Are mortgage ops teams moving towards more incentivized pay?

New criteria for mortgage underwriting, processing and closing compensation have begun to emerge as companies look more closely at operational positions in light of surging loan costs.

Some employers are beginning to consider things like defect rates, customer satisfaction or the number of touchpoints in drawing up plans for the fulfillment incentives that have been in vogue since the 2020-2021 refinancing boom ended, according to Stratmor Group.

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Amid an ongoing profitability crunch in which investment in manual operations has to be carefully weighed, compensation structures designed to encourage compliance, accuracy, efficiency and strong borrower relationships may be increasingly important.

"What sticks out to me is seeing that slight shift from straight per-widget pay to a more loan quality or customer satisfaction component," said Mark Cox, a financial analyst with Stratmor Group, when asked about what the latest trend in compensation for fulfillment roles has been.

The backdrop against which change is occurring
Operations pay often is the first to be cut. It shifts more toward variable-rate incentives when loan volume falls due to a need to rightsize for current capacity.

Stratmor Group's numbers illustrate this, showing fulfillment compensation in 2022 dropped 4% for closers, 7% in processing and 18% for underwriters. Average all-in comp per position that year was $112,661 for underwriters, $71,137 in processing and $68,238 for closers. 

Incentives in these areas also went under the knife, plummeting by 54% for underwriters, 29% in closing and 23% for processors. Compensation for overtime also saw declines that year that generally were in the low end of the 80th percentile.

Stratmor's final numbers for 2023 weren't available at the time of this writing, but the latest anecdotal evidence suggests that since 2022, there may've been some relative stability in job security and possibly pay for ops, even with the industry taking a record per-loan loss last year.

That's because while there's still a need to close a gap between revenue and expenditures, the industry may be mostly done with rightsizing operational capacity for reduction in volume. They have a greater need to keep the employees left, particularly given that it's spring buying season.

As a result, from a mortgage company's perspective as an employer, "You may be trying, to the extent possible, to hold on to your very best employees," said Marina Walsh, vice president of industry analysis at the Mortgage Bankers Association.

At first, a downturn opens up capacity to pay more attention to quality, but once it's gone on long enough that understaffing re-emerges, it becomes an issue again.

As a case in point, after the most recent refi-boom there was a surge in investor repurchase requests for flawed loans, which had a cost. Repurchase numbers have since fallen, in part because lenders clearly don't want to have to pay for mistakes like that now.

That effectively imposes a limit on compensation cuts in operations. If staff get overworked and quality can't be maintained, the result can be expenses around loan buybacks, compliance issues or lost revenue from issues that hurt customer referrals and retention.

To that end, compliant methods of linking pay to indicators that encourage operations professionals to avoid liabilities may make sense, and have some history in the broader consumer finance market.

A need to balance quantity and quality
Like most business strategies, adding changes to fulfillment compensation is easier said than done. For one, there's still not a lot of additional money in most budgets to devote to this.

So lenders may not want to automatically tie certain metrics to higher pay. Rather, they should consider making them "a ticket to entry for incentive," said Jennifer Smith, a principal at Stratmor Group.

Smith suggests making it "an expectation of the role that you're going to meet quality standards or metrics.

"Then, if you don't, it becomes a detractor in the sense that you may have your performance-metric dinged so that you no longer are eligible for additional incentives," she added.

Linking pay to indicators that encourage operations professionals to avoid those liabilities has been used more broadly in consumer finance, said Sara Parrish, president of Campusdoor, a white-label provider of services related to education debt that works with housing finance firms.

Some companies in that business have integrated quality assurance scoring into "how processors are eligible for salary increases and promotions," Parrish said.

A compensation framework can be a heavy lift operationally, so mortgage companies have to think hard about what incentives they want to add and how to make sure it's right before full implementation.

"It is complicated, you're talking about people's livelihoods and their pay, so you don't want to undertake these things lightly," said Nicole Yung, a senior partner at Stratmor.

"We often recommend a multistep process where the company figures out what's critical, whether that's customer satisfaction scores, the number of underwriter touchpoints, or a perfect file going to underwriting," she added. "They've got to understand the process, the metric, how to track it, how to talk about it with the groups and the unintended consequences."

In regard to the last point, Yung suggested thinking about how any particular incentive could affect other interrelated goals.

"If you only get compensation when a processor hands a perfect file to underwriting, you know what they're going to do. They're going to sit on that file until it happens, and then your cycle time will slow down. So then that's a bad customer experience," she said.

Campusdoor has used a mix of key performance indicators for its compensation, giving more weight to some of them than others, said Parrish. It only applies customer satisfaction scores to certain client-facing roles.

Companies considering any compensation changes should think hard about whether the moves will still make sense after the implementation period passes, said Mari Denton, a vice president of incentive and analytic solutions at Ncino.

"By the time you get the plan, analyze it, get everybody to vote on it in a comp committee, get the documentation rolled out, and then send it out to everybody and get their signature, a lot of time has passed," she said. "It's not something that can just be done super quickly."

Compliance considerations
It's loan officer compensation that mortgage companies tend to be most cautious about when they think about compliance when it comes to incentives, but operations positions also are subject to certain rules.

Financial-services regulators had proposed new parameters for incentive compensation at the time of this writing in May, with the aim of barring those that might reward more risky behavior or involve things like clawback provisions.

Also, underwriters and processors have filed employment and wage suits in the industry downturn, the Department of Housing and Urban Development has underwriting-incentive restrictions. There also is some legal sensitivity around notification timelines. 

"Part of the challenge on the notification period for change in incentive-based compensation is the fact that there is so much ambiguity. It is often referred to as a reasonable notification period, however, reasonable means different things to different people," Denton said.

"I frequently see this done with a 30-day notice but some lenders are a little more generous with this time period. The intent is to ensure that employees have time to prepare for the change. How much time is reasonable is dependent on legal counsel," she added.

Legal experts may advise records retention around compensation notifications.

"At a minimum, all payments should be tracked along with calculation methodology and the details of payment," Denton said. "We keep audit records of payments made all the way down to the loan level. This is critical for audit purposes."

She's found three key measures have helped with lenders' interest in maintaining compliance in this area.

"We store plan documents that the employees acknowledge and we also have employees acknowledge the plan in our system that does the calculation. This means that they can see what they agreed to, confirm that they have an assigned plan in the system that is set up correctly, and they can even validate the payments individually before they are paid. This covers your bases," Denton said.

What it means for operations professionals
The upshot of all this for people that work in operations is that the best way to maximize job security and compensation may lie in developing skills in the areas employers are or may be measuring.

Even if they're not officially judged by these metrics, they make a good case for employee value in the current market environment.

While advances around automated intelligence and automation could reduce the need for operational staff, there is some consensus that AI needs a certain amount of human intervention suggests mortgage companies will still need human expertise.

With that in mind, in addition to focusing on their generating strong loan quality metrics, fulfillment professionals may want to focus on developing product expertise that's currently sought after.

"I think a premium is being placed on those that know how to originate a variety of different types of loans, not just refinances," said Walsh. "The folks that companies are retaining have experience and know how to underwrite or process more difficult purchase production."

Being willing to work remotely also may open more opportunities and a wider range of compensation to employees, as this is something that's been expanded beyond underwriters to other fulfillment positions since the pandemic.

"I think the pandemic really led to this new way of thinking in terms of processors and closers," Walsh said.