Six Twenty-Five, Five Hundred.

Oh man! That’s a number I used to have to remember.

I saw that number on a screen the other day, and it felt like I found an old memory I lost somewhere in the back corner of my brain like a tchotchke in a bin in the attack.

625,500. Damn. I haven’t said that number in so long. It’s so weird. Like a long-lost friend. “Hey little buddy. Long time no see.”

If you were a mortgage loan officer between 2006 and 2016, you uttered those digits aloud at least five times per week if not 50, and you saw the numbers in your mind’s eye all the time, asleep and awake and during semi-lucid dreams. From ’06-’16, $625,500 was the conforming loan size limit in high-cost areas of the country like New York City and the surrounding counties. Fannie Mae and Freddie Mac don’t purchase loans that exceed the limits they set.

The conforming loan size limit in areas that are not considered high-cost, was $417,000 for that same 10-year period. Don’t even get me started on FOUR SEVENTEEN… The things I could tell you about 417.

Anyway… a mortgage written for a home in a high-cost area, with a loan amount between the standard conforming loan size and the high-cost limit is referred to as a “high-balance” loan or “agency jumbo.” If a homebuyer wanted or needed to borrow more than the high-balance limit, it’s considered a “jumbo” loan, also known as a “portfolio” loan because lenders don’t have the option to sell a loan of that size to Fannie Mae or Freddie Mac, so they service the loans themselves and keep them in their own portfolio.

I know… I know… All of these explanations about mortgage rules and loan size limits are starting to make this a pretty boring read. So, let me do my best to spice up a topic that’s not-so-hot.

Loan size limits affect so many things… You don’t even know!

A Mortgage Loan Officer’s entire career path can change based purely on the conforming loan size limit. It’s going to take me several paragraphs to prove that, but I think I can make a compelling case, and I think it might be sort of interesting along the way.

Let me start with something juicy. Do you have any idea how much money a mortgage loan officer makes?

I know hundreds of loan officers. I know some who earned no more than $25,000 last year, and I know several who earned more than $2 Million dollars in 2020.

The vast majority of loan officers earn their income almost exclusively through commissions. Most receive a miniscule salary, but it’s for legal purposes and it’s really just a draw that is deducted from future commissions. Theoretically, a loan officer’s earning potential is infinite. The more loans they write, the more commissions they earn.

Aside from the number of units a loan officer closes, the other major variable in determining their total income is the compensation plan offered by their employer – in other words, how much do they get paid per loan? For the most part, the answer to that question depends on where they work. A Mortgage Loan Officer has 3 primary options to choose from which type of lending institution they want to work for.

Retail Lending

A bank like Chase, Wells Fargo, Citibank, First Republic, or Bank of America.  Retail banks typically offer all or most Fannie/Freddie products, govt. loans like VA and FHA. They also offer jumbo loans that they keep in their portfolio. Retail banks use their own assets to fund mortgage loans. They do typically bundle and sell Fannie/Freddie compliant loans to those agencies.

Wholesale Lending  

A mortgage broker helps to arrange a mortgage for a client through another institution for a fee. The broker’s employer typically plays no role in deciding on approving or declining a loan and doesn’t use its own assets to fund a mortgage.

Correspondent Lending

Mortgage companies operating on the correspondent platform are a bit of a hybrid between retail and wholesale. Underwriters at these mortgage companies are given authority to approve loans and correspondent lenders typically fund these loans as well using warehouse lines of credit. But unlike retail banks, correspondents mostly sell loans very quickly after closing, often within a week, either directly to Fannie Mae or Freddie Mac or to another lending institution, like a retail bank.

Compensation Plans

Compensation plans look very different when comparing one lending platform to another. In most instances, basis points are used to measure the amount a loan officer earns for every dollar of mortgage loan volume they close. One hundred basis points is equal to 1 percent (of the loan amount). So, if a loan officer closed $50,000,000 in total volume over the course of a year, and they earned 100 basis points on each loan, their total compensation would be $500,000. If they earned 50 basis points on each loan, their total compensation would be $250,000.

Retail Comp Plans

Retail banks usually pay their loan officers in tiers. For example, if a loan officer closes $1Million on loan volume in a month, they might earn 60 basis points on every loan, which is 6/10 of 1% of the loan amount. If they close $2Million, they might earn 70 basis points on each loan that month, which is 7/10 of 1% of the loan amount. (The tiers are usually a little more complex than that). Top-tier earners at many of the big banks max out somewhere between 75 and 80 basis points on self-generated purchase transactions. For further perspective on the math, if a loan officer at a retail bank closed $3Million worth of mortgages in a month and earned 70 basis points on that total production, they would have made $21,000.

Retail banks often pay less to their loan officers for refinances, especially when refinancing clients that already had their mortgages with the bank. In instances like this, a loan officer might earn somewhere around 35 or 40 basis points.

Wholesale Comp Plans

A mortgage broker typically gets paid either by charging a fee for their services (an origination fee), or by way of Yield Spread Premium, which is a measure of how profitable the loan is based on the spread between the interest rate the borrower is given for the mortgage compared to the interest rate at par, which is the rate at which there is zero profit to the broker. In other words, if the par rate were 3% and the broker offered that rate to the client, there wouldn’t be any profit and the broker wouldn’t earn a commission. But if the broker sells 3.125%, there might be $5,000 in profit, or at 3.25%, there might be $10,000 in profit. Brokers usually earn a percentage of the profit with the other portion going to the brokerage. Today’s consumer is very well protected. Brokers must disclose all of these fees to their clients. Explaining it this way actually sounds a bit sinister, but it’s not. Realize, retail banks and correspondent lenders have margins too, and they also need to sell above the par rate. Retail and correspondent lenders don’t even have to disclose how profitable a loan is to them, so in a sense, an arrangement with a broker is the most transparent.  

Correspondent Comp Plans

Correspondent lenders typically offer loan officers the most attractive compensation packages. Many of these types of lenders offer around 100 basis points per loan, regardless of whether it’s a purchase transaction or a refinance.

It’s Not Just About the Comp Plan

If it were only about the comp plan, every loan officer would work for a correspondent lender. But there’s more to it than that.

Before I accepted any job with any lender during my career, I always considered things like the company’s reputation and the popularity of its brand. The speed and efficiency in which they process applications is a major factor. The ability to offer a wide variety of mortgage products with liberal (not strict) guidelines was important. A retail bank might offer leads and direct access to their banking customers, which can be especially important in the early part of any loan officer’s career. And of course, maybe above all else, I always needed to know how competitive were their rates? After all, I was selling a product and the only real differentiating factors between my product and my competitors’ product was rate and service. Having great rates makes the job so much easier.

In 2016 I was in my seventh year with one of the larger correspondent lenders in the country. At the time, more and more of my clients needed jumbo mortgage financing. Unfortunately, in almost every instance in which the loan amount was north of $625,500, the rate I could offer was not competitive with the super-aggressive retail banks who were more interested in capturing other business from these high net-worth clients than making a profit on the mortgage alone. I lost too many of those big deals… and when you get paid based on the loan size, losing a big deal is a tough pill to swallow. Finally, in 2017, Fannie Mae raised the high-balance limit to $636,150, but a modest change like that wouldn’t help me capture bigger loans. So, I went back to a retail bank in an attempt to chase jumbo business.

My closed volume was higher at the bank than it was at the correspondent, but I earned less per deal. I probably came out slightly ahead, but it wasn’t by much.

The Payoff: What about the high-balance conforming loan size limit is affecting loan officers’ career paths?

The limit keeps going up.

In 2017, Fannie raised the high balance limit from $625,500 to $636,150

In 2018, Fannie raised the high-balance limit to $679,650.

In 2019, Fannie raised the limit to $726,525.

In 2020, Fannie raised the limit to $765,600

In 2021, Fannie raised the limit to $822,375

For a decade, the limit didn’t change. It stayed stuck at $625,500. But in just the last five years, they’ve raised the limit by about $200,000. That means that loan officers at Correspondent lenders can easily compete on even more loans at even higher loan amounts. When you combine that with a 100-basis points compensation plan, the correspondent lending platform is growing in popularity amongst loan officers thinking of making a career move. Not to mention, the rate gap on jumbo loans is shrinking when you compare retail lenders to correspondents.

Last week, an old friend of mine made the decision to leave a major retail bank to join a correspondent lender. The bank he worked for was overwhelmed with volume which wasn’t being managed properly. Some of the refinances he submitted were taking up to 6 months to process, which clearly impeded his ability to produce and earn. He closed about $38 Million last year at the bank and he earned $190,000, a blended average of .50 basis points per deal between his purchase business and his refinance business. His average loan size was $477,000 per loan, far less than the new $822,375 conforming limit, so the math was clear as day. If he closed the same $38 Million at a correspondent lender, he would have made $380,000 — double the income.

For my friend, it came down to his level of self-confidence when it came to sourcing his own business. He definitely supplemented his loan pipeline with an occasional bank branch lead, but not enough to make sticking around worth it. He asked me, “If I lose that much business by leaving the bank… if I’m making the same amount of money, wouldn’t that be a lateral move?”

I thought maybe the bank melted his mind.

To make exactly the same amount of money that he earned in 2020, my friend would only have to close $19 Million with his new employer. If his average loan size stayed at $477,000, he’d have to close 39 loans instead of 79 loans to make the exact same amount of money. There isn’t a country or planet in which that’s a lateral move.

My first response to his question about a lateral move was: “It’s the same money for half the work!”

My second comment was: “Between phone calls and emails and analysis and administrative work, how much time did 40 loans take up in your life? You could reinvest that time back into your business, finding alternative referral sources, essentially giving yourself a raise. Or you could spend all that extra time with family or friends or on activities you enjoy. Money isn’t everything.”

The math isn’t as clear-cut for everyone.

There are loan officers who thrive in the retail environment. Loan officers whose average loan size is well over $1 million would likely do better at a bank. Loan officers who offer great customer service but can’t generate outside leads or find deals from their own book of past clients might also fit better in a retail environment where the bank is referring clients directly.