Reversing a decades-old policy, Countrywide Credit Industries Inc. has begun hiring loan officers who will work on commission.
The nation's largest independent home lender plans to employ 1,000 commissioned loan officers, two or three in each of its 450 branches, said Greg Lumsden, managing director of originations. The Calabasas, Calif., company has hired 200 in the last few months.
"We are adding dedicated outside salespeople whose job it will be to expand our reach into the local communities," Mr. Lumsden said. "What we are doing is overlaying a group of salespeople in each branch to expand the reach of the branches, which need more sales support."
Despite Mr. Lumsden's assertion that the effort is not a strategy shift but an expansion, the move is a sharp turn away from Countrywide's historical origination philosophy, which shunned commissioned sales as anathema to its basic business tenets.
"It is very expensive, very uneconomic, and presents a conflict of interest," Angelo Mozilo, Countrywide's founder and chairman, said of commission-based sales in a 1996 speech. "We don't have a commissioned sales force, and this is one of the primary reasons why Countrywide has survived and dominated despite the dramatic shifts that have taken place over the past three decades."
The hiring initiative also marks the second time this year that Countrywide has made a major philosophical departure. In mid-May, Mr. Mozilo said selling the company was no longer out of the question, reversing earlier statements.
Though the company, founded in 1969, initially used commissioned loan officers, a down cycle in the mortgage market in the early 1970s prompted Mr. Mozilo and his partner, David Loeb, to scrap the commission structure. They fired the entire staff in 1974 and started from scratch, opting to pay loan officers salary and bonuses based on the productivity and profitability of the branches.
"Their reasoning was that it was cheaper and more efficient to run advertising than it was to pay a loan officer," said Michael McMahon, an analyst with Sandler O'Neill & Partners. "History has proven that strategy to be absolutely true."
Mr. McMahon said the policy of not paying commissions to salespeople has given Countrywide control over its costs, an important advantage in an industry in which pricing can be volatile.
"If Countrywide decides that its mortgages are superior to Chase's and marks them up, Countrywide won't get any business," he said. "There is no pricing power, so to grow earnings, you have to control the cost side."
Over the last five years Countrywide, which has 5,400 employees in its consumer and wholesale divisions, has held its average total operating costs below 1% of its production volume. The average commission normally paid to a retail loan officer exceeds 50 basis points of the loan size; if one adds the additional overhead, costs of commissioned originations usually run well over 1% of production volume.
Though analysts expressed surprise over the change, several reserved judgment in deference to Countrywide's historical business acumen.
"The upside is that commissioned sales work, and most of the companies out there use that sales methodology," said Thomas R. Hain, an analyst with Lehman Brothers Holdings Inc. "So if Countrywide can make it work, more power to them."
"I can see the potential to selectively hire commission sales people in areas where their direct marketing does not reach," Sandler O'Neill's Mr. McMahon said. "In a good mortgage market that doesn't justify a major marketing campaign, it's conceivable they would put someone there to bring in the business."
Mr. Hain expressed concern that the change could create "channel conflict" within the company, pitting commissioned loan officers against originating staff who are compensated with salary and bonuses. He also cautioned that commission-based salespeople might be less loyal than their salaried counterparts.
"With commission, the guy giving the loan will tend to pick the one that will make him the wealthiest at the end of the day," he said. "What tends to happen is that if you go a 100% commission structure, well, that's essentially a mortgage broker."
If a company maintains both commission- and salary-based originators, Mr. Hain wondered, "Why does a fantastic salesman want to go work for salary?"
Mr. Lumsden said Countrywide has not experienced any conflicts. He said the compensation structures are necessarily different for the different types of salespeople.
For example, he said, a salesperson answering calls from borrowers responding to a Countrywide ad does not deserve as much compensation as one who originates loans by cultivating relationships with real estate agents and consumers.
