March 31st, 2012

Qualifying for Higher Payments…In Advance

140276734Someday, when many least expect it, inflation risk will drive up interest rates, and they’ll go up for more than just a few quarters.

When that finally happens, two things will impact how some homeowners’ adapt to higher payments: the velocity of rate hikes and the degree of income growth in the economy.

Our story in today’s Financial Post (Mortgage affordability depends on…) weighs in on those two factors and ponders some effects of a 2% rate increase.

One of the takeaways is that most mortgagors could easily handle that kind of rate-bump. Some, however (20% according to CAAMP and BMO surveys), would have a far tougher time.

It’s that latter group that regulators had in mind when they instituted a precautionary measure called the “benchmark qualifying rate.”

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March 30th, 2012

1 in 5 Challenged by 2% Higher Rates: BMO

Affordability-of-Mortgage-Payments20% of Canadians say a 2% rate increase would “hamper their ability” to afford their home. That’s according to a February 21-23 BMO/Leger survey.

This figure isn’t surprising given that November 2011 data from CAAMP suggested 21% of Canadians “couldn’t afford” a 2% rate increase.

One question that might come to mind when reading this is: How likely is a 2% rate increase?

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CMHC’s Reins Get Pulled Back

CMHCCMHC is throttling way back on its mortgage insurance business.

That was the eye-catching revelation in its corporate plan released last week.

The nation’s largest mortgage default insurer plans to end this year with “just” $557 billion of insurance on its books. That’s notably less than most people expected, and 7.2% below its much-publicized $600-billion insurance limit.

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March 23rd, 2012

One-on-One with Pacific Mortgage Group’s Ron Swift

Ron-SwiftPacific Mortgage Group (PMG) CEO, Ron Swift, oversees one of two operations in the mortgage industry whereby the same company owns both a brokerage and a CMHC-approved lender. (CIBC is the other, via its ownership of Mortgage Centre.)

As a result, Ron is uniquely positioned to see things from both a lender’s perspective and a broker’s standpoint. That, and his two decades of industry experience, made us eager to get his take on how he sees our industry evolving.

We asked Ron about topics ranging from consumer loyalty to lenders to the ability of non-bank lenders to compete in the conventional mortgage market.

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March 22nd, 2012

One-on-One with Pacific Mortgage Group’s Ron Swift

Interview: Ron Swift, CEO, Pacific Mortgage Group
Date Published:   March 23, 2012


CMT: Thanks for joining us, Ron. Appreciate your being here today.

RON: Great to be here as well.

CMT: Talk a bit about how the mortgage market is evolving. Compared to 10 years ago, I know we’ve seen a tremendous increase in the availability of mortgage and rate information online. Is it fair, in your view, to say that today’s borrowers are more independent, more rate-driven, and perhaps even less loyal to lenders and brokers?

RON: For sure, I think consumers nowadays have a lot more knowledge around what’s available for themselves.

CMT: And then, if that’s the reality, how should lenders and brokers adjust their businesses to address that?

RON: Well knowing that, you know, that the consumer is becoming more savvy, and as a result of that they are doing more “shopping”, at least online, before they make their selection. You just want to make sure that, as a lender or as a broker, that 1) you’re providing the sort of timely advice and staying in contact to maintain loyalty because it’s not just about the rate, and, you know, once you’ve, you may have them up front on the rate side, but after that, how do you maintain loyalty? It’s got to be because you’re adding more than just the rate, so it can’t just be a transactional-type relationship, you have to stay involved with this customer from the time of inception of the mortgage, to the time at the very end of that life cycle. So stay in contact and, during that time, keep providing timely advice so that they want to keep dealing with you and talking to you with any of their mortgage needs.

CMT: Yeah, I think that’s a key point, and speaking of rates, obviously, cost of funds come into play when we’re talking about interest rates. The monoline lenders, non-bank lenders for example, have relied on bulk insurance for low-cost funds and conventional mortgages in the past, and, you know, access to that bulk insurance is now more limited, from CMHC anyway.

For the balance of 2012, do you think that monoline lenders are going to be able to successfully compete with the banks in the conventional mortgage market?

RON: Yeah, that’s an interesting sort of nuance that’s come to the marketplace since February 1.

And I think, for sure, for the majority of monolines who specifically have their funding tied to securitizations, this is going to be problem for them. This is going to cost them more to securitize those conventional mortgages because they won’t be able to get the preferred bulk pricing to maintain the competitive rates that maybe a balance sheet lender has. So as a result of that, the additional low ratio insurance – if they still want to securitize – is more expensive, so that’s going to make it more difficult for them to compete in that space.                       

CMT: That’s interesting. Now, do you see anything maybe changing in the next one-to-two years to level that playing field?

RON: Well, I think this all will end up coming back to the cost of funds for all the lenders, and that’s including the balance sheet lenders. With some of the more recent changes that have come into place, whether it be the new accounting rules, the new IFRS standards, you know the International Financial Reporting Standards, the issues and restrictions on the cover bonds, the new Basel III as it relates to the cap requirement for all lenders to carry more capital as it relates to the mortgage risk, it’s going to hit everyone. They’re going to try to understand the profitably of these mortgages, and if your underlying costs are becoming more expensive, and you can’t bulk insure them, etc., then that cost has to be absorbed somewhere.

So, I think as much as it might hit the monolines right away because they don’t have a balance sheet option, even the major lenders are going to have to reassess – are they getting the proper return on their capital for these investments – especially in a low margin business such as mortgages. So I think it’s just a matter of time before these major lenders start to raise their rates to offset these costs, and ultimately the consumers will have to pay for it.

CMT: Yeah, that’s a real interesting point. Speaking of margins, that brings us to our next question which pertains to FirstLine, a former number one lender in the broker channel.

CIBC announced officially that it’s thinking of potentially divesting in FirstLine. If that happens, and FirstLine exits the market, how will that impact the broker market both in the near term and in the long term?

RON: Well, for sure it’s a wakeup call for our industry because, once again, I don’t believe FirstLine and CIBC are exiting because they weren’t making money through FirstLine. I just don’t think they were making enough money. They weren’t getting the returns on their capital, they’re not getting the cross selling, the retention rates of the business, or the broker channel is not as great as their own direct channel.

So I think, that’s a problem. So losing FirstLine on the surface, you know, it’s the number one lending entity that’s been in the marketplace for brokers for two decades. So, even being number one has, you know, had them leave the marketplace because they weren’t getting the returns. So it’s a lack of choice now, right? It’s one less choice you have as a broker to give to your consumers.

Second of all, of course, I worry that if others are looking, if other lenders are looking to this and saying, look, If the number one brokerage lender company, historically, is saying we can’t get the proper return, are they too also thinking that?

Then, of course, if we have any more, especially the major lenders leave, then one of the advantages and one of the value propositions that the broker channel brings to consumers, is this notion of choice. And obviously losing the big brands, makes the true choice for consumers not as available and therefore starts to take away some of the value proposition of the broker channel. 

CMT: Right, that’s going to be interesting to see how that plays out. Now, let’s shift to a consumer note, if we may here. We know that expert mortgage advice saves borrowers money.It steers people out of restrictive mortgages, it puts them into mortgages that better match their financial position and whatnot.

The problem is, it’s tough for consumers to quantify the value of that advice. So, the industry constantly advises consumers that rate is not everything. But the question is: how much more is great advice really worth?  Is it worth 5 bps points more than the average broker, 10 bps, 20? What’s your thoughts on that?

RON: Well, I agree with you 100%. It’s extremely difficult to quantify, even being in the business, let alone a consumer out there who doesn’t maybe necessarily know all of the value that they’re truly getting in the advice from their broker. And so, I would find it difficult to quantify, because we do know in our space that certain brokers, when they, you know, get to certain volume levels and certain supports from various lenders, they then get certain incentives and benefits dealing with that lender, which quite often also means preferred pricing. So, I find even with these guys who have been in the industry doing large volumes, they get the preferred pricing and for them they need to have that in order to compete every single day. So, I don’t find that they’re able to upsell the rate because of that experience and advice they can provide to a customer. They still need to be competitive every single day and getting the best rate.

So, I think consumers still today,  you know, sort of to your original point, aren’t aware enough and can’t truly value the advice because I think they think it’s kind of very similar, so therefore, it keeps going back down to then – what is the price?

CMT: Certainly, yeah, it’s a challenge to the channel overall. Let me ask you this: what characteristics would you say identify a top professional mortgage adviser, or to put it a better way what would you look for in a broker in you needed a broker for your own mortgage?

RON: Well, we all know, no one wants a mortgage, they want the house, right? So either they’re buying something and they’re refinancing because there’s something in their life in what they’re trying to accomplish. So, the mortgage is the means to the end.

But because it’s also typically my biggest expense I’ll have in my life, you really want to make sure you’re dealing with someone that is, #1) Professional, that you’re dealing with, and therefore, with that, comes experience and knowledge and being trustworthy.

Those are the things that I am looking for, you know, when I’m dealing with someone of this nature. I want to make sure those are the characteristics they have.

CMT: Honestly speaking, sometimes it’s hard for consumers if they don’t know the individual in advance, to try and gauge those characteristics, so it’s a challenge.

Ok, last question from a purely consumer interest standpoint. Brokers separate themselves from bank reps, for example, or credit union reps in that we have access to a broad array of lenders. The stats, however, show that statistically, at least according to Maritz in their 2011 numbers, the stats show that 90% of the typical individual broker’s volume, and of course there are exceptions, but 90% of the typical individual broker’s volume goes to just three lenders. Is that a problem from the consumer’s standpoint?

RON: I don’t think so, at the end of the day. Quite often if you’re going out to get your car repaired, or something like that, people would say get three quotes, you know, you want to get some work done in your house, get three quotes. It’s not ‘go out there and talk to every single builder or contractor, or every single mechanic.’ So, if you’re dealing with a true professional that has knowledge about all the lenders and truly understands the customer’s needs and wants, I don’t think that it is necessary that they have to be dealing with a whole pile of lenders, because I think typically you would find that your top three lenders will cover the majority of the scenarios that most consumers face every single day in their financial needs. So having three lenders, if they’re the right lenders for you and the kind of customers that you’re going after, I think that would be sufficient to properly service them.

CMT: Yeah, that’s a fair point, and experience and strategy offered by the mortgage planner are keys as well.

RON: Absolutely.

CMT: Let’s take it down to a broker level, and let’s shift to your company. Mortgage Architects is launching a brand new business model. Can you tell us a bit about what that entails?

RON: Yes. We’ve continued to look at what’s happening out in the marketplace as it continues to evolve–definitely the consolidation of the brokerage industry, you know, a couple of the firms really growing out there, and, you know, looking to what they are doing, and then talking to, not only our brokers internally, but also talking to external brokers around what would drive them to either join our company or to stay with our company. You have to deal with the first obvious thing, which is do we have a competitive program?

And so, if not, what would create a competitive program? So I think we have reassessed where we were at, and believed that we needed to make a change, and a change that was really going to be reflective of the value that the broker brings to the equation of the origination side. So, we’ve looked at it from a couple of different ways. One is, if you would like to join our company or work within our company, do you have your own licence to work under or do you need to work under ours? So that’s one of the questions we will ask. The next part we would ask is, are you looking to join us and sort of test us out, and therefore not be obligated to any locked-in contract that some others are offering?

So, we said that giving choice is a good idea. And of course then there are some saying, ‘I am prepared to commit to you, and if I do so, would that give me any benefits?’ So we created a program here that says, depending on whether you want to work under our licence or your own licence, and whether you want to commit to us or just see how it goes, we created a compensation model now that can truly reward those who want to commit to us and stay with our company.

CMT: So, in terms of actual numbers and splits, contract length, that kind of thing, what are we talking about?

RON: We have models that, if you’re under our licence and don’t want to commit to us and who are looking for the full service support of a brokerage firm, then your split would be 90/10, 90 obviously going to the agent.

If you still need to use our licence but are prepared to commit to us, then you will be on a 93/7 split.

However if you have your own licence, then we’ll change the splits even further. Once again, you can be under your own licence, but no actual contractual commitment to stay with us for any specified term, you would start at 93/7 but automatically by staying longer, the second year you go to 95/5 split, and the third year, and thereafter, you would go to a 97/3 split.

And of course, if you would like to use your own licence and have that ability, then we will actually start you at 95/5, and in your second year and thereafter, you go to 97/3.

And our commitments, when we talk about commitments we’re talking about three years. Knowing this world has changed so much in the last number of years, and trying to sort of predict forward what is going to happen to our industry, we thought it wasn’t feasible, we didn’t think it was probably a wise decision as brokers to commit and lock ourselves into long, long-term commitments. So ours goes out to a maximum of three years.

CMT: Ok, and then you have a lender operation as well?

RON: Correct, Radius.

CMT: …if you have a certain amount of volume, I mean, theoretically I’ve heard you can go up to 100%.

RON: Yeah, and that’s an additional side. So, from a brokering side, that is where our splits are.

Because we have a unique value proposition within our company that actually has a lending division, called Radius, we’ve also said, look, if you’re willing to also support Radius, we’re also willing to augment all of your splits and so it’s all based on how much business you would like to support Radius with. And so our starting level is, if you give at least 10% of your business that you do to Radius, so not even your primary lender, but as one of your lenders, then you automatically will have all of those splits in enhanced by 1%. And, if you go to 20%, it’s 2% and if you go to 30% or more, 3%. So, based on those models we talked about, you actually could get to, under the franchise arrangement, up to 100% either in your second or third year with the company, and you’d own and retain 100% of the commissions that you are making.

CMT: Ok, is it fair to say that Radius is I guess approaching a model where it’s operating more on a break-even basis, perhaps, to channel volume to the lender arm, which tends to be a little more profitable than the brokerage business?

RON: Yeah, so for sure, because I have accountabilities over both the lending and the brokerage arm,  we were looking at this thing, and I can tell you, for years as you look at, you know, where’s the money being made. So there’s clearly from an agent’s point of view, the value is in what you do every day, so therefore you get the lion’s share of the splits when it comes to the brokerage part of the business. But from the brokerage company point of view, there’s not truly very much money left over as a return on your investment. But in the lending side there is.

So we simply looked at it and said, look, from the pure brokering point of view, even if you didn’t support us, we can give you some high splits because you earn it,that’s the value add that you bring to the equation. And if we’re maintaining the brokerage part of the business at a break-even basis, we are prepared to make the monies on the lending side. And, of course, with the monies we’re making on the lending side, that allows us to reinvest into our brokerage arm to keep that moving forward.

CMT: Now, is there any concern that perhaps this highly competitive model might dissuade competing brokerages from encouraging their brokers to route business to Radius?

RON: I would think not. In reality, because at the end of the day, brokers will make their choice as to what firms they want to work under, right? Each firm has their own value proposition, so people will need to make that decision as to the support they’re getting, the splits they’re getting, things the company is doing to help grow your business, etc. So you will make those decisions and then, you know, you do need to make then a separate decision as to what lenders do I want to support?

So at Radius, we still have the mindset that I have to keep growing your business every single day as a broker, whether you’re inside our company or whether you’re outside. So if we can bring you a value proposition that makes it worthwhile to support us, and I think you would. I would think as brokers in general, you would want more choice, not less choice.

And brokers have clearly proven over the last couple of decades that, just because a lender has an origination arm, doesn’t mean you can’t support the lender. We see it with the big banks, not only do they have their retail platform, but they of course have their mobile sales force platform. So I think that the two truly can co-exist in this marketplace today as long as, once again, we keep adding value. And if we’re adding value, then I think then that we’re going to be someone who can survive in this business.

CMT: Gotcha. Ok. I think that wraps it up. Thanks again, Ron for your always informative viewpoints. Appreciate your being here today.

RON: I appreciate the opportunity.

Flaherty Tells Banks: Do Your Jobs

Jim-Flaherty2Finance Minister, Jim Flaherty, says it’s “a bit odd” that banks are asking the government to tighten mortgage rules.

Banks ultimately control who they lend to and shouldn’t require babysitting, or so one would think.

In comments made today, Flaherty hinted that we might not see further mortgage regulations in the near future.

These were his quotes from earlier, some of which were semi-amusing and certainly refreshing from a common sense standpoint:

  • “I find it a bit off that some of the bank executives are taking the position that the Minister of Finance or the government somehow should tell them how to run their business,”

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