The past few years have brought rapid change to the mortgage industry. Lenders and products have come and gone, and the competition has become ferocious.
A group of four executives weighed in on these changes at CAAMP‘s recent mortgage conference.
The panel included…
Michael Beckette, President & CEO, Mortgage Alliance
Colin Dreyer – President & CEO, Verico
Gord Dahlen – EVP, Invis/Mortgage Intelligence
Grant Thomas – President, The Mortgage Group
Here’s what each had to say…
On lender relationships:
Michael Beckette led off by saying, “Lenders have come to us and told us that efficiencies and funding ratios are becoming very important.” He predicted that mortgage agents will increasingly “have to focus on approval ratios and quality of credit” because lenders are keen on improving returns and minimize underwriting expenses.
Beckette sees brokers and lenders creating more “strategic relationships” as well. He said these relationships will come with more and more “quid pro quos.”
Individual broker volumes are also becoming important. “Lenders don’t want to work with 20,000 brokers,” Beckette said. Certain lenders have therefore created, or are creating, volume minimums and volume-based pricing tiers.
Paying agents more for higher closing ratios makes sense. It helps the lender while not penalizing the client.
On the other hand, requiring volume minimums leads to potential outcomes that aren’t as positive.
If brokers demand volume minimums, certain agents will be incentivized to do the wrong thing. For example, agents may send applications to a particular lender primarily to maintain “status” with that lender. If a better product exists elsewhere, then the client suffers.
Alternatively, agents may pool their volume under one name in order to get better terms with a volume-based lender. This happens already to some extent and could become more common. In turn, this could lead to more “super agents” (individual agents with many sub-agents submitting deals in the lead agent’s name). Are lenders better served this way? We doubt it, but this is what lenders can expect if they force volume requirements on agents.
On brokers’ concerns:
According to Grant Thomas, the biggest concern of brokerage executives is their company’s balance sheet. In the old days, 60% of finders fees went to the “house.” Today that ratio is reversed. Now, 85% of revenue (or more) goes to the individual agent, Thomas said.
The commission business model has completely changed said Dreyer. “Some [brokerages] have turned to a minimum fee model,” he said. For example, agents can now find brokerages that charge just a flat desk fee of $500-$750 a month. That covers only a fraction of the costs of most large brokerage firms, so it’s something broker executives are concerned about. “We have to learn to adapt,” Dreyer said.
In addition, Beckette told the audience that “we must find a way to reduce administrative costs…Admin costs don’t add value to the business.”
With brokerages now charging small monthly desk fees, big brokerages will have to add a lot of value if they plan to take 10-15% of an agent’s commissions. The best value adds typically include:
proprietary lending products
ownership opportunities (equity)
product & underwriting support
If you’re an agent and your brokerage takes 10-15% of your income without offering one or more of the above, it may pay to evaluate other options.
On lenders’ influence over brokers:
Beckette appeared concerned that lenders hold most of the cards. “As brokers,” he said, “we have very little control over our business. Lenders control our business.” As a result, he said brokers “cannot talk to a lenders as an equal partner.” Instead, Beckette said, “We get dictated to [by lenders]” and “to a great extent we’re dismissed.”
On CMHC’s mortgage buyback plan:
“I’m not sure how well the reverse auction has worked for our industry,” said Thomas. “It may have worked better for the bank industry.”
On small lenders:
“Non-balance sheet lenders are struggling for survival,” Beckette said.
“Brokers’ value proposition is not rate, but choice…We have to work with the lenders we have to help them stay in business,” he said.
On broker market share:
Brokers had just 9% market share in 1999, said Dreyer. Now it’s upwards of 35%.
Thomas predicted that, “in 5 years, brokers will have another 12-13% penetration.” That could be derailed, however, if “there are roadblocks put in our way by institutions or government that don’t know the value we add.”
While overall market share may increase, the number of individual mortgage agents may decrease–for at least a while. Broker ranks are oversaturated and Gord Dahlen suggested that agents who don’t focus on improving their skills and product knowledge will be “eliminated.”
On where brokers need to focus next:
“The mortgage broker value proposition is stronger than it’s ever been,” said Dalen. “We have the winning formula [because] independent advice wins out every time.”
Panel moderator Michael Campbell, however, said, “Most consumers still don’t know what this industry is all about.” If people knew that brokers offer “more product choices and more tailor made” solutions, broker share would undoubtedly be higher.
Unlike the banks, mortgage brokers have not marketed themselves sufficiently. As a result, good mortgage planners are still one of the best kept secrets in personal finance.
Beckette agreed. He said, “The biggest thing that separates us from success is that “people don’t know what a mortgage broker does. People still think mortgage brokers charge fees.” (Most often they don’t)
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