflated appraisals? It must be because the loan officer had too cushy of a relationship with the appraiser! It goes on and on...

Let me admit some things:

The standards for entering the mortgage industry were pitifully low and many unqualified (and potentially unscrupulous) people started selling mortgages. That has now been addressed with testing and licensing.
Loan programs were too liberal. Those loan programs are virtually gone.
Many consumers got caught up in the home buying frenzy and they began to use their home's appreciation like an ATM. The correction we are now enduring is fixing that issue.
With all that being said, the regulators have taken steps to corral the cowboys. The results are clear. The number of licensed LOs is down from a high of 450,000 to estimates of about 115,000 today. Those who are left have survived reduced loan products, testing, licensing AND the scorn of a reluctant public who views the LO with a suspicious eye. Those who are left are qualified professionals who are looking to serve their clients with solid financial advice and counsel. There are still some bad apples of course just as there are in any industry. However, the weeding out process has had a dramatic impact already.

But, that wasn't enough. Bring out the Bazooka - LO Compensation. Effective April 1st (assuming there is no last second change or delay), the way LOs are paid is going to change. Without going into all the nuts-and-bolts, for the most part, the mortgage BROKER (who just a few years ago represented 70% of all loan originations) will become a dying breed with projections of less than 15% of originations in 2011. Individual LOs will now be compensated based on nothing other than the loan amount for a transaction and/or an hourly wage. (Some lenders are working on "bonus monies" tied to some other quantitative and qualitative metrics, but those payments represent a somewhat gray area at the moment.)

The Consequences
It's too late for whining and there isn't a likely outcry from the public to rise up in defense of the loan officers. But, there does need to be an understanding by every one of the likely consequences:

More Loan Officers are likely to leave the industry as their income is slashed.....estimates of 75,000 LOs by 2012 are not uncommon.
Loan Volume will continue to consolidate to the 4 major banks, some regional banks & credit unions and some large mortgage banks with the smaller mortgage banks and mortgage brokers folding into larger companies or folding all together.
The additional cost to cover the additional expenses for accounting and compliance resulting from this regulation (projected to be 20-30 basis points) will increase the costs of borrowing money.
More loan products (like state mortgage programs that are below market interest rate programs) could go away because LOs need to be paid the same on those programs as they are on other programs and companies will not be able to afford to do that.
LOs will need to do more volume to replace their lower commissions and customer service will suffer.
The good LO is now poised to pay an even steeper price for the LO who was part of the problem but has now left the industry. I believe in transparency. I believe LOs who take advantage of customers (in loan product steering or the timing of the locking in of the loan, for example) have been eliminated or can be controlled in other ways besides this vague directive. I do expect some dissenting opinions on this blog post. However, I am hard pressed to find another industry that discloses as much as we are required to do (in terms of costs) to the consumer. And now we are being told by the government how to dissect the revenue. What's the next weapon to kill the elephant?