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A Lender’s View of the World

Bank-teller What’s on the minds of mortgage lenders these days?

Four of them sounded off at CAAMP’s lender panel last Monday.

The panel featured:

Here’s what they had to say… (Our thoughts in italics.)

On Canada’s mortgage market:

  • Liquidity “was non-existent” for lenders a year ago, said John Webster, but it didn’t last as long as many predicted.
  • Lenders expected a 30-35% drop in mortgage originations this year. Stephen Smith says: “It hasn’t happened.”

    (This year definitely exceeded expectations, but partly at the expense of 2010 volume. Many people accelerated their home buying and refinancing to this year. After rates eventually do rise, volume could fall noticeably.)

  • “We were going down a slippery slope. Some of our products were getting pretty exotic.  Time saved us.” – Boris Bozic

On borrowers’ mindsets:

  • For today’s home buyers, “dollar amount doesn’t matter anymore,” says Bozic.  Instead they’re concerned about, “What is my carrying cost?”

On advising homeowners:

  • With the potential for rising rates, mortgage brokers should counsel borrowers to leave “a little wiggle room” with their debt ratios. – Wahl

On the risk of rates rising:

  • “Refinance risk is certainly nothing I am concerned with,” said Smith. He believes, in 5 years, people will be earning more money. Moreover, debt ratio standards and personal covenants are being vigorously enforced, Smith said.

On lender incentives to underwrite prudently:

  • “Canadian lenders retain risk after they underwrite a mortgage,” said Smith. Therefore, unlike in the U.S. before the crisis, Canadian lenders have incentive to lend wisely.
  • “Delinquencies have not been a big part of the industry.” – Webster

On the future of Canada’s broker industry:

  • Four banks in Australia have 94% market share with brokers, according to Bozic. When non-bank competitors disappeared, broker compensation fell 40%.
  • “We've seen a decrease in broker share because of the banks’ pricing policies.” – Bozic
  • “We're going to see bank sales channels compete directly on price….Banks will use the strength of their balance sheets to gain back market share.” – Smith
  • Webster disagreed. He said consumers want service when they need it, not during banks hours. "I am quite confident the broker channel will continue to gain market share."
  • Smith agreed that broker share would rise in time, saying, “Mortgage brokers provide a phenomenal value proposition…In 10 years we see the mortgage broker share up to 70%.”

    (After watching banks retaliate these past few quarters, that seems very optimistic.)

  • For younger people, mortgage brokers will be the "first call." – Smith

    (Industry stats bear this out. First-time homebuyers use brokers far more than the average homeowner. They have far less loyalty to banks and far more loyalty to quick service and “the best deal.”)

  • The “shelf life is expiring” for volume bonus, said Bozic. He thinks broker bonuses will soon be based on portfolio performance.

    (At the time he said it, it was almost like Bozic was throwing out a trial balloon on this point. The truth is, it wasn’t the first time we’ve heard that traditional volume bonuses are “dead.”)

On broker/lender relationships:

  • “Brokers can no longer do business with any lender they want,” said Wahl. His firm, Xceed, prefers to do business with the top 20% of brokers. 

    (How many times have we heard that lately. [Rhetorical question]  For you bottom 80%, thanks for coming out. Lenders are saying [indirectly]:  “Go find a super-agent to work under.”)

  • Scotia wants the top 20% too. Webster says: “I don't think you have to be all things to all people.”
  • To this, Bozic retorted: “It appears we're all after the same 750 brokers across the country. There is a subset of brokers who are being left out.” 

    (You can say that again…)

  • Brokers feel "direct access to lenders is a problem,” continued Bozic.

    (This problem can’t be understated.  With all the status programs and “preferred lists,” lenders are handicapping a broker’s main advantage: choice. New or lower volume brokers are forced to funnel deal volume through big agents, or suffer with subpar pricing and service.)

  • Smith drew loud applause when he said First National opens its doors to all brokers.  “Some of our best brokers started with us 3 years ago sending us one deal.”

    (God bless Stephen Smith. Lenders want efficiencies, and that’s understandable, but cutting off skilled brokers who don’t succumb to volume minimums is not in the industry’s long-term interests.)

  • “We want mortgage brokers who do what they say, return calls, never lie on an application, and check things out seven ways to Sunday. There are too many people who take an easy way out (and don't fully disclose things on apps).” – Wahl
  • Xceed, like more and more lenders, closely watches approval rates, funding ratios, and default ratios.

On capital sources:

  • In the future, “the Canada Mortgage Bond is not going to be as attractive as banks’ balance sheets as a source of mortgage funding.” – Smith
  • Nowadays, Canada’s capital markets are “awash with liquidity,” noted Webster. However, “for a lender going forward, you either need a balance sheet, or need to rent one."

(In other words, relying on traditional securitization avenues to raise funds (like the Canada Mortgage Bond market) may not provide lenders with cheap enough capital to compete. It will be interesting to see if non-deposit-taking lenders, like Street Capital, MyNext Mortgage [our in-house lender], and Merix, can diversify their funding sources.)

Moderator and financial expert, Michael Campbell, said: "The number one financial issue people have is with their mortgage."

If brokers are to fill that need successfully, lenders must open their doors a little wider—especially for low-volume brokers who send up good quality deals and don’t waste lender reps’ time.

The broker industry has heard a lot of dialog lately about what lenders want, and what lenders “need.”  Let’s also ensure we pay close attention to what clients and brokers need, because a successful industry depends on more than the top 750 brokers.