One Insider’s Industry Outlook

future and past We had a somewhat sobering chat with a high-level brokerage executive last week.  He shared some candid opinions on the industry and we’ve conveyed them below (take them for what you will):

  • Market share for brokers could drop to 20-25% from roughly 30% today, for reasons that follow.
  • The number of brokers handing in their licenses lately has been well above normal.
  • Brokerage consolidation is looming because industry volume growth is stalling, broker compensation will shrink due to rate buydowns, and economies of scale will become essential.
  • Banks have extraordinary liquidity and will get increasingly competitive on rates. Big banks are not forced to rely heavily on the Canada Mortgage Bond market or high-cost deposits for capital, like many smaller lenders.
  • Banks are carrying huge balance sheets into a decelerating market.  More supply of cash and less demand for mortgages means tightening margins. 
  • Gaining market share has become a bank obsession.
  • Bank sales forces will continue to grow.

What does this mean? 

It means:

  • Competition will intensify in ways we haven’t yet envisioned
  • It’s a great time to be a mortgage shopper
  • It’s not a great time to be a brokerage firm owner
  • It’s not a great time to be a smaller lender without diversified funding sources
  • If you’re a broker, then selling something besides rate will become essential to survival, as will ensuring your customers make you their last stop, and not their branch.

Statistically, clients who contact a bank or broker are talking to at least one other banker or broker.  As technology makes it easier to shop around, people will increasingly do so. In turn, it may become common for customers to consult three or more sources before settling on one originator.

Fortunately, brokers continue to be differentiated by the choice and independent advice they provide to consumers.  The broker industry will need to heavily leverage those characteristics going forward.

  1. A broker should never sell rate. Anyone can give someone a good rate; a broker needs to sell a relationship more than anything.

  2. Indeed – my broker found me not just an excellent rate but also said that If I should wish to switch my mortgage provider before the term is over that he would in fact be eating the cost of the switch in penalties for me as long as I went back to him. That was a big plus in addition to him actually educating me about what influences the variable and fixed rates. This blog has definately supported everything he had said. And my mortars broker will have me for repeat customer.

  3. As an educated consumer, you can kiss my business good bye if you are not “selling rate”. The “relationship” only develops if it is good business. I couldn’t care less how much of a “relationship” we have if I can beat your rate (and mortgage terms obviously) else where. Mortgages are about money in the end.

  4. Mortgages ARE about money. That’s why educated consumers are concerned more with the total cost of financing than with the contract interest rate.

  5. Agreed. Obviously the “educated” consumer above is not so educated after all. A broker also caters to financing deals that banks won’t even touch, and that doesn’t mean only the sub-prime segment.

  6. I agree with the individual in question but let’s be real, it’s not a new problem. We can capitalize on the fact that bank originators are not professionals and are merely order takers for consumers who know little about mortgages and are only focused on the rate.
    Brokers must ensure they provide a service based on building relationships and not acting as order takers. Unfortunately, some brokerages have already taken the step to ruin the industry in order to obtain short term gains. Thinking like this would wreak havoc on everyone, including consumers.
    Lest we forget, if brokers weren’t around banks would be charging everyone posted rates.

  7. You obviously cannot read because I said “and mortgage terms obviously”. I never said the lowest rate is the only thing that is important but it is a necessary requirement WITHIN OBVIOUS reason (ie. a .05% discount may not be worth the inability to break the mortgage). My point was that all this talk about “relationships” is exactly that — “talk”. I wouldn’t buy a GIC for .5% less from one bank over another one just because I have a relationship — that is garbage.

  8. Lior, get off your high horse. You work in a commodity market and the best rate is the answer for most consumers with good credit. The advice you give is not rocket science and most of it can be had for free on the internet.

  9. Lots of slamming back and forth here, does not lend itself to good conversation and perhaps needs more moderation? Just an observation.
    Further to the article – yes, Banks are on a hiring spree right now. They are bulking up staff, which in turn will make things tight out there as they are also doing very focused marketing.
    We will all be fighting for the same piece of the pie, and it is not so much relationships to focus on, but on education.

  10. Consumer,
    You feel strongly that you know enough about mortgage terms to go it on your own. And that’s terrific. I would not argue that you don’t, because you know you best.
    However, I would submit that you are in the small minority of consumers. That being someone who can:
    * Determine the optimal mortgage term mathematically
    * Determine the optimal mortgage term from a budgetary and risk standpoint
    * Quantify the risk of choosing the wrong term
    * Find the lowest rate for the exact product that fits you best
    * Know all the refinance, penalty, pre-payment and other restrictions of that product
    * Understand how the flexibility of a particular mortgage can help you save more money over its term than the next best alternative
    * Know the guidelines of every product with respect to your circumstances, and what you have to do to qualify
    * Know how to save the most fees on closing
    * Know how to leverage your equity and free cash flow to its greatest potential
    This is the guidance that a mortgage professional imparts. While the above might not apply in your case, advocacy of this sort adds considerable value for millions of other Canadians.
    I’m sure you’d be the first to agree that borrowers are not all in the same boat. Perhaps you’ll also concede that a skilled mortgage advisor saves people their most precious asset: time. After all, anyone can learn anything on their own given enough time.
    At the end of the day, hopefully we can at least agree that having a trusting long-term relationship with someone who you like, who truly cares about your best interests, and who strives to save you money, is worth a few basis points.
    If not, I wish you every success in your mortgage hunt.
    Cheers,
    Rob

  11. Brokers and agents may be a handing in their licenses in record numbers but there are alot of them who don’t do much business. I actually see this as a good thing. Get rid or the part time agents who make us all look bad and we will actually grow the broker channel.

  12. Banks, at least in our area seem to have trouble finding people to hire that can actually put a mortgage together. They have the big producers. But same as the brokers, 80-90% do 80-90% of the business, the rest just screw it up.

  13. Hi Mike,
    Thanks for the note.
    With respect to the part-timers who are not reasonably competant, I’m in full agreement with you.
    Interestingly, we’ve heard estimates that as much as 5% of the loss in broker share (from the peak) is due to part-timers getting out of the business.
    Cheers,
    Rob

  14. having been in the business for over 8 years, i agree that relationship, educating consumers etc. is very important and I pride myself in knowing my clients and showing real interest in them beyond “here’s the deal i can give you!”…that being said, way too many brokers stop here and think that this is sufficient or at least should be the main focus, that is bogus! We are privileged to make good money in our industry and sometimes start feeling entitled (many real estate agents suffer from the same disease!) to how much we should make on a deal. If i have a great 5 year deal paying me 50bps and i don’t disclose it to the clients but keep talking about relationship, trust and the rest…sounds to me like a bad marriage! You can’t have your cake and eat it.

  15. In reply to Jeremy’s comment….
    Which broker firm is offering to pay the penalties on my mortgage if I switch before the term is done as long as I use the same broker? Sounds like a great deal….is there a catch?

  16. Hmm, seems hard to believe that they would eat 15K in IRD penalties to make a $2500 commission. I know some broker/banks will pay the outgoing lenders discharge fee, but thats only a few hundred bucks..

  17. Stan:
    Mortgage penalties are a big misconception. No broker or brokerage would pay the penalty on behalf of their clients. Even the banks with their deep pockets would never cover a pre-payment penalty to win over the business.
    Look over some of the ads in the newspaper. CIBC and BMO have been advertising their “no-fee” switches rather heavily over the past few months. You’ll see in the fine print section:
    “Transferring your mortgage for free *excludes* any existing lender charges”
    “Existing lender charges” include pre-payment penalties and in some cases even the discharge fee (about $300).
    As Blair indicated, some lenders would actually pay the discharge fee as long as it’s a straight switch and no additional funds are added. But the penalty owed to your current lender remains your responsibility regardless of the amount. Lenders such as ING allow you to roll up to $5,000 of your current pre-payment penalty into the new mortgage subject to certain conditions.

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