Early Payout Ratios
Just when you thought lenders couldn’t come up with any more ratios…
We read this article (click link) in CAAMP’s Mortgage Journal this month. It talks about how lenders use a variety of metrics to gauge the performance of mortgage brokers.
Two ratios currently in vogue are approval ratios and funding ratios.
Approval ratios (the percentage of a broker’s applications that get approved) are a useful measure of efficiency. Brokers with really poor approval ratios take up a lender’s time unnecessarily, and they should be dealt with.
Funding ratios (the percentage of approvals that close) are also based on reasonability—although it’s debatable whether they’re always in the client’s best interests. Some lenders are also quite unreasonable in their expectations of funding ratios, but that’s another story.
But now, we read about lenders tracking “early payout ratios.” That’s the percentage of broker-referred mortgages that are terminated by the borrower before their term is up.
The implication is that brokers should be held responsible when clients break their mortgage early—as if we have complete control over it.
It’s true that lenders are best served when borrowers ride out their full term, but penalizing brokers for a client’s decision to refinance (when it wasn’t known in advance to the broker) is ludicrous.
Despite our distaste for this particular measure, there is no disputing the fact that lenders have to make money. Early payouts affect their ability to do that.
The story discusses how it takes four years of revenue to pay for all the costs that go into a 5-year fixed mortgage.
The article also includes this seemingly inconceivable quote: “…all mortgages that pay out early result in a loss for the lender.”
Wow. Maybe if lenders are losing this much on early payouts, they should adjust their penalties. You would think that if a customer chooses a closed mortgage, and breaks his or her contract early, the penalty should be sufficient to bring the lender back to breakeven.
Whatever the case, there are certain lenders out there that are getting a little too ratio-happy. They should reconsider any and all ratios that penalize brokers for the effects of competition and customer behaviour.
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Sidebar: Renewal ratios are yet another broker metric some lenders are tossing around. There is a quote in the story that states: “Lenders expect to renew 80% of their maturing portfolio of mortgages.”
Really? Someone better adjust that statistic because it ain’t gonna happen. Homeowners today harness the power of the Internet, and the power of choice. Lender loyalty is not high on their list of concerns. A lender has to earn their business, and the competition is waiting to snatch a lender’s renewing customers faster than you can say “discharge statement.”
But wait! How about we claw back brokers’ commissions when a client doesn’t renew!! Stick it to the broker when the client goes somewhere else for a better deal. Now that’s brilliant!
