Many of the latest mortgage and real estate industry forecasts call for rates to move just a half percentage point lower from where they are now, as opposed to prior predictions of under 6% for 2025.
That, especially based on
Fannie Mae's November outlook
In turn, it could also open up loan officers for their employer to recapture a portion of their commissions.
This process is known as clawbacks and in the mortgage industry, two varieties, seemingly unrelated, exist. The first and more common is when a loan officer, who was given funds upfront at their new company,
The other is for an early payoff, or EPO for short, when the borrower quickly refinances their mortgage (typically within six months of the original closing) and the company reclaims all or a portion of the compensation paid.
Even though it is the latter that is likely to come into play, loan officers who feel their current employer is not competitive on rates and/or products in the new lending environment, could be looking to change employers.
Understanding your contract
In September, Brian Vieaux, the president and chief operating officer of Finlocker, conducted what is admittedly an unscientific poll on LinkedIn, asking whether mortgage loan officers have been contractually responsible for the return of their commission on a loan that pays off early.
Slightly over half, 51% answered in the affirmative, another 12% selected "it depends." But 37% said no.
As the poll's creator, he was able to glean additional insights about the respondents. He was struck by the instances where multiple loan officers who worked for the same company gave different answers: most answered yes but several responded no.
That indicated they might not be aware of
Vieaux started his online discussion prior to the
"What do people really think? Should the individual loan officer be economically responsible for an early payoff, or is it something that the company they work for should own the burden of?" Vieaux pondered.
Those who were in the yes camp tended to be the more experienced originators, which is another indicator of a lack of awareness of such provisions from many of the "no" respondents.
To clawback, or not to clawback
Vieaux sees both sides of the EPO clawback debate.
"If the company is paying a loan officer, certainly at the higher end of the compensation scale on a per unit basis, a more lucrative compensation plan, I think it is within the rights and it's actually prudent business practice for the company to be able to recover losses that they incur for loans that came in from that loan officer that earned a substantial commission," Vieaux said.
"On the flip side, you could argue that loan officers originating at companies where the compensation structure is less on a per-loan basis, and perhaps because the company is providing the lead, I wouldn't necessarily expect that the loan officer in that situation should be contractually viable for recovery on loan losses."
Meanwhile, calling the situation a problem "is an interesting word to use," he said.
"Because if EPOs become a quote, unquote problem, that means
Loan officers are likely to pick up the compensation benefits of the incremental gains in refinancings over what they would lose financially.
But it comes down to timing: the first quarter of the year is typically on the low end when it comes to production.
"Loan officers that continue to kind of live loan-by-loan and are not putting money away, holding a reserve for things like this, they're probably going to be surprised by any level of impact that they might have from an EPO," Vieaux said.
At the company level, EPOs also have some secondary market implications because if the loan has already been sold, the investor will make financial demands on the originator. A clawback is one way to mitigate those damages.
Do clawbacks work?
Do clawbacks have their intended effect on behavior? Ram Ramesh, professor of management science and systems in the University at Buffalo School of Management looked at clawbacks as an incentive for gig delivery workers in India.
The motivation for the research was to see what got workers to participate and more actively involved in the work they signed up for.
It looked at clawbacks for both financial and nonfinancial rewards; the nonfinancial was the granting of points towards an honor, like employee of the month.
The reward would be vacated if the delivery worker did not sign up for availability by a certain time the next day.
"When you claw back the financial reward, the participation level doesn't change much," Ramesh said. "But when you claw back the nonfinancial reward, the participation level goes down."
That shows that strictly financial motivators to encourage or discourage a behavior might not have the desired effect.
In the world of home lending, refinancing a customer could be a tradeoff. "Should I allow the clawback to happen and earn more commission this month, or my commission this month and hold on to my earnings of last month?" Ramesh said.
He noted the gig worker might elect to forgo the bonus because they have other reasons not to sign up on a given day. That ability to work for multiple employers at the same time could also inform that decision.
Mortgage originators, being in a highly regulated business, lack that ability to work for multiple firms, but one of the reasons for a clawback is to discourage them from shifting their license in a very short time period at an employer.
Clawbacks and employee expectations
"Are clawbacks bad all by themselves?" Eric Levin, executive vice president at Model Match, asked rhetorically. "Do clawbacks mean that the person that has the expectation of you paying them back something that they gave you up front?"
Or is the company being disingenuous or playing a bait-and-switch game, he continued.
"Well, not necessarily. It could be, but the other side of this equation has a responsibility to audit what it is that's been presented to them," Levin said.
His issue with clawbacks is that the job candidate typically has not reviewed the agreement sufficiently to understand what they have entered into.
While not saying every company does this, in general, the potential employer is not walking someone they give an offer to through every bullet point, just the highlights of the agreement, Levin said.
Funding job changers
During the high volume period earlier this decade,
"But volume declined at such a rapid rate that any new hire just couldn't perform at the level that they needed to perform," said Paul Hindman, an industry consultant. "So when they changed jobs and they were paying up these huge sums of money, these companies went after them and lawsuits were running rampant; they still are."
Clawbacks could create ill will, because the loan officer may feel they should not be held responsible for the market shift they couldn't control. On the other hand, the employer in some cases paid lot of money upfront for volume that never came in the door, Hindman reasoned.
"That competing dynamic is extremely complex and often results in legal battles and not only do companies go after companies, but companies also go after individuals," he said.
Lenders implement clawback systems to tie production to loan quality, rather than just simply originating the transaction, Bill Corbet, managing director and partner of strategic consulting at Blackfin Group, explained.
Don't take the advance; bet on yourself
When it comes to clawbacks related to employment, Chris Sorensen, senior vice president and director of retail production at Paramount Residential Mortgage Group, who recently did a podcast on the topic with Levin, said he understood the logic behind what some companies do because they are looking to protect their investment if they give the LO money upfront.
"At PRMG, however, our personal approach is that we would rather somebody bet on themselves and give them an accelerated comp plan for a period of time, which will equal to or be greater than, any advance of monies that they may seek from one of our competitors," Sorensen said.
He noted he has been in the industry 36 years and has held three jobs, so he is comfortable betting on himself. "Give me the opportunity, I'll take advantage of it," he said.
But conditions can change quickly, and companies end up operating differently than they did during the recruiting process. These LOs find themselves locked-in to the company because of these agreements unless they can buy their contract out.
"I would rather have an organization, whether it be mine or any other company out there, [where] mortgage professionals, in my humble opinion, should demand that an organization earns their trust and respect and loyalty every single day," Sorensen said.
EPO clawbacks: when are they appropriate?
Clawbacks because of an early payoff start with a similar mindset contractually. However, Corbet who spent most of his career on the secondary marketing side, has a surprising take on this.
"I would probably side completely with the sales folks that that's not appropriate unless they specifically refinanced the loan," Corbet said.
In the situation where four or five months after originating the first loan, the loan officer refinances the customer, the loan officer's company likely has to absorb a financial penalty.
"But I don't think clawbacks are appropriate for the originator, because if you go through the hierarchy, they don't really have any real control over the customer's behavior," Corbet continued.
That is especially true in today's market where prepayment penalties, only used in certain circumstances like subprime mortgages before the Great Financial Crisis, are frowned upon by regulators
Next, company pricing policies such as lender credits to help pay off closing costs are also typically outside of the control of the loan officer. Obviously, the biggest thing outside of the loan officer's hands is the direction of mortgage rates.
When rates drop, "every other LO in the industry is, in theory, trying to go after my customer. Those pretty tough odds for an originator to say, well, I can't spend my entire paycheck because I may have to give some of it back if the loan pays off early, and yet they really can't do anything about it," Corbet said.
Sorensen believes a clawback for an EPO is "fair and equitable," especially because an LO gets the lion's share of the revenue on the origination.
"Look, we're all partners in the business," Sorensen said. "An originator may be an employee, but they are treated, by and large by this industry, as close to an independent contractor as we can within the confines of the law, the rules, everything."
Not just for retail
It is not just retail loan officers who could be subject to EPO clawbacks.
Mortgage brokers have a contractual relationship with the wholesale lender.
"Why folks become a loan officer in a company versus a broker is to kind of create some space in those kinds of transactions," Corbet said. "They don't get all the benefits of being a broker, [but] they can't have the downside of being a broker.
Even though they can potentially earn more on a per-loan basis as a broker, the negative effect of the clawback could be larger.
Defining what is or isn't eligible
A possible defense for companies enforcing these clawbacks could be to define an eligible loan for a commission as one that doesn't pay off in a certain time frame, said Garth Graham, senior partner at Stratmor Group.
"Therefore, if it pays off, you can claw it back because it was not eligible for commission anymore," Graham said. But the conditions must be made clear to the LO. "It's definitely got to be documented in your comp plan."
Even if mortgage rates don't decline,
In a normal market, conforming rates are lower than those for higher dollar amount mortgages, On Nov. 25, jumbo mortgages averaged over 7%, while conforming mortgages were 6.743% according to data from Optimal Blue.
Jumbos have remained under 7% since then. That difference of approximately 25 basis points, if it holds, might influence some recent nonconforming borrowers to refi into a conforming mortgage, especially if they are able to roll the fees into the new loan.
Typically, closing costs put a drag on the benefit of early payoffs. On higher loan balances, a small break in interest rates could help mitigate those, Graham said.
"I think most lenders are more encouraged about the concept of rates going down that will improve margin and create refinance opportunities than they are of clawbacks associated with the previous production," Graham said. "It's a concern, but I think most people feel more bullish about what rates are doing than bearish about the impact on prepay speeds."
As rates fall, LOs need to stay aggressive
Even Sorensen, who supports EPO clawbacks, believes it still behooves LOs to have an aggressive follow up campaign and monitor their clients.
"If I'm the originator, I better make damn sure that my client understands if you're going to refinance before six payments are received by my investor, I need you to come back to me, and here's an incentive to do so," Sorensen said. "I may lose money when I refinance their loan and suffer an EPO, but at least I have some revenue coming in from the new refinance versus losing 100% if it goes to somebody else."
Hindman added that in many companies' viewpoint, the attitude is they paid the LO for that loan. They gave them "a lot of money for a loan that was supposed to have an asset life of a certain number of years and I was expecting to get that kind of return over that period of time.
"That didn't occur now and because it didn't occur, even though it was market driven, you're responsible for it," Hindman said, a similar tension to what he said about loan officers shifting companies.
