January 12, 2022|Corporate Governance, Mortgage Industry, Professionalism, Virus Response
The Wall Street Journal reported on January 12, 2022 that annualized inflation hit 7% for December 2021[1]; the highest rate seen in 40 years. Because inflation perniciously erodes savings and wealth, the WSJ headline prompted undergrad food science major turned mortgage industry daily commenter Rob Chrisman[2]to ask, “will raises keep up with an annualized inflation rate of 7 percent?”. I don’t know the answer to that question, but whoever tracks wage data for the mortgage industry[3]should also consider the concept of “hidden wage inflation”, lest they might miss an important part of the inflationary picture for the industry’s wages.
Hidden inflation & Lucky Charms
Typically, hidden inflation occurs when the price of something stays the same, but quantity or quality declines, like smaller beer glasses at your local bar[4] or fewer marshmallows in your Lucky Charms[5] (or raisins in your Raisin Bran[6]). As applied to wages, however, hidden wage inflation (raises) can be even less visible or tangible. But, for the mortgage industry[7], it is clear (at least to me) that hidden wage inflation is occurring in multiple ways. It is also important to recognize these raises are not merely “transitory inflation”[8], but reflect more permanent trends benefitting employees.
Wage inflation in mortgage
A fairly visible, but not particularly well understood, form of wage inflation in the mortgage business occurs with loan officer compensation when real estate values rise.[9]LOs are typically paid commission rates that are a fixed percentage of the mortgage amount. So, without any raise in commission bps, when average loan sizes increase (along with real estate values), so do LO paychecks (assuming the same number of average borrowers). Mortgage company profitability should also grow at a commensurate rate using similar assumptions (loan revenues are tied to volume which should similarly grow due to increased real estate values). It doesn’t seem to work that well in practice, however, because LOs often originate fewer, but larger, loans, while mortgage company originations and sales revenue percentages tend to be more volatile than LO commission rates.
Tax-free raises
But I am not talking at all about volume-based compensation when I speak of the hidden wage inflation for the mortgage industry. Rather, I’m talking about the impact that work from home (WFH), remote notarization, electronic transactions and other developments accelerated by the COVID-19 pandemic have had on mortgage industry compensation across the board. To be clear, I’m not opposed to WFH, but it is important to recognize that employees get valuable benefits from WFH that are a form of hidden wage inflation (tax free, I might add) which also costs the mortgage company something.
Some people will argue that WFH doesn’t count as a raise because you have the same obligations as to time and productivity and your cash compensation is the same. I don’t buy that. Here’s a few examples where WFH is really a hidden and tax-free raise: (i) reduced commuting expenses (public transportation costs, gas, auto wear and tear, etc.), (ii) reduced clothing and shoe costs[10], (iii) reduced dry cleaning, makeup, grooming[11]and similar personal maintenance expenses[12], (iv) reduced child/pet care expenses, and (v) reimbursed or paid technology expense for cell phones, internet, laptops etc. that you use also for personal purposes. Those items can be measured in terms of saved dollars, but are generally not taxed by the government…, yet.
Productive, but distracted
The saved dollars noted above, however, don’t fully reflect the full raise that WFH creates for employees because it fails to include the additional time employees get back; both from not commuting and simply being distracted (and distractable) by personal matters at while at home. The employer pays for your full time and attention while at the office. It has been my observation,[13]however, that you can do laundry, answer the door, go to the fridge, exercise, make lunch and dinner, feed and walk the dog, go back to the fridge, help kids with homework and do any other myriad of needed (or desired) personal activities while at home. So, the employer simply does not have your undivided and exclusive focus and attention as in the office without the same distractions. In a sense, enabling the employee’s time and attention to be diminished in favor of personal matters during the workday is a form of wage inflation (assuming no one is taking a pay cut to enable WFH).
Personal distractions are replete at home[14]and, based on some other anecdotal evidence I have observed, such distractions might even result in work quality declines even if productivity remains the same (like getting fewer marshmallows in the Lucky Charms in the form of higher numbers of QC findings). WFH is a genie that has escaped the bottle for the mortgage industry never to be put back in. While it is clear to me that many employees have received hidden raises from WFH, what impact WFH will have on mortgage industry quality, innovation and process improvement remains to be seen.[15]
FDIC turmoil redux
Meanwhile, last month I wrote about the institutional power grab at the FDIC by CFPB Director Rohit Chopra from FDIC Chair Jelena McWilliams. It seems McWilliams has now thrown in the towel. On New Year’s Eve (a very slow news day[16]), and without nary a word about the dust up with Chopra and the other Board members,[17] McWilliams resigned effective February 4. Her resignation results in a huge lack of balance in the FDIC’s Board of Directors (there are now 2 vacancies on the 5 person FDIC Board and one acting director with Chopra and Martin Gruenberg being Democratic appointees).
President Biden’s banking and consumer regulatory appointments to date have all been willing (some would say, eager) to use the regulatory institutions they control to focus on progressive agenda items like climate change, wealth disparities, fair lending, and community/social impact of corporate profiteering and free markets. Given the FDIC’s current governance dynamics, unless long-time agency staffers at FDIC step up to carry the 90 year-old institution’s mantle, old-fashioned institutional ideas like safety and soundness and banking system stability may be challenged by the progressives’ push.
[1] Annual inflation is measured by looking at the prices for the same goods a year prior. In this case that would be December 2020 prices.
[2] This links to a great interview by California MBA Association CEO Susan Milazzo with Rob and son Robbie about the Chrismans’ (Chrismen’s?) Chrisman Commentary and Robbie’s audio version of the same.
[3] Among other things, the MBA tracks wage data for the mortgage industry. Contact Marina Walsh. She’s got all the information.
[4]This isn’t the same as the problem with some imported beers which have always been smaller.
[5] Fewer marshmallows = less “magically delicious”. Actually, Lucky Charms offers a marshmallow only box so perhaps this was a bad example. Finally, perhaps a food science major can tell us what “magic” Lucky Charms are actually made of?
[6] Lucky Charms are made by General Mills, so the problems relative to the labor strike at Kellogg’s were removed from the classic Raisin Bran example which is made by Kellogg’s
[7] This is true of many other businesses as well, including, admittedly, the practice of law.
[8] Have you noticed that no one is saying that inflation is “transitory” anymore?
[9]Real estate values have increased at a rate greater than the rate of inflation almost everywhere in the U.S.
[10] Clothing cost trends predated WFH, but at a minimum with WFH you can significantly lower costs below the waist (just don’t stand up during your Zoom calls).
[11] You may still need to get a haircut, shave and/or put on makeup for video calls, but you definitely don’t need deodorant or perfume.
[12] WFH also facilitates exercise from home and lower health club dues for some people.
[13] Ok, I’m talking about myself.
[14] This distraction video is priceless.
[15] Marina and MBA should do an actual empirical study of WFH productivity and quality, because my observations are not data.
[16] If you saw any of this broadcast, CNN’s hosts and staff were definitely incapable of doing any hard news reporting that night.
[17] It was pointed out to me by one of my loyal readers that perhaps Ms. McWilliams did take a subtle, yet biting, swipe at Chopra and friends with her comment about her having a “deep appreciation for these venerable institutions and thier traditions” in her resignation letter. My reader thinks McWilliams is a national treasure, and with that kind of clever diplomacy you can bet (or hope) she will be back in some kind of leadership role in the near future.
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