Mortgage Rates & Mortgage Broker News in Canada

Street Capital Grows Out West

A year ago, the liquidity crisis had many non-bank lenders questioning their competitiveness.  Street Capital is the perfect example of how much things have changed.

The company is on a growth path, with solid funding sources in place and a brand new western Canada underwriting office.

Street’s Vancouver grand opening was well attended on Tuesday, with senior management and underwriters meeting with brokers from around the region.

Unlike some lenders who’ve been reducing their approved-broker lists, Street says its plan is to increase the number of brokers it deals with.

“We will be doubling our sales force across the country to continue to take advantage of the distribution power of the mortgage broker channel,” says Jason Humeniuk, VP Sales, Western Canada.

“Our commitment to the broker market in Canada, and in this case Western Canada, remains strong,” he adds.

This does appear evident from the investment the company has made in human capital and infrastructure in Vancouver.

Street says it is committed to equipping brokers with better “tools and knowledge” to stay competitive.  In our humble view, the best thing a lender can do for brokers (and customers) is offer innovative products at competitive rates, and that’s exactly what Street seems willing to do.  Its new industry-first 1-year variable is case in point.

U.S. Broker Share Collapses

In 2006, mortgage brokers originated 65% of U.S. mortgages according to the National Association of Mortgage Brokers (NAMB).

In three short years, U.S. broker share has collapsed to a previously inconceivable 15%.  (Again, a NAMB number.) 

We’ve seen other sources estimate an even bigger drop.

The causes of America’s mortgage plight have been widely publicized: 

• Over-borrowing by U.S. homeowners
• Applicants who weren’t properly qualified
• Less focus on credit quality due to careless securitization
• Mortgages with unrealistic rate resets
• Inaccurate credit rating agencies
• Lax regulation
• etc………

U.S. brokers have been blamed for much of the carnage—and the blame is appropriate in many cases. As a result, major U.S. banks, wholesalers, and thrifts, shut down their broker divisions, leaving brokers with drastically fewer choices to fund their loans.

Unfortunately, many honest and responsible U.S. brokers are now paying a severe price, thanks to the bad apples.

Jim Murphy, President of CAAMP, says “The U.S. provides a very important lesson for Canadian mortgage brokers.”  It’s a saga that underscores the value of prudent regulation, licensing requirements, and education requirements--to name a few.  Murphy says “Most, if not all, of these requirements (were) foreign to the U.S. broker market.”

Thankfully, Canadian brokers never followed the American’s lead.  For that reason, Canadian mortgage brokers lead the world in professionalism and we have a fantastic opportunity to script our own future. But, may we never forget what can happen to an entire industry when individuals in that industry take shortcuts to make a buck.

Kyprianou Now With Grey Horse

Nick Kyprianou, former President of Home Trust, has turned up as a white knight on a grey horse.  Grey Horse Corporation that is.

The company has hired Kyprianou to head up its new mortgage lending business.

Grey Horse says its subsidiary, Equity Transfer & Trust Company (ETT), is applying to become a new deposit-taking lender and will distribute its mortgages through mortgage brokers.

Most in the industry know Nick for building his former baby, Home Trust, from a small regional player into a successful national lender. Nick worked there for 17 years, having left just eight weeks ago.

In a statement, Nick said, "I am delighted to be joining Grey Horse at this juncture in its evolution and am committed to this strategic initiative. Having watched Grey Horse's progress over the years, I am impressed with its management team and growth prospects, and confidently invest my own personal capital in the Corporation's future."

Nick has reportedly invested $1 million of his own money in Grey Horse, via a private placement.

The firm’s main business at the moment is that of a transfer agent.  It’s making good money doing it. The company has been profitable 19 quarters straight. 

Regarding it’s target mortgage customer, Grey Horse says: “ETT plans to focus on alternative residential mortgages, a segment which represents 10% of the total mortgage market and is underserved by major financial institutions yet provides a tremendous opportunity for top and bottom line growth. Alternative residential mortgages are loans to borrowers who do not conform to major banks' standards of creditworthiness. Such mortgages are typically granted to self-employed business people, immigrants and borrowers with imperfect credit histories, and are often more profitable than insured mortgages.”

Grey Horse stock (Ticker: GHC on the TSX) popped 15.7% on this news yesterday, to $6.19.

Trends in Broker Compensation

MCAP is the latest lender to revamp its broker compensation policy.

Last week it announced a brand new set of bonuses for brokers, based partly on:

• 1st-year arrears (i.e.  how many of the broker’s deals were 90-days in arrears in the first year.)
• Funding ratios (i.e.  the % of a broker’s approved deals that close).

Both are fantastic ideas.  After all, rewarding good funding ratios and low arrears encourages efficiency and deal quality.  (It’s good that MCAP didn’t further penalize low funding ratios. Positive reinforcement is better than negative, and sometimes cancellations are unavoidable when it’s in the client’s best interests.)

Another change MCAP announced is that it will pay volume bonus (VB) not on firm-wide production, but on the production of the individual agent.  This isn’t a new concept (some other lenders do it too), but it’s not the most common model either.

Paying VB on individual performance seems to make sense—at least at first glance.  From a lender’s perspective, why pay a broker full volume bonus if they only do a few deals a year?

On the other hand, one could argue that lenders who link VB to individual production disincentivize new or smaller brokers.  Reason being:  Several competing lenders still pay full VB to new/small brokers based on the overall volume at that broker’s firm.

Whatever the case, it’s getting tougher and tougher for small brokers to deal with multiple lenders, and still get paid well.  To the extent this affects broker impartiality, it’s a legitimate concern.

An exception to that statement applies to brokers who work under “super-agents.”  Super-agents submit applications and aggregate volume from multiple sub-agents.  The super-agents thereby earn maximum compensation from lenders and then share that wealth with their sub-agents.

Super-agents are a growing trend in the business, and they may someday become the only way for most new/small brokers to earn top dollar.

The question then becomes, what have lenders gained by encouraging the creation of these super-agents?  That’s another debate for some other time…

Abode Mortgage Will Be Back

That’s according to a BrokerNews.ca report, and it could be as soon as a few weeks.

Abode’s CEO, David Nelson, says paying outstanding finders fees “was very important” when negotiating with the new purchaser.

He says the company is not far from a formal announcement (which will likely reveal the new purchaser).

If the deal goes through as planned, the new Abode will reportedly have even more product choices than before.

More…

Dig Into Trade Publications

For those new to the business, one of the best ways to get up to speed is to comb through past trade publications.

You’ll find hundreds of helpful articles on mortgage planning, lender policies, broker profiles, marketing ideas, and more.

Here’s a list of Canada’s biggest mortgage industry publications in electronic format (if we missed any, drop us a line and we’ll add them).

• CAAMP Mortgage Journal
• Canadian Mortgage Professional
• The BC Mortgage Broker
• BrokerBiz
• AMBA Matters Magazine

If you’re sitting around wondering how to improve your practice, flip through some back issues.  One good idea might boost your volume 10-15% a year, or more!

Bird In The Hand, or Two…?

BrokerNews had a good story last month on trailer fees.

Trailer fees are compensation paid to brokers on an annual basis. They are an alternative to the lump-sum finders fees that lenders normally pay brokers at closing.

The story cites some common benefits of trailer fees, namely:

• Brokers who use trailer fee lenders don’t have to fight lenders’ client retention programs to keep the client.
• Trailers discourage churning (moving a client to a new lender for no reason but to generate a new commission)

The problems with trailer fees (as cited by brokers) are:

• Potential conflict of interest (The claim is that trailers encourage brokers to not shop around for clients at renewal.)
• Concern about whether trailer fees follow agents when they switch firms
• Difficulty splitting trailer fees with sub-agents

One key point the story doesn’t talk about is renewal rates.

Cory McLean, a broker/owner at Verico Axis Mortgage, told BrokerNews that clients these days “don't feel a loyalty to a lender” as “they are becoming more educated.”

“That diminishes the value of a trailer fee,” McLean says.

That seems to make sense.  Clients tend to want two things more than any others: the best overall deal and a mortgage advisor they can trust. Most of today’s generation is putting less and less stock in the lender itself. As long as the lender appears reputable and has the best offer, people are usually happy.

Back to renewal stats.  One brokerage executive told us recently that less than 50% of mortgages make it to renewal. (Of course, for the clients that do make it to renewal, 90% stay with their current lender according to CMHC.)

So the combined odds are pretty good that a homeowner will either break their mortgage before renewal or switch lenders at renewal.  When that happens, a broker’s trailer fees often go out the window.

So the question is:  Does the broker take the bird in the hand (up-front finders fee) or two in the bush (smaller up front FF + trailers)?  Many still prefer a bird in the hand due to the multiple factors that can derail trailer fees. There is also a present value argument to be made for taking more compensation up front.

More important than any of this, is that we owe it to our clients to shop objectively for them on renewal.  Incentives from the existing lender shouldn’t guide our advice to consumers unless those incentives directly benefit the consumer.  That’s what people expect from us, and what we must deliver.

Xceed Lost $3.3 Million in 2009; Originations Up 46%

Last year was challenging for Xceed Mortgage, but Chairman/CEO, Ivan Wahl, has a “renewed sense of optimism” for 2010.

First the bad news…

• Net income last quarter was 1/2 of what it was a year ago—thanks to “a reduced net gain on the sale of mortgages and sharply lower securitization income.”
• Xceed’s loss for the year was $3.3 million vs. a $12 million loss the prior year
• Revenue for fiscal 2009 sank from $22.3 million to $9.4 million.
• Wahl says: “An increasing number of Canadians still are unable to renew their mortgages if their overall credit condition has not improved sufficiently for them to qualify for an insured mortgage.” Many of them will be stranded come renewal time.

Interestingly, despite losing money in 2009 (see earnings), Xceed underwrote 46.3% more mortgages. One might expect that more mortgages = more profit. Not last quarter. (Although Xceed did trim its deficit for the year.)

Xceed said that 2009 left it with “lower-spread margins than previously enjoyed.”  An industry-wide liquidity shortage and warlike competition in the insured mortgage market (the only market Xceed now plays in) didn’t help.

The good news…

Xceed Mortgage plans to become Xceed Bank, as we wrote back in August. Wahl said that bank status will give Xceed “a new and important avenue for accessing stable capital at a reasonable cost” and will “significantly increase our underwriting capacity.” It will also give Xceed a way to get back into more profitable non-prime lending.

Wahl says, “We believe that the application process is making progress, but the timing of any approval is entirely up to OSFI.”

MCAP Update

MCAP is one of Canada’s biggest non-bank lenders, and it recently made a welcome improvement to its early termination policy.

Prior to this year, a firm sale was required to break an MCAP mortgage in the first 36 months. This was meant to prevent losses that occur when a borrower breaks his/her mortgage early.

It wasn’t too popular, however, because it kept people from refinancing elsewhere for three years. (It was the main reason we didn’t send them much business ourselves.)

Now that this “sales-only” clause is history (as of January 26, 2010), MCAP’s products and prompt turnaround times will return to center stage.  As a result, its business should increase.

We’ve always been curious, though, why MCAP’s fees and standard penalties were not enough to make MCAP whole if a client breaks early. So we asked this question to Ron Swift, President of MCAP Service Corporation.

“The answer depends on a couple of key factors…” Ron said. “The total cost of acquisition (broker compensation, hedging, underwriting, etc.), time of pay out (near the beginning of the term or near the end of the term) and the lender's method of funding the mortgage (balance sheet versus securitization).”

“For certain, the closer a mortgage is paid out from when it was funded, the more likely the lender will not be made whole with the penalties.”

In order to eliminate its sales-only clause on existing mortgages, MCAP said it may need to claw back part of the broker’s commission if the client breaks the mortgage before three years and goes elsewhere. The reason: Longer-term MCAP’s mortgages are sold to investors on the basis that they will not be paid out in the first 3 years, barring a sale.

Ron conceded that clawbacks “are not common practice” in the industry. He says this is only being done to “provide an option for a (prior) customer who is choosing to pay us out of their sale-only mortgage in the first 3 years, versus us saying no to allowing them to pay out the mortgage.”

Two key points about clawbacks:

• They will not apply to new MCAP mortgages.
• Nor will they apply if the client remains with MCAP after breaking a current MCAP mortgage before three years.

All of the above is a net positive for MCAP and its customers going forward.  It seems that, more and more, lenders are re-evaluating their policies to benefit customers (we just saw Home Trust get rid of their IRD penalty on variables, for example).  As the Internet makes homeowners more knowledgeable, the trend towards consumer friendliness will hopefully strengthen.

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About MCAP: MCAP is Canada's largest independent mortgage and equipment financing company, with more than $25 billion in assets under administration. MCAP originates, underwrites, securitizes, and services mortgages and has over 100 institutional investors and over 130,000 borrowers.

Racing To Bank Status

Bridgewater Bank sent out a nice email the other day summarizing 2009.  In it was one point that resonated. 

It said:

“Unlike lenders that depend solely on lines of credit or “warehouse lines” supported by third party lenders, Bridgewater Bank has the advantage of being able to raise consumer deposits to fund its mortgage business, delivering us from the vagaries of third party decision making driven by market impacts.”

Many of the non-deposit-taking lenders out there would love to be in that position.

Non-deposit-taking (“non-bank”) lenders were put at a disadvantage last year.  While banks enjoyed overflowing deposits from market-shy investors, most non-bank lenders had to rely heavily on the Canada Mortgage Bond market for mortgage funds.  As a result, non-bank mortgage rates were dependent largely on that market.

Banks, meanwhile, had lots of relatively low-cost cash to lend thanks to deposits and government mortgage buybacks. As a result, they were able to underprice competitors and recapture market share.

Going forward, non-deposit funding sources (CMBs, mortgage backed securities, covered bonds, etc.) might not be enough to keep non-bank lenders competitive.  One monoline executive told us Friday that, “Everyone will be a deposit-taking lender (eventually).”

Similarly, we still recall the prognostication from Scotia Mortgage Services’ President, John Webster, who said in November: “For a lender going forward, you either need a balance sheet, or need to rent one."

Recently, we’ve seen lenders like Xceed and CHIP apply for bank status--so they can get their hands on deposit money.  It seems other lenders may not be far behind.  We hear there are at least 30 new bank and trust applications with OSFI as we speak.