Wells Fargo Hikes Commissions to Boost Mortgage Revenues - Analyst Blog

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In an endeavor to drive up soft mortgage revenues, Wells Fargo & Company ( WFC ) is boosting employees' payoff, per a Bloomberg report. As the housing market in the U.S. is improving with the demand for new homes, the company's mortgage businesses - one of the biggest in the U.S. - is striving for a greater market share.

What's in Store for the Employees?

In a telephone conversation with Franklin Codel, who supervises mortgage origination for Wells Fargo, the news agency noted that Wells Fargo has revised its pay plan beginning the current year. However, the latest modifications have been made primarily to recruit and retain employees, particularly its efficient loan officers. The new plan is applicable till the end of 2015 and there could be changes, if necessary.

The top tier commission rate for the loan officers increased 0.7% to 70 basis points (bps) from 63 bps. This reflects a base commission of $11,200 in a month for an employee who closes loans of $1.6 million.

The new pay plan also combines two lower tier commission rates into payment of a single rate. It calls for a commission rate of 65 bps, replacing the old rates of 48 bps and 58 bps. The combined rate represents a base commission of $3,900 for loan officers who handle loans of $600,000.

Precisely, the new plan sets commission rates for loan officers handling loans on the basis of volume or amount. This distinctive feature is expected to entice loan officers conducting business in strong housing markets, which should drive in high loan balances. On the other hand, employees in other regions may opt to complete for more volumes of smaller loans.

To earn the top-tier commission rate, loan officers must complete or refer to at least nine loans in a month from 11 loans in the old plan, or bring in loans of at least $1.6 million. Loan officers must handle 4 to 8 loans, or $600,000 to $1.599 million in volume in order to qualify for the middle tier commission rate.

Further, the new plan has enhanced the top commission on a single loan for employees, provided they score top grades for customer satisfaction.

Why This New Pay Plan?

As interest rates have risen, slower mortgage refinancing activity has affected mortgage revenues of financial institutions like Wells Fargo. According to Mortgage Bankers Association, loans to refinance existing debts may decline to $96 billion in fourth-quarter 2014, down by around 75% from first-quarter 2013.

However, Wells Fargo aims to capitalize on the rising demand for new home purchase. It is estimated that mortgages for new home purchases may increase to $195 billion by third-quarter 2015 from $115 billion in first-quarter 2014.

As loan origination calls for a much challenging job that depends on the relationship with real estate agents and a referral network, the company through its new plan intends to boost employee enthusiasm to bring in more business. The pay plan is focused on loan officers who bring in referrals from local real estate agents, home builders as well employees within the company.

Notably, large lenders have witnessed talent loss as loan officers have often moved to smaller companies owing to attractive pay packages and promise shorter turnaround times for closing deals. Also, other firms take in loan officers owing to bigger contacts with realtors and a strong network.

Bottom Line

While the new pay plan would weigh on the company's expense base, we remain encouraged on the move as it may boost the mortgage business of the company. Management noted in its second-quarter 2014 conference call that mortgage origination volumes are expected to be higher in third-quarter 2014 compared to second-quarter 2014.

Wells Fargo currently carries a Zacks Rank #3 (Hold). Some better-ranked stocks in the finance space include Select Bancorp, Inc. ( SLCT ), Piper Jaffray Companies ( PJC ) and First Community Bancshares, Inc. ( FCBC ). All these stocks sport a Zacks Rank #1 (Strong Buy).

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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