A Close Look At The Broker Biz – Deloitte Report

Deloitte “The future for the mortgage broker channel in Canada remains positive,” says Deloitte, an international consulting firm.

That’s one of dozens of conclusions in this report released Wednesday.

Deloitte’s paper included a slew of data. Here are some key takeaways (our comments in [italics]):

  • 38%: Broker market share in 2009.
    [CAAMP says it’s now 25%. Among other factors, the decline is a direct result of two things: 1) banks putting more reps on the street; and, 2) banks finally realizing that low rates and market share are correlated.]
  • 50%: Approximate share of broker business sent to Scotiabank, FirstLine, and TD
    [Big balance sheets let banks offer products, incentives and rates that brokers sometimes don’t get elsewhere. That, however, does not mean non-bank lenders are inferior. Quite the opposite. Non-banks provide valuable alternatives to brokers fighting bank retention strategies (TD’s for example). The competitiveness of non-banks will grow further as cheaper sources of capital become available to monolines.]
  • 2/3: Share of brokers working for the top five brokerage firms.
    [Consolidation of brokerage firms seems inevitable with shrinking volumes, shrinking finder’s fees, lender volume minimums, volume-based pricing, demand by brokers for higher payouts, and intense competition for top brokers. Deloitte says “Boutique brokerages are being pushed into larger broker houses” for competitive reasons. Scale economics will take on heightened importance and strengthen this trend. Money talks, and volume is money.] 
  • 2800: Number of bank mobile mortgage reps.
    [Everyone knows this number will rise, putting more pressure on brokers. Brokers retain some advantages, however. The most important are objectivity and choice (because brokers know and sell multiple lender’s products). Hopefully lenders don’t get carried away with “preferred broker” lists and destroy this edge. Lenders who use top 100 lists and the like, are so excited by the “efficiencies” they create that they’re completely blinded to the effects these policies could have on the industry long-term. Unless things change, volume pooling and submission desks could become essential for brokers to compete with bank reps for “A” business.]
  • 88%: Percentage of customers that stay with their lender at renewal.
    [This number is roughly 74% for broker-originated business suggests Deloitte. Where that number goes from here is a tough call. Lenders will invest more in client retention strategies because renewal business is a low-cost revenue stream (Deloitte’s graph below illustrates this nicely). Over time however, customers will increasingly scout out better deals online, which could make it tougher to retain them.]

 

Mortgage-Profitability

  • $4.7 billion: The “funding gap” in non-prime lending “over the next five years” caused by diminished liquidity and less competition.
    [This gap will close with the return of non-prime securitization (which disappeared after 2007) and as more subprime lenders achieve bank status.]
  • 55-65%: The required funding ratio for lenders to be efficient, according to Deloitte.
    [The Internet lends itself to rate shopping. Lenders need to understand this because cancellation ratios could rise as mortgage shoppers become more net-savvy. Clients are loyal only to a point. When an obviously better rate/product comes along elsewhere, and the originator can’t match it, they risk losing the deal. And no lender efficiency policy is going to thwart that.]

We’ll follow up with Part II of this story shortly…

  1. I third that. You really do a banner job at analyzing industry developments. My personal feeling is that brokers will probably do a lot of adapting in the next few years. We’ll need to continually improve our exceptional value proposition and get even better at communicating it. MK

  2. Lovely, lovely, lovely. In the end brokers will have to adapt. In my opinion, those who only sell rates will be squashed as banks take notes from brokers and emphasize rates and service. The only thing that would separate a truly independent broker from a bank employee is impartiality (which no bank employee can achieve) and providing applicants maximum flexibility (which again most banks can’t achieve given the fact they’re risk averse). Ultimately you have to create added value and the brokerage industry as a whole have done a poor job emphasizing that. Many brokers, by their own choosing, have become a commodity for rates. It’s the absolutely wrong direction.

  3. Hi Lior and Mike K.,
    Couldn’t agree more with your comments about communicating broker value on a wide scale. CAAMP does this but its budget is somewhat limited. Successful consumer awareness on a national scale takes a huge ongoing investment (millions versus hundreds of thousands) and/or creative viral/guerrilla marketing.
    Brokerages themselves can also be important contributors to the dialog with consumers. Dominion Lending and Mortgage Alliance are two great examples of brokerage firms that are investing significant media dollars in educational campaigns.
    Cheers,
    Rob

  4. True, but reality is that the consumers really do not care. To them, service means: a) they get the money, & b) they get the best rate. Whether we like it or not, triple A residential mortgage business is a commodity business. That’s why I shy away from it. But for those of us who needs volume, what choice do we have? Educate all you want. The public does not care until something goes wrong. How often is that?

  5. Once a client has used a mortgage broker, one who works for them and is knowledgeable in the industry they realize the value added and tend to stick with the broker side of the mortgage business. It is a matter of mortgage brokers educating the public on what they do for them. Often clients think that brokers charge for their services and don’t understand the merits in dealing with brokers. Once they are educated in the merits of dealing with brokers they are on board and rarely go directly back to the banks. DLC has hired DON CHERRY as their spokes person. Ads start airing tonight during the hockey game. Will be interesting to see the feedback!

  6. I think consumers do care. They want to be warned about pitfalls, compare offers, and know exactly why a three year variable is better than a five year fixed. Education is always worth something when it cuts the cost of getting a mortgage.

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