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CMT has a long record of critiquing government rule changes in the mortgage business. It’s a check and balance on a bureaucratic system that sometimes “forgets” to consult stakeholders and discounts the consumer repercussions of its policies.

But it would be a mistake to misinterpret this as advocating for the status quo.

On the contrary, Canada’s mortgage regulators have kept our housing market from going completely off the rails. Specifically, they’ve been prescient and wise in reversing lax lending policies, including:

  • Zero-down insured loans
  • 100% rental financing
  • 95% insured refinances
  • 95% stated income financing
  • Insured interest-only financing
  • High-ratio HELOCs
  • Insufficient minimum credit scores
  • Inadequate documentation requirements
  • Qualifying high-ratio variable and short-term borrowers at inadequate rates
  • Allowing insured cash-back down payment mortgages
  • Unnecessarily high maximum debt ratios.

Policy-makers at the Department of Finance, OSFI, CMHC and the Bank of Canada should be applauded for their role in these measures. We don’t say that enough.

If needed, and I stress the phrase “if needed,” the government could take additional steps to cool overvaluation (in the few regions it exists) and improve borrower quality. It could do that by:

  • Raising minimum credit scores
  • Lowering maximum debt ratios for below-average credit scores
  • Lowering maximum debt ratios for low-equity borrowers
  • Incentivizing development and reducing developer red tape to alleviate the supply constraints (a central driver of overvaluation)
  • Publicly publishing individual lenders’ arrears rates
  • Adding new insurance surcharges for lenders with arrears rates in the worst X-percentile
  • Requiring more public data disclosure from default insurers (e.g., Why on earth does CMHC not disclose TDS buckets, like what percentage of its borrowers have TDS ratios over 40% and an LTV > 90%?)
  • Increasing insurance premiums on borrowed and gifted down payments.
  • Increasing insurance premiums and MBS guarantee fees where they are not actuarially sufficient (albeit they’re already more than actuarially sound in most cases).

There’s a lot that’s been done, and still a lot that could be done, to make Canada’s housing market safer.

But one thing that should never, ever occur is policy that penalizes low-risk Canadian families with higher borrowing costs. No one wins in that scenario. And that’s exactly what the regulators have done by:

  • steadily reducing the liquidity of, and access to, NHA-MBS
  • not maintaining CMB allocations adequate for lender needs
  • eliminating insurance on low-risk refinances
  • imposing capital requirements that are overkill in many cases
  • overcharging for MBS guarantees
  • eliminating long-amortization options for those who can qualify at a standard 25-year amortization
  • forcing insurers to charge surcharges in Canada’s most liquid real estate markets
  • restricting bulk insurance access
  • eliminating important securitization outlets for insured mortgages (e.g., ABCP)
  • limiting access to low-cost insured financing for low-risk borrowers with higher-value homes
  • not fostering covered bond access for smaller and mid-size lenders
  • hamstringing banks by keeping covered bond limits below internationally accepted levels
  • not fostering private RMBS markets sooner
  • promoting loss sharing, which (depending on how it’s implemented) could hammer the final nail in small lenders’ caskets.

…and this probably overlooks many more such myopic policies.

How lenders sell and fund mortgages has never been the problem in Canada. It’s bad mortgages that are the risk.

Without question, we owe it to taxpayers to keep government-backed mortgage exposure in check with judicious underwriting, and regulators have enforced just that (over-enforced in some cases).

But the government also owes it to taxpayers to use the AAA credit rating Canada has been blessed with to lessen families’ borrowing cost burden.

This doesn’t mean lenders should give fringe borrowers more options. Definitely not. Under-qualified borrowers should see their options further restricted, and soon. That’s how to create a safer mortgage market and slow overvaluation at the same time.

But never, ever, should policy-makers force a prudent 800-credit score borrower with 20% equity and a secure employment to pay more for her mortgage.

That’s exactly what’s happening today, because of a shotgun regulatory approach that shoots to kill consumers’ options, and asks questions later.

Canada’s mortgage regulators should be simultaneously: (a) applauded and (b) held accountable. Citizens constantly hear the former in carefully planned CMHC speeches, Department of Finance press conferences and Bank of Canada Financial Reviews, but there aren’t many people doing the latter.

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In the media’s race to break down last month’s mortgage rule changes, accuracy has seemingly taken a backseat to fast-published, under-researched commentary.

Here’s a case in point, a Globe story that ran October 17. (And yes, I hate to criticize my own because the Globe has some extraordinary professional journalists.) But this particular story is drastically misleading by virtue of it omitting or mischaracterizing a slew of essential points, including:

  • A primary reason that banks support the new insurance rules:
    • Limiting which mortgages can be insured eliminates securitization options. That handicaps bank competitors, thus providing banks an opportunity for higher net interest margins. By no means is this the only reason banks support the changes, but it’s one that’s too important to overlook.
  • Why banks chose to offer low rates (like 2.99%) in the past:
    • The author’s insinuation that banks were somehow reckless or irresponsible because they advertised competitive rates is absurd. At the time that 2.99% made headlines, market rates had already fallen to levels that permitted such pricing. Are banks expected to ignore market forces and price themselves out of the game to slow housing? No. That’s not their duty, in any sense of the word duty.
  • The true level of default risk:
    • The author doesn’t mention that people who refinance must have 20%+ equity. People with 20%+ “skin in the game” will do everything humanly (and inhumanly) possible to avoid losing their tens or hundreds of thousands of dollars of equity. If they hit rough waters financially and their ship is sinking, they generally get off the ship (sell) or plug their financial leak some other way…before they lose their house.
  • Stakeholder motives:
    • Ad hominems are the most rampant fallacy in the housing debate. The argument typically goes something like this: Brokers make less money with more rules, so they can’t be honest about a mortgage rule’s true impact. The Globe writer plays right into this by charging mortgage finance companies and brokers with “griping” and making a “stink” about the changes. And he writes barely one sentence to explain the industry’s actual positions on these issues.
  • The competitive impact:
    • The author claims that “what’s been proposed isn’t so tough that it should decimate” bank challengers. Is that so? Well let’s see. Up to a third or more of most mortgage finance companies’ (MFCs’) residential business comes from refinances, extended amortizations, rentals and (to a lesser extent) jumbos. If MFCs are immediately less competitive on that much product, and it results in borrowers paying hundreds of millions more in interest every year, that ain’t something to celebrate…or ignore.
  • The business models of bank challengers should be “questioned”
    • Here’s a real beauty. “If some lenders’ futures are severely hurt by what’s on the table, then their business models ought to be questioned,” the author proclaims. Of course, he makes no attempt to explain said models.
    • Fine. Question them. But don’t just assume that they’re abnormally risky or non-value-added. If you want to see the effects of oligopoly pricing, where MFCs are marginalized, check out Australia’s mortgage market. There, four banks rule supreme over 90% of the market. “The figures tell us that the non-bank lenders are the most competitive when it comes to interest rates, yet they are being squeezed out of the market,” Mortgage & Finance Association of Australia CEO Phil Naylor told Your Mortgage magazine. Naylor, incidentally, has called on Australia’s government to review Canada’s mortgage model, which “guarantees competitively priced funding pools accessible by non-bank lenders.” Well, at one time it did guarantee that anyhow.
    • The facts speak for themselves. Securitizing lenders put enormous aggregate savings back into consumers’ pockets, and it’s made possible only by our sovereign’s guarantee. These savings offset all and any exposure borne by insurers and citizens, multiple times over, as has been demonstrated time and again.
  • Confusing prime and non-prime lenders (and the public):
    • The story mislabels prime lenders like First National as “alternative lenders” (“alternative lenders” is common parlance for non-prime lenders). 
    • Worse yet, the story charges mortgage finance companies with making “riskier loans.” Say what? Anyone covering this business should know that arrears rates for most MFCs are less than half that of major banks. Heck, even CMHC data confirms this if a journalist takes the time to look.

“I get it that our business is totally misunderstood by 95% of the media,” says broker Ron Butler, “but if you are going to devote this many column inches to something, at least take a stab at understanding the difference between non-bank ‘A’ lenders and non-bank ‘B’ lenders.” That’s not too much to ask.

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Keep calm and carry on

You’ve probably lost count of how many times you’ve heard that stale motivator after last week’s mortgage rule travesty. 

Brokerage heads are busy reassuring their agents, investors and lender partners that we brokers will persevere and get past this. Well of course we will.

But wouldn’t it be nice if broker leaders spent as much time publicly decrying these rules as they did publicly comforting themselves?

The truth is, we as an industry just got unapologetically shafted by a handful of anonymous policy-makers—policy-makers who sit insulated from the backlash and consumer repercussions in their cozy government office towers. 

There is absolutely nothing to be ‘calm’ about when:

  • broker lenders are forced to hike rates 15-25 bps and ditch products because of a bureaucrat’s stroke of the pen;
  • a world-class lender like First National has its market value hammered six days in row;
  • hard-working qualified Canadian families are told to pay enormously higher interest because—virtually overnight—they’re told they can no longer qualify for a refinance.

We brokers depend on product access. “What could be more damaging to the rank and file mortgage broker than telling their clients that 30-year amortization without a surcharge is only available from a bank?” asks broker Ron Butler. “…Why wouldn’t many consumers just go to the bank?”

Without choice and competitive rates, we’re just another mortgage seller pushing advice and service. Our industry cannot—and will not—grow on advice and service alone.

And the hits just keep coming. We get the next dagger in Q1 when bulk insurance premiums at least double, which will make broker lenders even less competitive. And the grand finale could come next year if/when regulators propose a deductible on insurance claims. Depending on how that’s implemented, some lenders may not survive it.

Keeping calm is not the answer. All that does is show regulators that we’re willing to take whatever rancid medicine they spoon down our throats. It makes them think they can restrict mortgage lending overnight, with virtually no consultation from consumer advocates or people who actually know how mortgage finance works.

Don’t just sit by calmly and tolerate bad policy that threatens your livelihood. Stand up for the tens of millions of Canadians who need mortgages and cost effective refinances. Stand up for the choice and cost savings we deliver as brokers. Tell the media how bureaucrats on the public payroll have unilaterally decided that well-qualified homeowners should pay more to renegotiate their debt—and have fewer options for managing their limited cashflow, despite absolutely no default data to support these moves. (And no, this doesn’t refer to overleveraged borrowers. Those folks should be curtailed.)
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Write about this on your blogs, write to the Finance Minister, sign this petition, copy @FinanceCanada on social media, volunteer for association policy committees, tell your MP and tell your broker network’s leadership.
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None of this is about broker self-interest. It’s about saving Canadian families literally tens of thousands in interest over their lifetimes, with no material increase in housing risk. It’s about standing up for government sponsorship of the mortgage industry, which has kept defaults low for decades, added billions to government revenue and fostered vital competition in a market dominated by six lenders.

Carry on, yes, but don’t keep calm.


This editorial solely reflects the author’s opinions and not those of this publication’s parent.

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One of the most touted value propositions we express as mortgage brokers is choice. Brokers can compare dozens of lenders whereby lender reps push only one brand: their own.

Having a wide array of lenders allows broker clients to enjoy more customized financing solutions. That’s important because one lender doesn’t fit all. A given bank, monoline or credit union may have punitive penalties, restrictive porting policies, poor blend and increase options and so on. Customers need choice, and our industry depends on it.

That’s why I’ve always found stats like this—from FSCO, Ontario’s broker regulator—to be surprising: Roughly one in five brokerages finance more than 50% of their mortgages with just one lender.

Now, some of this can be explained in cases where licensees must register as brokers under the Act, but essentially act as lenders. But many are just everyday brokers who choose to funnel the bulk of their mortgage volume to one supplier.

Maritz discovered a similarly eye-opening stat in 2011 when it found that 90% of the typical broker’s volume goes to just three lenders. That’s profound for an industry that promotes consumer choice.

This raises important issues:

  • Firstly, if you’re a broker who does over half your business with one lender and/or 90% of your business with three lenders, and you boast something like “We have access to more than 40 lenders” on your website, your marketing is deceptive at best.
  • It’s a sad commentary when full-time brokers are forced to route their volume mainly to 1-3 lenders in order to access competitive pricing and service. Most brokers would prefer to sell the best product and rate for each unique client, if they could. But too many can’t. They don’t have the deal flow to get those rates and products.
  • This reinforces how critical it is for lenders to embrace deal desks (a.k.a., Central underwriting hubs), so that up-and-coming brokers can access status pricing/products while ensuring lender efficiency.
  • Similarly, it underlines how vital it is that ALL brokerage networks operate professional deal hubs. It’s unbelievable that some national firms still don’t have them. Those who don’t are doing a massive disservice to their small and mid-sized broker members who are handicapped by their volumes.

One more thing on that topic. For you brokerages who run these desks, please don’t fleece your agents by pocketing the volume bonus and efficiency bonuses. Charge a flat, transparent and fair fee (e.g., 5-7 bps, minimum $100) that’s commensurate with your actual processing costs.

Lender access is sacred. Deal desks should be a service to agents, not a fat profit centre for broker networks, which already earn splits and/or franchise fees. If you superbroker owners out there want the bottom 80% of your agents to prosper, and you want to support young brokers entering the business, start thinking long-term and strategically on this issue.

Brokers may someday lose the rate war, but if we play our cards right, one battle we’ll never lose is product selection. We have to use this benefit to our advantage as an industry by helping smaller/newer brokers access more products efficiently, and with fewer volume commitments.

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Protecting housing smThe B.C. government’s “blame non-resident homeowners” campaign is now officially out of control.

Provincial leaders have just molested international homebuyers with a savage 15% land transfer tax. Worse, and incomprehensibly, they’ve applied it retroactively and with no compunction to purchasers already locked into contracts, people with no other way out besides losing their deposit. This is how the premier wants B.C. to be judged by those outside our borders.

Of course, there are other countries with protectionist real estate practices. But there are also other countries that levy 80% marginal tax rates and jail women because they forgot their burkas. Taking cues from other nations is not, by default, sound.

Given the knee-jerk nature of this tax (the market got all of eight days’ notice to prepare for it), one wonders if B.C.’s premier ever pondered its hypocrisy.

Yesterday I asked a personal finance “guru,” who shall remain nameless thanks to her vulgar response, whether the U.S. should retaliate and force onerous taxes on Canadian snowbirds. It’s a legitimate question.

Those who exclaim, “Yes! Protect hapless local Americans from marauding Canadian purchasers,” should think about that response for a moment. For if Canada snubs international buyers, we can’t argue against the same treatment for Canadians abroad. We have no basis to complain if other countries erect tax fences to shut our people out.

As important as it may be to stabilize home values, before exhausting other options and branding ourselves real estate protectionists, important questions should be considered:

  • How would we feel if the Americans slapped a demoralizing new retroactive tax on the half-million+ Canadians who own down south, and the millions more that will someday buy there?
  • How just is it for officials in Florida or Arizona or California to disadvantage and displace Canadians so locals enjoy cheaper homes?
  • How wise is it to discourage global investment in a country like ours, with its insufficiently diversified economy, and whose outlook deteriorates every time commodity prices drop 10%? (Note that many international investors and their executives, who invest and work in Canada, need second homes here.)
  • How much should pandering politicians put equity at risk for the 70% of Canadians who own homes, and the one in four seniors who depend primarily on home equity for survival?
  • Given the myriad of supply/demand factors driving home prices, to what extent does legal foreign buying (which likely accounts for just 1 out of 20 purchases long-term, most being high-end properties) really push up prices for working-class Vancouverites?

A key word there is “legal.” Fraudsters, money launderers and other criminal buyers must be chased down, fined, spend time in a 6’x9′ box and/or have their properties confiscated. 

By contrast, overseas buyers who respect our rules and buy a second home here should be welcomed with wide open arms, for their diversity, capital and contributions can be a net benefit to this great country. In so many cases they invest here, spend here, help fund the educational system here and support Canadian jobs here (and let’s not let student mansion owners distract from that message).

In cases where non-residents leave “affordable housing” vacant and don’t invest in and foster employment, perhaps that specific practice should be discouraged. But how short-sighted it is to lump all non-nationals into that same boat. 

At first blush, most people support higher taxes on Chinese, Korean, U.S., UK, Indian, Taiwanese and other non-Canadian buyers, and you can understand why. People are frustrated. They love Vancouver and they want a comfortable, affordable place to live in or near the city.

Heck, my wife and I lived in Vancouver for five years and we often wished we had enough money to buy a nice house near our workplace. But clearly, owning in a beautiful high-demand area in one of the world’s greatest cities was not our God-given right. Nor is it anyone’s.

Sometimes people who can’t afford something have to make hard decisions, like commuting an extra 45 minutes, changing jobs, living in a condo, migrating or otherwise improving their lot in life.

Without fail, however, both people and economies ultimately adapt to affordability challenges. But it takes forethought and time, and politicians focused on upcoming elections don’t feel they have that time. So we get short-term mindsets creating long-term policy—a bona fide travesty.

B.C.’s new land tax reeks of hypocrisy. If this country’s leaders want to be open members of the global community, and benefit from international trade, and protect our ownership privileges abroad, and attract foreign investment, we simply cannot send a message to non-Canadians that they’re less valuable to our society than we are. 


The views and opinions expressed herein are solely the views and expressions of the author and/or contributors to this site and do not necessarily represent the views of Mortgage Professionals Canada, or its advertisers or stakeholders.

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…Robots are racing to replace mortgage brokers.”

Like it or not, we’re going to see more and more headlines like this.

This particular story comes from the UK, where British entrepreneurs have a head start on automating mortgage services.

On this side of the Atlantic, brokers seem largely unconvinced about robo-lenders eating their lunch. This recent ilovemortgagebrokering.com podcast is one example. “Am I concerned that I’m going to be disrupted out of a job by an app? I am not,” said co-host Dustan Woodhouse, arguing that a human touch is needed because mortgage clients have unique requirements and large sums of money at risk.

Co-host Scott Peckford added, “The people who focus on giving advice and can add value to a transaction are still going to have lots of work…Not everybody wants to do E*Trade.”

No doubt, most successful established brokers take comfort that their existing high-touch model and referral sources will continue streaming a fountain of business. But it’s a different future facing many newer agents. I’m talking about those who operate run-of-the-mill low-tech brokering practices without the benefit of large tappable client databases. For them, automated mortgage systems (and their deep-rate discounts and online decision support tools) may pose greater danger.

Then again, some in our business pooh pooh the entire premise of automation slashing rates and commissions. They hold that mortgages are too complex to be widely automated, suggesting that most consumers need (and will gladly pay a premium for) one-on-one advice.

Well, somehow firms like Betterment have figured out how to code self-serve platforms and amass up to $5 billion in customer assets. And they’re doing it in just as complex a business: investment management and asset allocation. They’d probably be the first to tell us that AI is easier to program for prime mortgages, where fewer variables go into product selection.

How much brokers worry about all this will vary on the uniqueness of their business model, their technology, their referral networks, their database size and so on. Fortunately for our profession, things like non-prime underwriting, lender follow-up and mortgage fulfillment (i.e., the closing process) are harder to automate, assuring a place at the table for traditional brokers with Alt-A files, “B” deals, time-sensitive conditional purchases, portfolio rental financing, commercial financing, etc.

If “A” business is your meat and potatoes, however, the world is about to get more interesting. “Your referral relationships aren’t going to dry up in the next 6 months,” writes mortgage technology expert Jesse Passafiume. “…but there will be an increasing number of digital savvy competitors that earn business—your business. The time to adapt is now.”

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Justice FBA few months back, B.C.’s mortgage broker regulator fined and banned Jorawar Singh Gosal from the broker industry for 10 years. Mr. Gosal admitted to doctoring a client’s income documents to get his mortgage approved.

Given Gosal’s admission, we asked FICOM if it had referred his case to the authorities for prosecution (hoping it would say “yes”). Unfortunately, FICOM’s spokesperson couldn’t speak to the specifics of the case, citing legal reasons.

He did say this: “As a matter of course, in any file where there may be potential criminal activity or breaches in other regulatory areas, we refer files to the appropriate agencies, regardless of whether or not they choose to pursue the information.”

So that’s good. We’ll infer that FICOM sent Gosal’s case to law enforcement.

Make no mistake, altering documents to deceive a lender for personal gain is a criminal offence.

According to the Department of Justice:

Subsection 366(1) of the Criminal Code prohibits forgery, which is where a person “makes a false document, knowing it to be false,” with the intent that the document should be acted on as though it was genuine.

Under section 321 of the Code, “false document” is defined to include: a document “that is made by or on behalf of the person who purports to make it but is false in some material particular”. The offence of forgery is complete, where the person who makes it knows it is false, and where they intend that some other person act on the document believing it to be genuine.

Subsection 368(1) prohibits the use of a forged document as though it were genuine. The offences of making a false document and using a false document are both punishable by a maximum of 10 years in prison.

Under section 380 of the Code, fraud comprises two elements: (1) deception or some other form of dishonest conduct, coupled with (2) deprivation or risk of deprivation of another person’s property. Mortgage-related fraud is subject to the Criminal Code and is punishable by a maximum of 14 years in prison, where the value of the fraud was over $5000, and by a maximum of 2 years where the value was less than $5000.

So, given all this, we could assume Gosal was investigated by law enforcement and that they’re taking all appropriate measures. Or can we?

So far there’s been no formal charges laid that we could find in court records. Perhaps it’s just a matter of the criminal investigation needing more time.

Mortgage Fraud_FBWhat we do know is that consent orders are not enough. Document fraud usually gets handled internally in the lending industry, without the benefit of public exposure (which would strengthen deterrence). When it is referred to law enforcement—which by no means happens in the majority of cases—it’s all too often not pursued due to “insufficient resources.” That’s exactly what keeps the back door open for bad apple brokers.

Weasel agents need to be eradicated from our business, not only for the risk they cause lenders and borrowers, but for degrading consumer confidence in our profession. Regulators need to reward whistleblowers, like the OSC now does, and make offenders pay for those rewards.

It’s time to make examples of such embarrassments to our industry. Criminals fear jail time more than a $4,000 fine and a licence ban (which should be a lifetime ban, by the way, not just 10 years).

While we’re on this topic, whatever became of those alleged fraudsters who sent bad paper to Home Trust? Nary a peep about whether any of them were charged. That’s unfortunate. Really…and truly…unfortunate.

 

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Falling interest rate FBLots of brokers out there criticize rate buydowns. They argue that buydowns cause a “race to the bottom” in mortgage pricing.

If that’s how you feel as a mortgage broker, take solace. The race isn’t far from the finish line.

Online mortgage rates have already plunged to levels where some brokers now earn just 35 basis points in compensation (or less), even on five-year fixed terms. That’s one-third of what most brokers make.

At these revenue levels, only a minority of exceedingly efficient large-scale brokers will succeed long term in the deep discount market. As more independent mega-brokers sign on directly with funders (à la True North Mortgage) and/or negotiate $50-$100 million volume deals with lenders, that’ll become all the more true.

Adding to this trend is the virtual certainty that more lenders will launch DTC (direct-to-consumer) call-centre models and sidestep originator commissions. And, of course, our major banks won’t be left behind. CIBC has already flashed a glimpse of the future by negotiating rates on borrowers’ smartphones and bypassing traditional mortgage specialists.

Thus far, the rest of the broker industry (those without deep discount models) seems largely unfazed by these developments. Canada’s top mortgage agents— the 20% that do 80% of the volume—have profitable existing books of business and established referral sources. In their view, they can sufficiently sell their value to clients. Moreover, their volume has yet to take a serious hit.

Then we have the lean-minded so-called “order takers.” These are online shops willing to work for 35 bps. These are the guys who have started to move the market for all brokers—regardless of experience, referral sources, salesmanship, advertising, value propositions or what have you.

I increasingly hear from $200- and $300-million producers who are losing deals over 5-basis-point rate differences. This is something that rarely happened to them in the past, but it’s occurring with more regularity today.

As time goes on, brokers will hurry to find solutions to this problem when, in fact, one key solution is the same as it always was: dollarization.

In industry terms, dollarization is the practice of articulating the value (in dollars) that customers receive from your advice and assistance. It’s an effective strategy given the commoditization dilemma, but it’s not easy to execute. 

The question you’re trying to answer as a broker is: What is it worth to someone, monetarily, if I find them the optimal mortgage?

“Optimal” refers to the mortgage with the lowest cost of ownership and the best customer experience. Getting a theoretically optimized mortgage is worth something to people because it saves them time and money (interest cost, penalties, refinance rate surcharges, conversion rate surcharges, reinvestment fees, discharge fees, etc.).

But here’s the rub. Identifying the lowest cost of borrowing for a particular client takes serious work and analysis. It entails something like this:

  • asking the right interview questions upfront
  • understanding a client’s five-year plan
  • calculating the probability of certain life events occurring in that timeframe
  • objectively comparing features and restrictions for several mortgages
  • mathematically ranking which mortgage (or series of mortgage terms) are the best value over five years
  • explaining that to consumers in a way they understand (and believe), with hard numbers to back it up, and
  • ensuring the customer doesn’t take that knowledge and go elsewhere.

Note: We focus on five-year time horizons because: a) mortgage terms over five years are not cost effective at today’s rates, and b) predicting the future beyond five years approaches futility.

In an era where online rates are often 20+ basis points below median broker rates, failure to optimize people’s financing and dollarize that service may become a death warrant. It boosts the odds that customers evaluate you on price, and price alone. And that’s a bad outcome for the more than 95% of brokers who don’t/won’t have the buying power and side deals to compete on rate.

When the “race to the bottom” is officially over, those who prosper against the Walmarts of the mortgage industry will be the professionals who can persuasively explain why their higher rates are not just padded profits. Many quality full-service brokers believe that their service to prime borrowers is worth an extra 20+ bps. In most cases, it’s not. But it’s not worth just 1-2 bps either, and effective dollarization can get that across to folks.

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Showing cards FBThe public is increasingly aware of what mortgage brokers make per deal. And now, courtesy of pending regulatory change, they’re about to become even more aware.

Should that concern you as a broker?

If you like making full commissions, you bet.

Everyone from the CBC and Globe and Mail to trade magazines and consumer forums have published how FICOM (B.C.’s broker regulator) wants to force brokers to reveal their compensation (more on that). In time, other provinces may follow.

What Happens Next

If/when these rules pass, it could take just a few years for a critical mass of borrowers to realize: a) how, and how much, brokers are paid; and b) how they can use that knowledge to negotiate lower mortgage rates.

As this information comes to light, savvy price-shopping consumers will have a field day (savvy being the key word; more on that below). It’s kind of like knowing your car dealer’s invoice cost. It provides a basis for negotiation.

For many brokers, that is unequivocally a problem, a big problem. Tamsin McMahon at the Globe writes, “traditional brokers…argue that revealing their commissions will push clients toward discount brokers offering the lowest fees and rates.” You better believe it will.

Countless borrowers will gravitate to the obvious savings and increasingly opt for brokers who cough up more of their commissions. Who wouldn’t want to save an extra $1,000 or $2,000 in interest?

Where Things Take a Wrong Turn

Choosing the right mortgage isn’t just about the obvious savings. Anyone can compare a three-digit number.

Minimizing one’s borrowing cost relies on finding the unobvious savings, for that has the biggest potential impact on borrowing cost.

Unobvious savings come from:

  • more flexibility (e.g., not having refinance restrictions when you need to refinance, blend and increase restrictions when you need to borrow more, insufficient porting timeframes when you need to port, etc.)
  • lower fees (e.g., avoiding or minimizing prepayment charges, legal fees, appraisal fees, discharge fees, reinvestment fees, title insurance fees, credit line fees, etc.)
  • better strategies (e.g., optimal term selection based on one’s family, employment and financial circumstances, refinancing tactics to lower overall interest expense, early renewal to lock in or average down on one’s interest rate, timing one’s application to get better rates, prudently utilizing debt to invest, structuring rental portfolios to maximize future financing options, etc.)

Unobvious savings come from detailed product comparisons and careful client analysis. Will deep discount brokers, who typically can’t afford to spend 3 to 4+ hours advising clients, offer this same degree of counsel? Likely not, at least not one-on-one.

And if you’re a well-qualified, experienced, financially savvy mortgagor, you may not even care. You might save just as much with that no-frills online rate you found yourself. But that’s not the majority. There’s a reason why the majority of investors prefer advice, despite 30 years of online discount stockbrokering. Likewise, most mortgage consumers want and need guidance. They don’t have the time, skill or inclination to learn the lingo and make detailed comparisons of mortgage features and restrictions.

FICOM’s plan puts online discounters in the catbird’s seat. “It’s really simple,” Ron Butler told the Globe. “I operate on one-third the income of the average mortgage broker, so I don’t mind it being showed to people.”

For the most part, this author (who also has an online mortgage business) doesn’t mind either. For one, brokers should have nothing to hide when it comes to compensation. And second, FICOM’s rule will boost volume for Internet mortgage models materially, for at least a few years.

Ultimately, however, compensation disclosure will lead to bigger buydowns and it will drive down commissions industry-wide—faster than the Internet alone would have done.

This worries more than a few broker network bosses. Any business that takes a percentage of agent commissions—as opposed to a flat fee—is destined to take a haircut.

What’s Wrong With FICOM’s Plan

There is nothing inherently wrong with more disclosure. Various professions disclose their pay in black and white. But with most other businesses, there is less chance of people drawing conclusions about the product/service based on the compensation of the salesperson.

For example, all traditional realtors in a given province make about the same commission percentage. Knowing a buyer’s agent makes 2.5%, for example, shouldn’t cause you to doubt that realtor’s recommendations. The market, not the realtor, sets prices and their commission percentage doesn’t increase if they sell a higher-priced home.

With mortgages, however, compensation varies and is directly linked to price (the rate), term, short-term lender promotions, etc. Knowing the originator’s compensation alone tells you nothing about that mortgage. At any given time the best mortgage can pay the highest commissions and the worst mortgage can pay the lowest commissions, or vice versa. Not surprisingly, research shows that choosing a mortgage based on originator compensation can lead to costly mistakes.

It’s a Start

FICOM’s plan is on the right track. There is no question that a minority of brokers sell worse products for greater personal gain, and we’ve argued for years that something should be done about it.

But implementing this rule, as is, would be detrimental to hundreds of thousands of Canadians. Its flaws first need to be addressed.

For example:

  • It proposes disclosure of all economic benefits to the dollar. How do brokers know what they’ll be paid when lender bonuses are often contingent on future volumes?
  • It mandates this disclosure, but arms consumers with no information to interpret the data.
    • How do average consumers know if a 110 bps finder’s fee plus 7.5 basis points efficiency bonus plus $175 marketing dollars is reasonable for a 5-year fixed?
    • How do consumers know if their broker could have sold a lower rate for a similar product, and still made a normal commission?
    • How would consumers know if a mortgage that generated a lower commission actually entailed the lowest cost of borrowing?

If FICOM could provide benchmarks for these comparisons, that would be useful. That would put this disclosure in context. If FICOM had clear suitability guidelines, that would reduce self-interested mortgage recommendations.

Without this information, FICOM is delivering but one thing to consumers: more ammunition to negotiate rates. FICOM’s actions will expedite commission reductions in the mortgage broker business. In turn, brokers will need to close more deals to earn the same living. That means less incentive to spend 3-4 hours counselling clients and poorer choices for consumers who rely on that advice. That shouldn’t be a regulator’s decision to make, not unless their solution is bulletproof.

Only a minority of knowledgeable consumers with negotiation skills will benefit from this policy change, to the detriment of less educated consumers who arguably need the most protection. The proposed rule, as is, is not the answer. It is like a shovel with no handle, an incomplete tool.


Sidebar: Today, February 20, is the last day to send FICOM comments on these rules. You can do so at brokerconsultation@ficombc.ca.

 

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Over the weekend I came across this headline.

53000-savings

It was based on Ratehub.ca’s Digital Money Trends release, which we covered this week. That report yielded some useful new data, as noted. Unfortunately, it dropped the ball in one key claim.

The report attempts to show how much Canadians would have saved by choosing a RateHub rate, versus the banks’ posted rate over the past five years.

Posted-rate-versus-discount-rates

 

In our story Wednesday, we purposely ignored this stat. Comparing savings between discount and posted rates is like telling vacationers how much Expedia would have saved them versus hotel rack rates, or telling car buyers how much TrueCar would have saved them versus MSRP.

For any mortgage company to compare its discounted rates to bank posted rates (which almost no one pays anymore) is, in this author’s view, distorted and disingenuous—to put it politely.

It’s a shame because the report could have compared Ratehub (or any rate comparison site) to average rates, or the bank’s special offer rates, and still made a very valid point. It didn’t have to resort to the 1995 playbook on bank challenger rate marketing. And, by the way, if you’re a broker or lender, neither should you.

Any qualified homeowner who’s spent half an hour researching mortgages online knows that paying posted rates is ludicrous. Even the banks themselves would tell you how uncommon it is for their own borrowers to pay posted rates.

If you want to make a point about how great your rates are, compare them to a reasonable benchmark. MortgageDashboard.ca shows the average broker rates being advertised by Canada’s biggest brokerage firms. Use that, or something more akin to what borrowers actually pay. Don’t discredit yourself by using the “my discounted versus your posted” trick.

Sidebar: Interest rates are only one component of total borrowing cost. This story isn’t meant to imply otherwise. And for full disclosure, let it be known that this author also owns a rate comparison site.