FP’s BMO Story

Financial-Post The Financial Post’s John Turley penned a surprisingly negative story a few weeks ago.  The article was an opinion piece that was very pro-BMO and very anti-mortgage broker.

BMO aside, Turley made several specious arguments and unresearched generalizations about the brokerage industry.  Naturally, there are several counter-arguments that apply to this story.  So in the spirit of fair rebuttal, a sampling of Turley’s claims and related facts follow.

Claim #1:  Turley’s story asserts that BMO’s decision to stop outsourcing mortgages to mortgage brokers is good for customers “who are better served by bankers they know.”

Fact:  Suggesting that homeowners are better to rely on bankers instead of mortgage planners is quite a bold statement.  Many would politely (or not so politely) disagree with this generalization.

To compare the two, let’s first focus on the process of quoting rates.  At the branch, clients are typically offered “discounts” from posted rates.  When compared to banks’ exorbitant posted rates, these “discounts” look like a real deal.

Let’s look at 5-year fixed mortgage rates, for example.  Five-year terms are the most popular mortgages in Canada.  As of this writing, BMO and RBC are both running “special offers” of 6.13% on their 5-year fixed mortgages.  (How these can be considered “specials” is another conversation.)

Now let’s post the first challenge of the day.  If you have good credit and sufficient provable income, try calling any mortgage broker on this list.  Ask them what their best 5-year fixed rate is.  You’ll probably be hard pressed to find one that can’t beat 6.13% by at least 1/2% or more.

Occasionally banks will, in fact, offer decent limited-time specials.  The vast majority of the time, however, mortgage planners secure homeowners significantly better rates and privileges.  What’s more, you don’t have to twist a banker’s arm or go to negotiating school to get them.

Mortgage planners are also very good at doing what their name suggests:  plan mortgages.  This includes strategizing with you on the best way to choose products, save interest, submit and structure your application, and make pre-payments.  This is money-saving, advice-based service that bankers rarely offer, if ever.  BMO’s branch-based mortgage reps sure as heck won’t suggest a TD mortgage if TD has the better product for your needs.

Claim #2:  “Contracting out key business responsibilities [to brokers] comes at a price – for bank shareholders and customers. The subprime-mortgage debacle in the United States is a case in point.”

Fact:  U.S. lenders and originators did not qualify borrowers properly.  Plain and simple.  That is why the U.S. is in the mess it’s in. 

No informed observer would ever analogize the U.S. and Canadian mortgage broker markets–because they’re not comparable.  Canadian brokers are bound by totally different rules and underwriting standards.

Turley relents by noting American-style misdealings are “not evident in Canada.”  If that is the case (and it is), then why draw this parallel in the first place?  What evidence exists to prove that BMO’s and RBC’s model is possibly better for shareholders than TD’s, CIBC’s, Scotiabank’s, National Bank’s, etc. etc.? 

If brokers eventually capture 50% market share in mortgages, and BMO doesn’t have this important source of business (but its competitors do), we’d be shocked if BMO shareholders were really better served in the end.

Claim #3:  “The fundamental dilemma created by banks that outsource their responsibilities and abandon the “know your customer” principle remains–it sends a clear message that customer service isn’t the bank’s business.”

Fact:  There isn’t one single bank with a broker channel that doesn’t know their customers.  Whether borrowers go through a mortgage planner or a bank branch, they:

  • Fill out the same type of application
  • Provide and sign the same essential mortgage documents
  • Prove identity in the same rigorous manner
  • Undergo the same underwriting tests

Banks like TD and Scotiabank even require that broker clients go to the branch so they can meet them when they sign their documents.

Quite simply, TD, CIBC, Scotiabank, and National Bank would all take issue with Turley’s claim that they’re forgoing customer service.  In reality, the service that matters is the total service the client receives.  It could easily be argued that broker clients receive far more service because they’re serviced by both planners and the lender.

Client #4:  Confidence that borrowers will repay their mortgage is “an important check and balance in the financial system that mortgage brokers are not obliged to fulfill.”

Fact:  Canadian brokers do in fact underwrite their deals prior to submission, but here’s a more relevant point.  Banks have to approve borrowers for them to get a loan.  Whether customers come from the branch, come from a mortgage planner, or come from the mortgage-fairy, the underwriting standards are virtually the same.  As long as the bank underwrites a mortgage properly, this claim is irrelevant.

Claim #5:  Customers want long-term relationships and the Bank of Montreal wants to know its customers. Mortgage brokers don’t facilitate either.”

Fact:  Mortgage planners build long-term relationships that no bank can replicate.  Why?  Because planners have one job.  They owe nothing to shareholders.  They owe nothing to their branch manager.  They owe their existence only to the client.  As a result, they do things BMO and RBC reps rarely do.  They find ways to help clients avoid interest.  Moreover, they recommend the best lender for the client, not the only lender they have access to.

Claim #6:  “That our oldest bank, Bank of Montreal, had to relearn the value of “good old-fashioned customer service” says a great deal about how far banks strayed in the 1990s. 

Fact:  We had a client with a $2 million mortgage recently.  He was loyal to his bank for years and had hundreds of thousands of dollars on deposit.  The bank offered him a rate 1/2% above our quote, with far worse privileges to boot.  The bank’s offer would have cost him over $38,000 more in interest over five years.

While anecdotal, this is the type of “good old-fashioned customer service” many customers have come to expect from some banks.

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Side bar:  CIBC, which sports the best capital ratio of the top 25 banks in North America, is a proud supporter of mortgage brokers across Canada. CIBC spokesman Rob McLeod says CIBC values mortgage brokers and understands that broker business is an “important and fast growing” segment of the market
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  1. Thanks as always for the comments everyone.
    The foibles of Canadian banks have been well documented by the press and CIBC has had a healthy share of them.
    At the end of the day, BMO, CIBC, RBC, etc. are all respected institutions. Many of us just happen to see more value in CIBC’s, TD’s, Scotiabank’s, and National Bank’s business models because of the benefits brokers afford consumers.
    As a side note, it’s always difficult to write stories like this. It’s a battle between conveying honest opinions and disenchanting people we know and respect at banks like BMO and RBC. In the end however, with predispositions in check, the ultimate duty of this publication will always be to raise the level of debate and educate the consumer.
    All comments—whether in agreement or dissent–are welcome. If folks are kind enough to explain their positions sufficiently (for the benefit of the community), that is always appreciated.
    Enjoy the day!
    Rob

  2. We lost our faith in banks when we went into our branch to get our mortgage. At the time we asked our bank for a mortgage we had over $100000 with them. They offered us 6.39 % for a 5 year mortgage so we called a broker to see if we could do any better. We ended up getting 5.79 % for the same mortgage. The experience left a bitter taste in our mouth and it will likely be our last trip to the bank for a mortgage.

  3. I almost snorted milk out of my nose when I read that BMO is actively trying to build long-term customer relationships… and I say this as a BMO ‘customer’.
    ‘Customers’ rarely see a BMO employee face to face because they (like all other banks) actively penalize you if you go to a teller rather than use ATMs or online banking. And if you DO need to see a live person for some reason, god help you. You might be waiting in line for what seems like forever. Ever hit a line on old-age pension day? Yikes.
    There’s a basic agent-principal problem when you try to find a mortgage through a bank, and I’ve never appreciated businesses that force you to haggle to get the best price. That’s ok – they’re trying to maximize profits like any other business, but Turley-Ewart frankly seems divorced from reality.

  4. Hi Al,
    Enjoyed your milk visual very much. Thank you. :)
    It’s a funny and ironic point you make about banks actually wanting to see their customers less versus more. Canada’s banks would probably be thrilled to bits if everyone did all their banking over the internet. Although, that would make it kind of tough to “know your banker.”
    As for the “joys” of haggling over rates, I think people will someday revolt. Moreover, I think at least one big bank will see it coming and take action–perhaps moving to an “everyday low price” model–akin to what Saturn did in the car business in 1990.
    We’ll see……
    Cheers,
    Rob

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