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.

  1. Honest question: why is it advantageous for lenders to only deal with the top X% of brokers? Does it add to efficiencies somehow?
    Or is it perhaps designed as an incentive for brokers to funnel clients towards certain lenders?
    Have no idea – just wondering.
    Al R

  2. Typically, funding ratios are better for the top 20% and there is a belief that as a broker increases his/her funded volume with a lender he/she will take a longer term view of the relationship and be less likely to submit suspect deals or withold info just to get the deal done.

  3. Al R
    Lenders claim that brokers who fund high volume are better for efficiency. The truth is, the efficiency gains are marginal.
    The real reason lenders try to make brokers commit to volume minimums is to pad their bottom line. Lenders are 100% absolutely NOT doing this for the clients benefit. From my perspective, they could care less about the impact of these status programs on clients. I was at this lender panel myself and not once do I recall hearing any discussion of what is best for the client.
    Lenders current “preferred broker” programs are doing more longterm damage than good. In 10 years there will be 100 massive broker teams left in Canada sending volume to a handful of lenders. Independent brokers will no longer be able to survive and the Scotias, Firstlines, and MCAPs, have themselves to blame.
    John

  4. John, with all due respect, in my 10 years in the lending business the numbers just don’t bear that out. Funding ratios vary significantly and in a low spread business they makes a real difference to the bottom line.
    The broker industry has low barriers to entry and there is a big difference between new operators and experienced, successful entrepreneurs. I actually don’t think cutting off a huge swath of brokers in the way many lenders are is a smart move but it is being done to lower operating costs first and foremost.

  5. Thanks for the perspectives. My follow up question would be whether this would have any positive impact on lenders’ bottom lines if brokers were forced to funnel approvals through the “super-agents” that Rob referred to…
    In that situation, they’d just be relying on the super-agents to filter deals on their behalf. Seems like it would add another layer to the process and drive up costs.
    If certain brokers are submitting dodgy applications on a regular basis or have very poor funding ratios, then by all means cut them off. But it just seems silly to refuse business (i.e. from a new broker) before any of these problems occur.
    Al R

  6. I feel that the lenders should look at the quality instead of quantity of business received from the mortgage brokers. Some lenders like ING when insisting on brokers to commit at least on 4-5 deals a month tend to forget that as Mortgage Brokers our primary obligation is to look after ours client’s best interest and not that of the lenders . We would be doing great injustice to our clients by not matching them with the right lender and sending all the deals to one or two lenders – just to fulfill the monthly commitments agreed upon. I encourage all Agents in our office to send more deals to lenders like ResMor Trust, First National,Home Trust , Bridgewater Bank who support the broker network and are easy to deal with and avoid lenders who are insisting on minimum volume requirements.
    Rajesh Kothari
    rajesh_kothari@centum.ca
    http://www.mortgageswithraj.ca

  7. No one looks ahead in this industry.
    Lenders want broker loyalty but they forget that brokers ENTIRE reason for existance is to compare mortgages objectively for customers.
    If people don’t think brokers are doing that they won’t use them. The lenders will be no better off for excluding small brokers.

  8. Hi Ode,
    Thanks for the comment. It’s worth noting that some lenders do embrace the small guy. Most of the lenders who don’t offer status pricing discounts fall into this group. There are also lenders that offer advanced status to brokers who commit to certain volumes (but that doesn’t address the objectivity factor).
    There is no question that most brokers are being pulled in two directions these days. While many don’t think that’s healthy for the industry long-term, it’s unlikely that lenders will be pulling their status programs anytime soon.
    Perhaps working under super-agents (with wholesale access to many top lenders) will level the playing field for smaller brokers. We’ll have to see…
    Rob

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