Lender Business Opportunity

Lenders with “status” programs give preferential treatment to mortgage agents who commit to certain volume minimums or efficiency ratios. 

Status programs are increasingly becoming hurdles that mortgage agents have to jump in order to:

a)  Get the best rates; and/or,

b)  Get the best compensation; or,

c)  Do business with that lender at all.

People with considerable experience in our industry have told us that this trend will undoubtedly incentivize agents to do business with fewer lenders.  There is only so much volume to go around and agents who spread their volume among too many lenders may find themselves without status at any lender.

This raises several possible implications.  For one, brokers could someday become only marginally better than bank reps at shopping the market.  In other words, a preponderance of status programs may drive agents to push products from just a handful of lenders.

Another possible result is that agents may be forced to route their volume through “superagents.” 

Superagents aggregate volume from multiple sub-agents and maintain status with one or more key lenders.  They are often employed by an agent’s brokerage house. 

More brokerages may start encouraging their sub-agents to submit deals through superagents to gain status pricing.  That will possibly come at a cost to the sub-agent (a percentage of the agent’s commission for example).  This has been going on for a while at certain brokerages.

In any event, it’s not inconceivable that lenders may someday be left with very few status brokers apart from superagents and high-volume broker “teams.” Status programs are simply not conducive to generating future business from small or newer agents. Most younger agents, for example, don’t want to allocate volume to lenders unless they can get the most competitive rates and terms from the outset.

lender-opportunity That leads to the next by-product of status programs: opportunity. An opportunity may someday exist for a lender to increase efficiency, cut frills, and deliver exceptional pricing to independent agents who have little status elsewhere. 

A lender who catered to underserved independents like this would probably cultivate loyalty and build a large agent-base (which would likely include some of our industry’s future volume leaders).

Of course, this lender would need to operate in a very lean and unique manner in order to be profitable.  Among other things, it might choose to:

  • Brand itself as the lender for independent-minded agents
  • Operate with an Internet-only business model
  • Simplify products and underwriting guidelines
  • Feature scaled commission tiers or cost-effective buydowns so brokers could offer rates competitive with status brokers, in lieu of full commission.
  • Charge fees to offset:
    • Costly cancellations
    • Declines due to obvious non-qualification
    • Pre-approvals
  • Replace Development Managers with broker call centres and/or improved online information portals
  • Implement automated document management systems like Exchange 2.0 or MCAP’s Professor Upload.
  • Offer agents tools to drive new business like mortgage planning software and online sales training
  • Claw back commissions for termination or defaults in the first year.
  • Make brokers become “certified” in the lender’s products (perhaps through testing) to reduce support demands from agents.

Thus far, lenders’ status programs have operated under the 80/20 philosophy. (In other words, that 80% of the business is done by 20% of the agents).  As time goes on, opportunity may exist in catering to agents in the 80% category.

An analogy in the stock trading business would be E*Trade.  In 1996, while leading brokers were demanding monthly volume or account minimums for the best commissions, E*Trade automated the business and went after all traders with rock-bottom commissions.  They became the #1 Internet broker in the world as a result. 

A similar opportunity could be waiting in the mortgage industry.

  1. This is nothing new, many brokers have been using preferred lenders and only being using a select few for years.
    Brokers should be provincially regulated and controlled like the car insurance business in B.C., anyone in this industry knows that Imba, Caamp formerly Cimbl do not actually do anything but PR for the industry, it’s time to wake up people.

  2. Hi Karma,
    A lot of brokers do use a few lenders for most of their business. Two things are worth noting, however:
    1) This definitely does not apply to all brokers
    2) Often there are very legitimate reasons for using a small number of preferred lenders.
    The questions that matter are: a) Does the client benefit from the broker/lender relationship; and b) Is the client aware of it.
    Disclosure is now much more open in many provinces. Thanks to this and continued consumer education, more checks and balances are being added to the system to help ensure preferred lender relationships are in the client’s best interests.
    (By the way, brokers are provincially regulated in most cases).
    I would have to strongly disagree with your statements on the various industry groups. That topic is beyond the scope of this article, however.
    Rob

  3. Hi Marcus, Thanks for the note. Risk is inherent in business but one model that’s proven to work best in commodity businesses is being a low-cost producer. Lots of lenders are trying to compete with subpar rates and “great service.” That’s not long-term viable in our view because “service” is a watered-down claim”. You need something else. Unique products can be a good substitute for competitive rates, but not service.
    Just our take. Exceptions exist for every rule of course…
    Rob

  4. As I re-read the original article, one major thing jumped out at me. “Simplify products and underwriting guidelines”, how would a lender compete in the market place without products that are in the same market spaces that are offerd now? Ok, we can discuss that later. The “underwriting guidelines…” part is what drives me around the bend. Most of us in the industry already know that a lot of lenders are basing their underwriting guidelines on THE INSURERS recommendations. The opportunity to simplify it more does not exist, or it does if the lender doesn’t intend to insure the deal, which of course means they take on ALL of the risk, and thus it is smart prudent business to use detailed underwriting. Have we forgotten what just happened in the USA that had an element of minimal underwriting on billions of dollars of mortgages?
    Ok, maybe I am ranting, but Rob, I am sure you can appreciate where I come from. Every time a new lender comes on to the street the thought of being “independant broker specialists” is considered, but the numbers do not play out to make it sustainable. Unfortunately in Canada, you gotta deal with the “Superbrokers”, or it’s not worth being in the broker channel. Lenders are not a service, they are in existance to make money! I do not have a problem with that all, as theses lenders are also providing jobs for Canadians as well.
    Just my 2 cents, without interest…lol.

  5. Hey Mark,
    Thanks for the 2 cents, and we appreciate you giving us a break on the interest.
    There are lots of ways to simplify guidelines actually. It can be as simple as posting easy-to-navigate policies on the lender’s website. I’m amazed how some big lenders have such poor documentation, and/or don’t post it in an easy-to-use online interface. That’s a problem because a lot of inefficiency results from brokers not knowing guidelines, and not being able to easily answer questions about a deal before submission.
    You could also simplify guidelines with the creation of an “elite” product line–designed for people with the best credit, best ratios, and fully provable income. Guidelines for this market would be as simple as can be because risk factors are minimized on an owner-occupied deal with a 720 Beacon, 20% TDS, and T4 income.
    Regarding the guidelines required by insurers, “Simplify” doesn’t have to mean “eliminate.” Mind you, conventional balance sheet lenders could indeed “eliminate” superfluous policies if they focused on a specific type of clientele. The low-risk clients discussed here would not present the risks you refer to in the US.
    In any event, there’s lots of inefficiencies in this business (not just with guidelines), and these lead to higher rates for low-risk borrowers. Numerous successful companies have catered to the masses and remained low-cost producers through automation and specialization. Our view is that one or more lenders could profit nicely with this model as well.
    Happy candy day…
    Rob

Your email address will not be published. Required fields are marked *

More Stories
millennials struggle with homeownership
High Home Prices a Growing Obstacle for First-Time Buyers
Copy link