The Mortgage Business was Sliding. But Salespeople Still Raked in Big Fees.

The Decision

In April, Walsh and Mangels decided to bring down the ax. "Basically, what we really needed to do was just scrape down to the foundation and start over," says Mangels. They would eliminate sales commissions and switch entirely to a salaried staff. They decided to break the news at the end of the week, looked at the calendar, and groaned--it would be Friday the 13th.

When the day arrived, Walsh and Mangels sat down in a conference room and summoned the employees one by one. A glass window overlooked the cubicles on the office floor. Employees stole glances toward the conference room. In the days beforehand, the owners had tried to soften the blow by leaking hints of the coming changes. Some employees urged them to reconsider: One even tried to change Walsh's mind by approaching Walsh's brother.

They had decided to fire five commissioned loan officers plus three members of the support staff. Walsh and Mangels considered offering the commissioned employees salaried positions but decided there would be too much bad blood. It seemed clear no one would stay for maybe half of what he or she made in the past.

Chris, Nancy, Marcy, and others were gone. Six of the newer salaried officers were allowed to stay. Under the new structure, mortgage officers would earn a base salary of $36,000 per year plus a flat commission of $100 for closing a loan. Depending on productivity and volume of business (which fluctuates with interest rates), they might earn $60,000 to $120,000 a year.

The staff changes were part of a larger rethinking of the business that the owners hope will attract business: Walsh and Mangels will pass savings to customers by covering closing costs.

In the fall, Scout plans to roll out a website on which customers will be able to compare mortgages. Walsh and Mangels are betting that the industry is approaching a day when customers will be able to shop for mortgages online much as a person can shop for airline tickets on Orbitz. They expect to be licensed in all 50 states by 2008. In the fall, Scout plans to roll out an aggressive ad campaign of direct mail, Google ads, TV and radio spots, and billboards. New ads may promote the idea that Scout reps have no incentive to steer customers toward high-interest or risky loans. "Unless you separate compensation from the program, you cannot get honest advice from anybody," says Walsh.

Scout hopes higher volume will outweigh lower margins. "If we can offer absolutely the lowest rate possible, will we gain market share? It has to be a yes," says Walsh. "It could be the greatest or best decision we ever made, or the worst. Only time will tell."

The Experts Weigh In

A great first step

Commissioned loan officers are a costly anachronism. On easy loans, they are much overpaid. On difficult loans, few have the training and skills needed to guide a befuddled client. And those that are qualified are not disinterested. There is hardly a mortgage lender in the business who would not bounce their commissioned loan officers if they knew a way to replace the lost production. Whether Scout will succeed will depend on how well it executes. Lowering the price to reflect the absence of large commissions is a great first step.

Jack Guttentag
Professor
Emeritus Wharton School
Philadelphia

The right decision

Bravo to John Mangels and Steve Walsh for having the guts to make the right decision. In 1991 the company I own faced a similar crisis. I spent most of my time devising elaborate commission incentive contests and refereeing commission arguments. The sales staff was solely interested in how much commission they made. When I switched to salaries, 30 percent of the sales staff quit immediately, including many top performers. Within one year, sales went up 40 percent, and 16 years later things continue to improve.

Jim Mcingvale
Owner
Gallery Furniture
Houston

Not enough upside

The move will help Scout avoid minimum wage lawsuits, which have plagued employers of low producers who don't earn the minimum wage in commissions. It will draw a higher-quality employee looking for stability. But while lower earnings per transaction may decrease incentive to steer borrowers to higher-cost mortgages, it may drain the incentive to excel in selling, leaving Scout paying salaries regardless of revenue. Given today's depressed market, there doesn't seem to be enough upside for such fixed expenses.

Sam Garcia
Publisher
Mortgagedaily.com
Dallas