Being at the right company isn’t about the warm and fuzzies. I find that many originators are leaving money and resources on the table without even knowing about it.
Do I Mathematically Work For The Right Company?
I firmly believe you need to work somewhere that you trust the leadership, you are inspired, motivated and happy. At the same time it is important to understand the math behind it. I’ve seen originators go from being happy with their current position, to understanding the math and realizing they are being taken advantage of.
How Many Pieces Are In The Pie
- If you work at a Bank, the math is pretty simple. They keep everything and just pay you what they feel is fair.
- If you are a broker you just get whatever comp you set with each actual mortgage bank.
I’m going to spend time going over the mortgage banking platform which I believe is the best opportunity for an originator or a branch manager.
- Company Margin / Spread – How companies make money
- Branch Margin / Spread – How branches are profitable
- Loan Originator comp – How loan officers get paid an how the other margins impact an LO
- What I should consider fair
Company Spreads
When a mortgage Bank closes a loan there is a total amount of revenue generated usually defined in basis points or a percentage of profit compared to the loan amount. This could be directly from the sale of the loan to a specific investor, it could be hedged where the mortgage bank has pooled that loan with other loans based on lock date and the secondary department will sell based on the overall commitment price, or it could be kept for servicing if it is a Fannie, Freddie, FHA or VA loan. The company will take their cut and the rest is left over for the branch to divide out to cover costs, commissions etc..
Company Spreads overview:
If a mortgage bank has next to nothing from a spread it should be concerning as an employee. The reason being is if the company is not profitable, how long can they remain solvent? Mortgage Banks need “net worth” and liquidity requirements to continue having access to investors. Without profits they will never get better. The company also charges their “standard” fees and in the old days they were called junk fees for Processing, underwriting, doc fees etc… this is the other source of revenue to cover costs and expenses. Most companies look at these fees and set their fees in order to “keep the lights on.” If the company can set their fees at an amount that will cover all of their overhead based on the closed units per month then the basis points from the rate sold meaning their margin is the actual profit.
Fannie/Freddie spreads:
Typically I see these anywhere from 50 bps to 150 bps but the reality of it is most companies play with this and adjust it quite often. I’m not a huge fan of it but I understand why. They are trying to pick up some bps based on market condition while overall being very skinny and competitive. I’ve also seen companies adjust 1 branches spread to cover the losses that they know another branch will incur so the overall area or region is profitable. I’m not a fan of this approach but it does happen. I do however think that 50 bps to 90 bps is a fair company margin. How do you know what the margin is? You won’t unless they tell you or unless you price compare to another mortgage bank where you know the margins.
VA and FHA Spreads:
Government loans are the most profitable loans out there and I’ve seen mortgage banks take huge margins on these programs. Generally we see mortgage banks set the company spread at 125 bps to 300 bps and this is also where companies will compensate for other branches. If 1 branch does a bunch of govt loans and another doesn’t, they’ll increase the spread on the govt branch to compensate for lowering a margin at the other branch. Again I’m not a fan of this but it does happen more than you would think. I think a fair govt margin for the company is 125 bps to 175 bps, anything over that is just getting greedy in my opinion.
How will you know? This is the hardest to figure out since in most cases when you price compare you’ll be selling the same rate as another mtg bank but the profits will be less. Unless the company tells you’re the only way to figure it out is to price compare and see how you stack up.
Non-Agency / Jumbo Spreads:
These loans have the lowest overall margins and are the least profitable loans from a basis point side of things. You’ll see these margins anywhere from 50 bps to 100 bps and anything over that just makes your pricing not competitive at all. The overall dollar amount should be larger because of the loan size but the percentage of profits are much smaller. Again the only way tot tell is to price compare or have your company tell you.
Overview/Closing Notes:
The bottom line a company needs to have spread to be profitable, sustainable and provide a good environment for their employees. I would never recommend figuring out the spreads and then changing companies because of 12.5 or 25 bps because these can change daily. You need to know that from a math stand point you are being treated fairly across the board. This is a great way to ensure you’re at the right company or could be the catalyst for considering a move.
I’ve seen branch managers that are completely happy figure out the spreads and realize they are missing out on 125 bps fro govt loans and 50 bps for conventional loans. At that point no matter how happy you are if you’re leaving 200K or more on the table maybe you aren’t’ in the right place. If you’re leaving 10 bps on the table and are happy then you know you’re a the right company.
Branch Margins / Spreads
In this section we want to go over how branches are profitable for the branch managers, how branches stay in business but also give the loan officers an idea of what a great branch looks like.
The best Model for running a branch is the P and L system where the branch manager sets the branch margins, has flexibility for price exceptions and creates a operations team to support the branch originators. We all know that there are producing branch managers and non-producing managers but that’s a completely separate topic. In this section we want to give an overview of how it works and if you’re in the right place to reach your goals.
If you’re an originator:
You should be in a branch where you have your set comp, they provide mentorship to help you build your book of business and also an operations team that allows you to spend your day originating not processing. There should be clearly defined tasks that everyone on the team does and you should feel like you are in a position you can excel. The Math behind it though is that the branch still needs to operate and be profitable.
That means is you have a 125 bps comp plan you can’t sell all of your loans at 125 bps, there should be between 50 bps and 100 bps of additional spread in each loan to help contribute and pay for the overhead, the operations staff, marketing etc.. Of course from time to time you should be able to get price exceptions when you need to win a deal but you also need to understand that to get the support you need to succeed it costs money. In all the branches I’ve seen over the years depending up on how tight they run that is somewhere between 50 bps and in the highest it’s 100 bps over your LO comp.
If you’re a producing branch manager:
Producing branch manager’s should by definition focus their time on producing. Too many times I see “producing” branch managers have originators that do more loans than they do which makes no sense to me. As a general rule a producing manager should do about twice as many loans as the next originator in the office. Yes there are various team set ups so this isn’t an exact number but it’s a gauge to determine if you’re operating in the correct way. As a producing branch manager the biggest benefit of the P and L system using spreads is that you can set your flat comp on each loan for commissions but the additional basis points can pay for the support you need to continue to grow. Using the P and L system to allow you to add key operations people, improve your office space, pay for marketing etc… is what takes a producing branch manager from 10 loans a month to 15 or 20 without increasing the hours worked.
Producing branch managers are truly running their own business, managing their own profit and loss and ensuring that not only are they profitable but that the company they work for has a profitable branch. This usually equates to between 50 bps and 100 bps over the actual flat commission. When you take into account payroll, payroll taxes, benefits, 401K match, rent, credit reports etc… that add’s up. Too many times I see great originators make the shift because they think they’ll pick up all these basis points in compensation but they don’t account for all the costs.
This is by far the most profitable way to be in the mortgage industry in my opinion but it’s also the most difficult to manage. As a producing branch manager your first step should be focused on building a top notch operations staff which costs money, where does that come from? It comes from pricing your loans with between 50 to 100 bps of additional spread over and above your commission. I’ve seen managers take a lower first year flat commission in order to build out the operations team.
Once that is done you can look to start building out your loan officers in the branch but keep in mind if they don’t have the operations support or great mentorship they won’t be with you for long. All originators understand that when they work at a branch someone has to pay the bills, they get to sell, get their commission and move on. I really feel it’s fine to explain to your LO’s what they need to price at and why. Ultimately if you can have everyone in the office closing loans at 50 bps to 100 bps over the commission you’ll have enough to cover your expenses assuming you manage the correctly and you’ll also get to a point where the spread that your originators create covers all costs. At that point the manager can increase their compensation for their own personal loans and that is where the increased profits come in and why I think this is the ideal model for top producers.
If you’re a non-producing manager:
The spreads will vary when you’re not producing because at this point the entire branch revenue is on the originators shoulders. It really comes down to breaking down expenses, average revenue but most importantly worst case scenario. What is the fewest amount of loans and volume that could happen in a month with your originators? When you figure out your averages and your worst case you can back into what margins you need above and beyond the originators comp. Because you’re not getting paid on your own loans or doing your own loans I think you need to be running at a 75 to 125 bps spread over and above the LO’s comp plan. The reason is that if you’re not producing that means you have 40 to 50 hours a week to spend on helping your originators and your operations. The LO’s in the office should greatly benefit from this and in turn they should view it as “I’m paying an extra 25 bps to 50bps to have this help.”
Wrapping it all Up
To bring a conclusion to all of this you need to be happy where you are at. You need to enjoy where you work and feel a sense of pride that you’re surrounded by the people you’re surrounded by. The spreads and the basis points matter because I’ve always believe in working smarter not harder. Doing more loans isn’t always the only way to increase your income sometimes it’s just doing the same loans in a better way.
The things I wanted to make very clear is that at every level there needs to be some profit. A rising tide floats all boats, if the company has fair spreads and makes money they will be able to continue to offer what their managers need, if the Managers have fair spreads that allow them to run a profitable branch as well as a branch that can grow their loan officers will benefit and be able to do more loans. If loan officers work for a company that has fair spreads, has a manager that has fair spreads that also mentors them they will do more loans and in turn make more money.
Too many times I see 1 side of the equation making all the profits which is not how it should be. Not everyone is the quarterback but the team doesn’t work if everyone doesn’t do their part and understand their role. People need to be compensated fairly based on how much they contribute in an even and fair way across the board.