Have you been thinking about becoming a mortgage broker? You will when it gets closer to tax time. Other reasons will solidify the rationale for becoming a mortgage broker (or licensed originator as they are technically called now) as soon as possible. But income tax issues will be the epiphany event that starts the stampede. Indeed, many loan officers will wonder why they didn’t make the switch sooner.
First, let’s look at your taxes. More specifically, IRS Form 2106, that once friendly form with which most loan originators working for other people could deduct un-reimbursed marketing expenses and other business related fees and charges. Starting with your 2018 tax return, the one you must file by April 15, that form will do you no good.
This is not intended as tax advice – for that, please see a tax professional. But as a result of the 2017 Tax Reform Act, it will be a shock to most loan originators when they realize the hundreds or thousands of dollars they spent to market themselves last year can no longer be written off.
The tax act eliminated from IRS Form 2106 employees used to deduct their un-reimbursed business expenses. Given that loan officers work almost exclusively on a commission-based compensation plan and are largely responsible for advertising, licensing, transportation, entertainment and other marketing expenses, the inability to deduct these still legitimate business costs is going to hurt not only their own incomes but their employers’ businesses as well. For what it’s worth, ending this tax benefit was necessary to generate revenue to cover the cost of the bill’s tax cuts. And since this is a revenue issue for Congress, a reversal of the new rule is highly unlikely until this provision expires in 2026.
People who operate their own mortgage brokerages do not have this problem. All the expenses incurred with running your own firm are, well, expenses, pure and simple. And as such, they are deductible, right along with whatever you pay yourself. Womp, there it is! A real smack in the face. You should have become a mortgage broker last year. If you did, your car, phone, marketing, golf outing, dinner with real estate agents and brokers and all your other travel and entertainment business-related expenses could be written off. You wish you were a broker now, don’t you?
If that negative tax consequence doesn’t convince you, how about this positive one: Tucked away in the 2017 tax law was a little goodie that permits some small business owners to deduct 20 percent of their income – right off the top! That’s right: Earn $100,000 from your business and only $80,000 counts as income. Ask your tax advisor about Section 199A deduction. There are rules and limitations to meet in order to qualify, but if you do, it’s an extra incentive to have your own company instead of working for someone else.
Now let’s consider technology. There has been an absolute technological leap in what mortgage providers can achieve super fast, on-line. From IRS Form 4506-T, appraisal waivers, pricing engines and data pulls from financial institutions in order to confirm deposits, income and assets, the long heralded advances are finally here. The National Association of Mortgage Brokers just pulled together an incredible suite of technology using Calyx Software, Lending Pad and Lender Price to help new mortgage brokers get into the business. So with the technology and business platforms now available, it has never been easier for someone to become a mortgage broker.
Furthermore, dozens of lenders – Quicken Loans, Franklin American Mortgage, Freedom Mortgage, Plaza, Stearns, UWM and loanDepot, just to name a few — now have incredible loan production portals for mortgage brokers that provide a seamless production and approval process. And most wholesale lenders provide on-line marketing tools you can use to keep in contact with your local customer base and real estate professionals.
As a mortgage broker, you can choose the wholesale lenders with which you would like to deal in order to provide a greater customer experience. Loan originators at a bank or a lender don’t have that luxury. They are stuck with whatever loan products their companies pick for them. The loan options available to mortgage brokers and their clients are vastly superior to those offered by a loan originator at a bank, ranging from low-down payment, part-time income scenarios, condos, non-conventional loans, gifted downpayments and many others.
Pricing, of course, is generally most important to your customer, and brokers have the corner on pricing, too. One lender may be pricing loans slightly cheaper than another, depending on how each one views market conditions at the time, their costs, and whether they locked in long-term rates more favorably than their competitors. Consequently, brokers have a pricing advantage. Unlike banks and mortgage bankers, they can switch quickly to the best loan product available.
Lastly, there’s Donald Trump. Why Trump? Whether you love his politics or not, he is stamping his imprint on the mortgage regulatory process, which will improve the mortgage marketplace for the better. The prior administration was reluctant to change any regulation, no matter how logical, and the business could not get much guidance on how to follow the rules. This contributed to the cost creating a mortgage. As reported by the Mortgage Bankers Association, the cost to make a loan was more than $8,957, much of which was passed on to the borrower.
Lower regulatory costs will take time to work their way through the system. But the rules regarding the Ability-To-Repay, fixing creditor payments to mortgage broker firms (they are counted twice), changing loan originator compensation, the inability to obtain clear guidance from the Consumer Financial Protection Bureau on how to reduce operational risk exposure are all reasons many mortgage loan originators took refuge inside banks and mortgage bankers.
Now, under the current regime in Washington, we can expect to see a mass exodus by former brokers who again want to work for themselves. And the return to “private practice,” so to speak, should be hastened by the fact that the shift from a refinance market to largely a purchase money market will compress margins further at banks, mortgage lenders or otherwise. Consequently, as the year moves on, you can expect to see many banks exit the mortgage business altogether, and many independent mortgage bankers merge with others of their channel. And if the slowdown in sales continues – but perhaps even if sales rebound a bit – many loan officers may be getting pink slips. Or as Trump would say, “You’re fired!”
Has the light bulb gone off yet? Hopefully, it has. Remember, it’s never too soon to become a licensed originator, “AKA” a mortgage broker.
Roy DeLoach is a Washington, D.C. based lobbyist with DC Strategies Group. Mr. DeLoach represents clients in the financial services and securities areas before Congress and federal agencies. He is an expert on the mortgage broker industry and profession. www.dcstrategies.us