Broker compensation patterns and trends: 2005 - 2009

Changes in the mortgage industry have been swiftly effected over the past few years. Many of the changes have come about as a response to the high level of observed delinquencies and defaults on residential mortgages as house prices plummeted and others have evolved from continuing concerns about the treatment of borrowers during the mortgage origination process. The segmented mortgage industry of the early part of the decade, with loans being originated in the prime, subprime and government mortgage sectors has been largely replaced with a bifurcated system. By year end 2010, the FHA/VA (government sector) combined with the conventional, conforming market share of originations was 90.8 percent. FHA lending standards are governed by the Department of Housing and Urban Development (ìHUDî) while in the conventional, conforming market lending standards are governed by Fannie Mae and Freddie Mac, or their conservator, the Federal Housing Finance Agency (ìFHFAî). Both the conventional, conforming and FHA loan products can be originated in different channels either through a typical retail channel, or through a wholesale broker channel through brokers or correspondent lenders. In this paper, we examine some of the observed trends and changes in the types and levels of broker compensation that existed before the regulatory change that brought about the implementation of the Federal Reserve Boardís (ìFRBî) new loan officer compensation rule. Among other questions, we examine the variance in broker compensation across geographies, across lenders, across borrower types and across loan products. The intent of this ex post analysis is to provide an understanding of the potential impacts of the declining broker industry on both access to mortgage loans and on the pricing of mortgage originations.