Mortgage brokers have a new concern that may eclipse even the Federal Reserve compensation rules they will have to adhere to come April 1.
Wholesale lenders are writing new contracts on what these third-party salespeople can earn. And for some brokers, it isn't pretty.
A New Jersey broker said he recently received a contract from Citigroup's CitiMortgage, capping his fee at 2% of the loan amount.
The broker, requesting his name not be used, wasn't all too thrilled with the cap, but what irked him even more was a message from his account executive, warning that if he didn't return the paperwork by Friday, CitiMortgage would automatically cap him at 1.5%. "Can you believe that?" he asked.
Under pending Federal Reserve rules, brokers cannot be compensated based on a loan's rate or terms. Most brokers have come to accept this as a given, although there is still a chance that the Fed will be slapped with a temporary restraining order by April 1, when the compensation rule goes into effect.
The National Association of Mortgage Brokers and the National Association of Independent Housing Professionals have started legal funds to contest the rule, but neither appears ready to file a legal motion. Keep in mind that both these trade groups are supported by loan brokers, a group whose fortunes have been decimated by the housing downturn. It short, neither is flush with money, though they're hopeful some large wholesaler will step forward with a wad of cash to fight the good fight. (NAIHP chief Marc Savitt likes to point out that without loan brokers, wholesale funders will cease to exist.)
Although wholesale lending accounts for just 10% of all new mortgages funded today — compared with 30% three years ago — it's still an important outlet for lenders looking to expand into geographic markets where they don't have a physical retail office.
And now that it's spring and the Fed rule is pending, wholesalers are telling brokers what they can expect to earn. "Previously it was the states that dictated how much a broker could earn," a lender said. "New Jersey had a fee [cap] of 4.5%, but that includes lawyer and lender fees."
In general, most caps implemented in recent years were written by the table funders, that is, the firm actually writing the check at the closing table.
Typically, these caps ranged from 1.5% to 3%, which seem reasonable to many — but there's a catch.
A 2% fee on a $400,000 loan translates into a gross of $8,000, which is a decent chunk of change for a broker working the New York/New Jersey market. But a 2% fee on an $80,000 condo in Florida works out to just $1,600.
What bothers brokers like James Farris is that it takes just as much work to process a $400,000 loan as a $100,000 loan. "I work on a flat-fee basis, and so far none of my lenders are offering the option, even though the Fed clearly permits brokers to be paid a flat fee."
Keith Lowry, a sole proprietor broker with Full Service Mortgage in Colorado, said that, between the coming Fed rule and the new contracts being offered "there is just a lot of confusion all around."
Lowry noted that some wholesalers are going out of their way to explain all the compensation changes to their brokers, hoping to head off problems before they occur. He said he has no problem with a 2% cap, but added that some wholesalers are offering no cap at all. (Instead they are offering ranges on how much a broker can make.)
On the other hand, wholesalers are telling brokers that, as SunTrust put it in a rate sheet, they can "choose the compensation they want to earn on each loan," just as they do today. In a recent presentation to its brokers, SunTrust Mortgage set its minimum compensation at $500 — and its maximum at $70,000. That's not a typo. It's $70,000. Who can argue with that? Of course, it takes a really large loan to generate that kind of fee — and how many of those will a typical broker see in his lifetime, much less a year?
