Brokers VS Bankers : Perspective from a CEO that’s seen both sides
The gloves are off.
By Aaron VanTrojen, CEO/Founder, Geneva Financial
Anthony Casa, the outspoken leader of the Association of Independent Mortgage Experts (AIME), has been on a mission to reestablish the broker model as a viable platform for mortgage originators, and takes it a step further, claiming to be a better resource for borrowers. He has doubled-down recently with arguably misleading and some outright untrue accusations, including the overcharging of veterans by retail lenders.
While most originators and sales people will boast that they do not sell rate, Anthony’s message is clear, brokers are cheaper and they are better for the consumer.
Per recent statements, Casa is selling a narrative that mortgage loan originators have a duty to hang their license with a broker over other choices like independent direct lenders or big banking institutions.
“Don’t you feel a fiduciary responsibility to your customers to go work in the channel that gives them the best terms? The answer is YES, and anyone that answers anything other than “YES” needs to understand that “not selling rate” versus doing what is right and in the best interest of the consumer is what is most important and will always be in order for this this be a sustainable profession.” - Anthony Casa
As an industry veteran, I would agree. Mortgage brokers are, and have always been, “cheaper.”
Most bankers, with their bloated bureaucratic management, executive positions and pay to match, have been squeezing originator compensation with higher pricing to the consumer for years, namely in 2008 under the veil of compliance costs, and most recently under the cover of margin compression.
But are brokers better for the originator, and more importantly the consumer? If you think that the broker comeback is due to what is “in the best interest of the consumer,” you are selling a myth. That myth becomes a shield for those who state they don’t sell on price but essentially wind up requiring a lower price to attract and close clients - they have no other value to offer.
Don’t Call it a Comeback
If sharply lower prices were always “in the best interest of the consumer” and brokers were the segment of the industry boasting those prices, why did they exit in masses a decade ago?
If your answer is “technology,” that is a copout. Sure, technology has radically improved over the last decade, but competent originators could close loans just as fast and nearly as easy through wholesale channels ten years ago as they can today.
“Brokers are making a comeback” seems to be all the rage over the past twelve months or so; but it begs the question – Why did they go away in the first place. An even better question is why they are making a perceived comeback, and is it a good thing?
Both Sides of the Story
By now you’re wondering “Who the heck is this guy and who is he to make these statements?” Let me begin with a little history about my past on both the broker and banking side, which should lend some legitimacy to my speaking on and giving an educated opinion about the subject at hand.
I started my career in the mortgage industry working for a small mortgage broker, Morgan Financial, Inc. based out of Portland, OR who had just opened an office in Phoenix.
The Morgan Financial, Inc. model was to pay the originator 100% of the compensation, minus $450 per file to the Company, $495 per file for processing (if you used a corporate processor), and all employer taxes and loan costs (i.e. credit, appraisals, etc.) were charged back to the originator.
The same compensation model was applied to individual loan originators and branch managers. Branch managers generally paid their originators a “split” on earned income from the wholesales (prior to originator compensation laws). Splits, or percentages on earned compensation is no longer legal since the Fed Rule and now CFPB Loan Originator Compensation Laws, as it is not static and will vary by transaction.
Originators under this model had access to over 300 wholesale investors with limitless loan programs for clients. If the program existed, we could do it. You just needed to know where to go to find the information. For a well-educated originator, you had the ability to not only beat much of the competition (especially banks and bankers) because you had not only a far lower price, but better and more creative options to structure one’s financing needs - similar to how it has been over the last decade; and even today.
I would argue that, since inception, brokers have had better pricing and more loan options than most bankers. However, I will argue - with evidence, that while this is predominately the reality; it is not always the case.
One downside to this model is that there were simply too many loan options for your typical originator to manage. There were over 300 wholesale lenders to choose from; and therefore, 300 different ways to process a loan.
For a true mortgage professional, if you constantly spent time researching and studying the different loan programs and lenders, you could capitalize on these resources and be unstoppable against the banks, bankers, and your less educated mortgage brokers. If you were a true professional, there was no shortage of lesser competitors. Unfortunately, most mortgage brokers did not expend the time to master their trade and defaulted to the limited products they knew.
The result: not necessarily offering the best terms to a client. Not necessarily due to the fact they didn’t exist, but that the originator lacked the proper education of one’s own products.
Over the course of the next several years, Morgan Financial evolved to a broker / banker platform. You now could “bank” loans or continue to broker. Veterans of this industry will tell you this is the natural evolution of a successful mortgage brokerage once the broker begins to realize the challenges associated with scaling a broker platform.
Many loan originators started to move their business to banked channels because it was more forgiving and you no longer needed to know 300 different ways to process a loan. Banked loans were more streamlined and if you got hung up with a process or condition, it was quicker to deal with an in-house underwriter to resolve whatever issue you were experiencing.
Despite new and improved technology, the above mentioned factors remain largely unchanged from the pre-mortgage meltdown era. Personally, I chose at that time to continue to broker. I was a “professional” and had little to no issues packaging loans and getting them through any one of the 300 wholesale lenders in a timely fashion.
Closing on time was never an issue for me, as I was a professional. I keep repeating that because it is a critically important distinction as to why brokers largely went by the wayside, and one reason why their comeback will likely prove problematic.
In 2006, Morgan Financial sold to a large mortgage banker, and as a professional originator with the heart of a broker, I realized that I would never work for a large bureaucratic mortgage banker.
Since the brokers were exiting by the masses and I could not find a mortgage bank that would fulfil my needs as a professional (or compensate me as such) I was forced to start my own company in 2007 - as a mortgage broker.
When originators were fleeing to bankers out of sheer ignorance of the newly formed regulations (which nearly all originators failed to personally read) Geneva Financial, LLC began its successful quest to compensate originators more than the competition and offer superior service to that of our banker competitors.
Yes, in 2007. Everyone told me it was impossible, and unsustainable. We not only did it successfully, we did it compliantly (more on that shortly).
Changed by Demand
In 2014, Geneva Financial, LLC transitioned to a mortgage banker; because of demand from the originators; not greed of the owner or management.
The originators wanted to still make the 250 BPS we were paying but have all the resources of a larger institution. Company paid health insurance. 401K. CRMs. Marketing support. Underwriting control.
Converting to a banker allowed us to offer these benefits and more, without changing compensation, and with only a small change in price to the consumer. We did so without billing the expenses back to the originator.
Clients may have to pay a nominal price to receive enhanced service and a superior experience. No charge back to the originator for CRM, marketing, credit reports, or even the employer taxes.
Still today, we continue to pay nearly twice the national average in loan originator compensation without nickel and diming branches or originators. Today, 11 years later, I am still told my model is unsustainable. Brokers may gross 275 BPS; but their net is far lower. You just need to be good at math. Under a broker model, you would never be able to scale or offer valuable services to the originator, and more importantly, the client (more on the shortly).
And then there’s Compliance
Since the inception of Dodd-Frank and the CFPB Rule on Loan Originator Compensation (previously the Fed Rule), I have yet to meet a single originator, branch manager, regional manager, or owner that has even read the regulations. Not one.
Most of what this industry knows is from what their manager told them, and/or their employer allowed. Simply because your company is bigger than mine and has lawyers your company paid to try to circumvent the rules, or because they have never been fined (as far as you know), doesn’t mean they are abiding by the rules.
I have also never been introduced to a company that I, or the regulators I have spoken to, would say were compliant. Considering that I talk to dozens of originators every month, from coast to coast, from nearly as many companies, I am referring to a sizable percentage of the industry.
Now I am not going to get into a pissing match with someone regarding “interpretation”, especially when it is impossible to form an educated interpretation if you have not even read the rules you are forming an interpretation about.
I am not a fan of making blanketed statements about a segment of the industry as Mr. Casa does, but I must make an exception here as my vast experiences with the subject has led me to such a statement.
Mortgage brokers are largely operating outside of the rules.
Most mortgage brokers do not have a compliance department. Most mortgage brokers do not have a legal department. Most licensees have not studied, or even read the very regulations that are designed to protect the consumer. And most, are in violation of many of the regulations created to protect the consumer (i.e. Fair Lending, Originator Compensation Rule).
· Price charged to the consumer can vary by transaction based on the wholesale lender the loan is placed with, as well as the compensation paid by wholesaler to the mortgage broker. The wholesaler is often determined by the originator’s ability to place loans at the highest paying wholesaler when dealing with a less sophisticated client, and place more sophisticated clients with lower paying wholesalers. This affects the price being offered to the public and the compensation being paid to the originator. Arguably a Fair Lending violation as all consumers are not treated equal.
· Compensation to the originator that can vary by transaction based on the wholesale lender the loan is placed with would be defined as a “proxy” and prohibited per the CFPB’s Loan Originator Compensation Rule.
· Varying compensation whether it is a “banked” transaction (or table funded transactions) verses a “brokered” transaction. Again, a “proxy,” and a common violation of mortgage bankers as well.
Note:Every regulator that I have spoken with since the inception of the rules concurs with my “interpretation.”
If you do not believe my “interpretation,” email your company’s policy that allows these practices, as most brokers do, and send them to both Federal and State regulators. Make sure to leave a return address so they can respond.
The client may be able to get a lower price with a broker because a broker is more apt to violate state and federal regulations to deliver such a price.
Now, is that in the best interest of the consumer? Are brokers really looking out for the client’s best interest when they are so willing to turn a blind eye to the very regulation designed to protect the consumer?
In recent conversations with originators from two of the larger mortgage brokers in the country, and one rapidly growing broker in my local market, they implicitly stated that the price to the consumer, and the compensation they receive can change at the will of the originator transactionally. This is not a one off, it just so happened to be a recent conversation with three large companies. Not to pick on just the mortgage brokers; most bankers are also willing to violate both regulations with reckless abandon.
In is important to note that last week a met with one of the country’s largest wholesalers and vented my frustrations with the sheer lack of compliance with the industry as a whole; but the conversation was mostly focused on brokers. They stated to me that while they were very aware of the lack of compliance from the brokers, they did not push back as their competitors would not. They did tell me that some states of recent have been enforcing Federal laws. In particular Washington State that investigates brokers to make sure the pricing and compensation does not vary based on the wholesaler the broker places the loan with. To date, I have been unable to validate this claim.
You get what you pay for…
What is a fair price to charge, and what is a fair compensation to earn? The answer is in the eye of the originator; and ultimately the consumer.
Not all are created equal, and there is vast span between the professionalism and expertise of the average originator and a true professional. The price a client is willing to pay for a mortgage originated by a loan officer has far more to do with the expertise and professionalism of such originator; more so than the market, or the logo on one’s business card.
“My market is the most competitive” is largely sung by those that lack the ability to bring value and expertise. For true professionals it is not about how much one can charge, but how much one will pay for your value.
For those that are truly mortgage professionals, masters of their trade, price has little to do with the value that they bring to the transaction. For their clients, price is not the reason that they work with a professional.
I am not blind to the fact that price is important, but it should not be the leading proposition. And if it is, you may find yourself working for a broker.
Originators that have flocked to mortgage brokers of recent years have largely done so due to the competitive nature of the industry due to margin compression. Simply fewer transactions and more originators competing for those diminished transactions. Stop the insanity.
If you cared solely about the lowest price and what was best for the consumer, you would have been a broker years ago; or would have never left the broker platform in the first place. You ran in the last couple of years to the broker model because you largely sold price and found yourself less competitive in a banker model.
In most cases, rightfully so. Mortgage bankers with the bloated executive and management incomes and inefficient systems, and President Club retreats to exotic locations took its toll on your competitive ability. Especially for those originators that always sold price. But not all bankers are created equal.
Remember, the sole reason I started Geneva Financial, LLC was because I refused to work for a bloated bureaucratic mortgage banker.
No one moves to a broker model for compensation. At least not those that are knowledgeable about the economics of a broker model versus a banker model. The broker industry likes to promote 275 BPS compensation plans, yet it never actually pays 275 BPS; not even close.
Below is an example of the differences between mortgage brokers, bankers, and Geneva Financial compensation.
Warning:This is self-serving for Geneva Financial, and is a generalization; but accurate to many organizations. You are welcome to do your own math with your current employer to see how you stack up.
There will be variations in compensation throughout the market. This example is solely to serve as tool for what is common in the industry.
I am largely a fan of the mortgage broker platform. What Anthony Casa and UWM have been able to accomplish in the last couple of years is impressive, and they do deserve recognition for this.
Mortgage brokers are good for the industry. Competition is good for the industry. I believe Anthony’s motives are for the good of the industry; although blanketed generalizations about bankers is just as misguided and harmful as the same tactics that bankers used against brokers in 2008.
Maybe it is just intentional payback. Bankers perpetuated this idea that brokers could not survive the “new” regulatory environment; and without any due diligence, the brokers listened. The migration to banking was even more misguided than today’s move by some to brokering. Originators of all platforms need to get educated.
The intent of this article is to help educate the industry as to the differences between the two platforms. Also note that there are considerable differences amongst companies within the platforms. The self-promotion of Geneva Financial, LLC is to help separate my Company from other mortgage bankers and not be pigeon holed into “retail model is dead” rhetoric that Anthony is spewing.
All bankers are not greedy, bloated, bureaucratic institutions motivated solely by ROI. I am a self-described punk rock, progressive, tree-hugger from Seattle, WA; and my employees, and customers, benefit tremendously from those core values.
My “heart is a broker” approach does not come from my vision that price is what makes an originator or company the “best for the consumer.
It comes from my professionalism as an originator to be willing, and able, to provide limitless loan products, help educate clients about the best financial instruments to meet their needs, and provide a customer service experience that is not predicated on fancy mobile applications and automated messages from robots.
Call me a dinosaur, but I still value Humans as the most important asset to our Company. We spend a lot of capital on our employees; not on replacing them.
I recently met with a recruit that I have been pursuing sporadically through the years. He has always been employed by large mortgage bankers. Recently the company he was employed by was acquired by an even larger mortgage banker.
Instead of suffering acquisition woes, he bought off on the emerging broker frenzy, and decided to start his own mortgage brokerage. Since we have established what one could call a friendship over the years, he asked to meet in person so he could pick my brain.
Having successfully started a mortgage broker company, he was immediately challenged by his inability to scale under such a model. He wanted to recruit top talent and offer the service and support that professional originators demand. My friend found out quickly that the economics under the broker model simply did not generate enough revenue to do so, let alone hire even one compliance person to keep him legal.
Like so many other brokers, he knew what he knew, which was limited in respect to the actual regulations. A sharper price was simply not enough to offer top talent. At the end of our very productive meeting, he concluded that he would have to radically increase his net worth to give him the ability to offer delegated banking (at a higher price), or just shut down and roll up under a company like Geneva Financial.
I will always support the broker model as I truly do have the heart of a broker. That is why we offer more loan products than even most brokers. Please try not to point a finger at the big bad bankers because they charge to much.
I don’t know a single loan officer that got into this business to help people. Helping people was a byproduct of one’s ability to make a very lucrative living selling mortgages. And if you truly help a lot of people you deserve to be paid well; which is ultimately a byproduct of price.
Until you start advertising that you offer the best price without taking consumer protection seriously, stop saying the brokers are the best for the consumers.
Advertise that you will charge clients more, when able. And a note for the entire industry, if everyone would truly aspire to be a professional, looking out for the best interest of the consumer (abiding by the spirit of the rules versus trying to circumvent them), while earning compensation reflective of your value add, we would all be better for it. Including the client who would be more than happy with your fee for service.
I openly invite real, human conversation, on both sides of this issue.
Join me on April 12, 2019 at 8am Pacific for a “gloves-off” conversation where I will defend my position to all challengers in a live format open forum. REGISTER HERE
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