Mortgage due-diligence firms are once again thriving, but an old controversy about how they pay workers has also resurfaced.
During the height of the subprime boom, third-party due-diligence companies like the Clayton Holdings LLC, Bohan and Opus profited handsomely by reunderwriting nonprime loan files for Wall Street companies and correspondent lenders. After the subprime market crashed, the business tanked, and New York Attorney General Andrew Cuomo put it under a microscope to examine its role in the mess.
This time around, due-diligence companies are working for investors, searching old loan files for underwriting flaws that would let the investor force the originator to buy back the loan. The amounts involved in buybacks is significant. For example, Freddie Mac said last week it had made lenders repurchase $4.1 billion of loans in the fourth quarter, more than double the amount a year earlier.
Roughly a decade ago, controversy centered around whether due-diligence companies paid their underwriters under a W-2 form or treated them as independent contractors, forcing the workers to pay their taxes directly.
Today the larger due-diligence firms like Clayton and Opus are paying their underwriters using W-2s, but some smaller players do not.
Why does it matter? When an underwriter is paid using a W-2, the 12.4% Social Security tax due is split between the company and the worker. But if a due-diligence firm says its underwriters (many of whom are freelancers but also regulars) are not employees, it can file a 1099 Form and let the worker worry about paying the full 12.4%.
Such due-diligence companies can save on out-of-pocket expenses — and gain a potential advantage in bidding for contracts because they can charge less.
Corissa Verbeski, a managing director at Opus in Lincolnshire, Ill., said her firm uses W-2s and she is none too happy that some competitors do not.
"The use of 1099s over W-2s creates a competitive disadvantage for those firms paying via W-2," she said. This lets the former companies "offer lower pricing" to their Wall Street and bank customers, she said.
About seven companies do not use W-2s for at least some employees. One of the better-known of these is Allon Hill LLC. A contractor who works for the Denver company said he is considered a 1099 worker. This person must not only foot the whole tax bill but also make his own payments for unemployment insurance and worker's compensation. It also means this contractor, if he loses his assignment, cannot easily collect unemployment benefits.
Through a spokesman, Allon Hill's chief executive, Sue Allon, said the company "conducts its business in compliance with applicable laws, including those governing employment. We do utilize independent contractors from time to time … , and we pay independent contractors in accordance with pertinent legal requirements."
She added, "We predominantly employ full-time and temporary employees and adhere to the laws that govern these employee classes."
