In this second take of Deloitte’s mortgage broker report, we look deep into the crystal ball to see how Deloitte’s findings on our industry will play out.

The theme is change. More big changes are coming and it won’t take a decade. It could take just a few years.

Here are a sampling of quotes from Deloitte (our views in [italics]):

• “A branch originated mortgage is the most profitable…broker and MMSF (mobile mortgage sales force) mortgages are less profitable but broadly comparable to each other.”
  [Deloitte predicts that branch mortgage origination will decline. MMSFs, brokers, and online providers will take up the slack. To improve margins on broker business, lenders will attempt to cross-sell other financial products through brokers. Cross-selling two or more products can boost mortgage profitability over 20%, says Deloitte.]

• “The scenario anticipated five years ago where mortgage brokers were expected to represent the majority of origination volume is unlikely. The channel will continue to stabilize, settling at approximately one-third of mortgage origination dollar volume.”
  [Brokers are a threat to banks and banks are doing everything in their power to keep broker share under 40%. In reality though, 1/3 is a very healthy number in a bank-dominated industry.]
• “Remote options such as online and telephone banking have also emerged as alternative channels for obtaining mortgages. Although in the early stages of adoption, they signify an important trend for individuals interested in self-service.”
  [In the seventies, few stock brokers envisioned a day when people wouldn’t need face-to-face relationships to complete a stock trade. A decade later, online trading changed the industry. Online “self-serve” mortgage models will take time to unfold, but unfold they will. When they do, they could have a significant cost advantage to full-service models because of the economies permitted by online interfaces. Online mortgage models have barely even begun to attract “Innovators” at this point. “Innovators” refers to very early adopters of new technology, as coined by Everett Rogers, a researcher in the 1960’s. Innovators are a small financially secure portion of the population. They are willing to take risks to try technology that is uniquely advantageous, simple, and accessible. As more early adopters gravitate to low-cost online models, these models could eventually go viral and lead to industry consolidation.]

(This chart shows the typical market adoption progression for technological advances. Click to enlarge. Chart courtesy of Everett M. Rogers, Diffusion of Innovations via Wikimedia)

 

• “Escalating trailers and commission claw backs are common industry practice (in Australia).”
  [Expect the same trend in Canada over the long-term. Brokers may rebel against commission clawbacks, however, unless lenders offer trailers or some other perk to offset the pain.]
• “Brokers (in Australia) are considering charging clients a service fee.”
  [There are few words that draw more ire in Canada than “fee.” Yet financial advisors and other professionals are commonly fee-based and successful at it. At some point we’ll see a small number of mortgage advisors offering fee-based consulting for objective advice with no strings attached. Whether they gain any foothold is hard to say.]
• “Brokers will need to evolve from ‘rate shoppers’ to advisors offering value-added benefits to succeed in a hypercompetitive marketplace.”
  [Without exception, all of the best and most successful brokers already do this. Deloitte says, “The ‘broker as advisor’ value proposition will be the most successful approach for this channel.” That is dead on. Every mobile mortgage rep has the power of branding behind them, and they’re now armed to compete aggressively on rates. Their weaknesses are independent advice and mortgage choice. Brokers must target these weaknesses to prosper long-term.]
• Mobile sales reps are “challenging” the perception that brokers have the best rates.
  [You can say that again. Nevertheless, lenders have different costs and funding requirements. At any given time there will be lenders with promotions for specific terms/products that the banks cannot touch.]
• “High instances of ‘rate shopping’” has lenders focusing on funding ratios.
  [People have rate shopped for ages, but the industry could be in for a surprise in coming years. Customers will make rate aggregator websites the first stop on their mortgage journey. Bank reps and brokers who can’t convey value-added service, and are 10+ bps off the market, will drop like flies from the “A” lending game.]
• “Auto-adjudication…increases efficiency and can improve funding ratios.”
  [Given enough time, technology will allow auto-approvals on AAA-quality applications. It’s already happening in a limited way for pre-approvals. Auto-adjudications will cut underwriting costs and make the AAA segment all the more competitive. Non-prime underwriting, document reviews, instructions/funding, and other functions that require eyeballs will continue to be labour intensive.]