By: Don DeRespinis, CPA, CITP, CGMA
Summary:
Opportunities to better serve clients managing costs and terms of credit
Opportunities to increase revenues
Just as CPA’s embraced financial investing as a new source of revenue, Mortgage Brokering has become an opportunity waiting for a solution. Mortgage Loan Originators (MLOs) employed by banks (depositories) and mortgage companies (non-depositories) are generally not as educated as CPAs and usually ill-equipped to properly advise homeowners on the management of debt.
Most Americans use Financial Advisors to manage their financial assets, but where are the Debt Managers?
Most Americans have “bad debt.” “Bad debt” is over-priced through high fees to secure or maintain the debt, and debt that contains little or no principle reduction. Interest rates on all debt should be analyzed annually as part of a financial checkup, just as ROI is analyzed at least once a year for asset management and decisions are made related to tax consequences for individuals and businesses.
Clients benefit as much by ROI by reducing interest expense as there is by increasing ROI on assets. And when the proper calculations are made, the return on the reduction of interest is guaranteed.
Management of debt includes the following:
- Selecting the terms of new debt which most likely matches the needs of the borrower
- Selecting the loan with lower costs to acquire: origination and settlement costs
- Selecting loans with lower costs to maintain: interest and mortgage insurance costs
- Determining net tangible benefit to the consumer on a refinance transaction
- On an annual basis calculate restructuring benefits and costs. If savings are greater than 1% per year for more than 5 years restructuring should be considered.
In addition to the benefit to clients, mortgage brokering is an opportunity for CPAs to create another stream of revenue and enhance current services with limited risk.
The average fee earned by a mortgage business on a mortgage transaction, depending on the market, can be over $5,000! And while every one of your clients will not need a mortgage every year, ten percent of them most likely will. That means in 10 years, all your clients will probably need a mortgage to either purchase or refinance residential property. Interest rate environments, markets and people change all the time. Most people cannot determine with any accuracy what their life will look like in five to ten years. While most borrowers have refinanced in the past few years, many have not and are still carrying “above market interest rates” on their mortgages and other debt.
Anyone 12 to 18 years into a 30-year fixed mortgage can most likely benefit by switching to a 15-year fixed with a lower rate at the same payment if not less and more principal reduction. A one percent savings over 15 years saves tens of thousands of dollars. Guaranteed with no gimmicks!
Likewise, switching a fixed to a 5/1 or 7/1 adjustable mortgage late in a mortgage term can save significant amounts.
All these factors become more important as the home mortgage interest deduction loses its value through limitations and phaseout of deductions along with higher standard deductions.
On the purchase side, financing a home mortgage requires competent analysis of acquisition, maintenance and financing costs. Loan decisions are made on strict compliance with income and asset calculations. Obtaining a mortgage requires understanding bond premiums and discounts, amortization and the relationship between the price of a bond and the rate. These are skills accountants learned in college, but rarely have an opportunity to apply in real life.
Most CPA’s and CPA firms throw their hands in the air when it comes to mortgages, rates and income qualifying rules. They send the client to the local bank or, if they are lucky, a trusted local, mortgage professional. I was a practicing CPA for twenty years and helped many clients get financing for free. I never understood UW guidelines until I became a Mortgage Broker. Then I found out how simple they were.
One of my clients was a real estate firm who also owned a mortgage brokerage business. As I had audited them for many years, I was unaware of how the business really worked, but I was intrigued. After my wife had an opportunity to work with a mortgage broker and then a national lender, we learned how the business worked. In 1996 we started our Mortgage Brokerage business. In 2000, I retired from my tenured position at Western Connecticut State University and we set out to lend $1 billion. In 2010 we hit the mark.
In the mortgage business, it is easy to calculate how much $1 billion in loan volume converts to revenues to the firm. If your average compensation were 1.375%, as ours was, total revenues over a ten-year period would be about $13,800,000 or $1,380,000 per year. Because of new LO Compensation Rules issued by the FED the average compensation has now increased to 1.75% to 2.00%. Thank you regulation!
Running a Mortgage Business in the past required two primary costs; Origination Fees, compensation directly to the licensed MLO, and; Direct Costs, the costs of education and licenses and individual direct loan costs . To earn a profit Mortgage Companies earned revenues of 2% of loan volume. Origination fees generally are 1% of the loan volume. Direct costs are .5% of the loan volume which resulted in a profit of .5% or a 25% margin.
With Mortgage Brokerage services added to a CPA firm and along with FinTech applications of wholesale mortgage lending, the costs to maintain a Mortgage Brokerage business is substantially less now. Today, for a small firm to operate a Mortgage Brokerage business all costs would be less than $10,000-$15000 per year. One partner along with an assistant can handle all loan originations for the firm. That partner or manager would also be responsible for educating other firm staff on doing debt management for their clients. This becomes the driving force to maintain and grow loan origination. Just as AUM has meaning so will AMLO, Annual mortgage loan originations.
An inexperienced individual can no longer become a Mortgage Broker. Under federal law all states must have laws which require every licensed mortgage loan originator to be supervisor by a qualified individual and most states require a “Control Person” who has experience, to be in charge, of the license for the location. In addition to licensing, to operate as a Mortgage Brokerage CPAs need processes and relationships with the right vendors.
In working toward this goal, CPA’s could get some CE credits by including the NMLS* Mortgage Loan Originator Pre-licensing Education (20 hours) as part of the required 40-hour annual CPA Continuing Education requirements.
Each state has its own licensing requirements. But once the national education is completed, the CPA would take the NMLS MLO exam and become state-licensed as an MLO. MLOs are sponsored by a licensed broker or lender, who would arrange to compensate the CPA.
In most states, after two years of gaining experience, the CPA firm could qualify for a mortgage broker business license. They would still need to partner with the right vendors. Some lenders offer services that are nice to have but not necessary for success.
In 2009, the Secure and Fair Enforcement Act (SAFE) was passed requiring the licensing or registration of all MLOs in every state.
As accountants, educators and entrepreneurs, we began teaching MLOs and in 2011 we published our book The Mortgage Professional National Residential Mortgage Originator, 20 Hour SAFE Act Comprehensive Mortgage Loan Originator textbook and course. https://www.amazon.com/NATIONAL-RESIDENTIAL-MORTGAGE-LOAN-ORIGINATOR/dp/1111988404
The course was approved by the NMLS for Pre-licensing Education (PE) Credit. In 2017, the NMLS approved our 20-hour PE on demand full video course which is now being offered. The course is approved classroom style video for PE licensing and compares to others which just offer read, click and quiz for 20 hours.
Contact Don DeRespinis at don@cloes.online for more information on how he can help your firm include mortgage brokerage services as an additional revenue source.
And take the NMLS PE for your CPA CE and get the legal facts about mortgage origination and real estate finance in the 21st century. cloes.online