A Close Look At The Broker Biz – Part II

Future-of-Canadian-Mortgage-BrokersIn 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.]

Market-Adoption-Online-Mortgages

(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.]
  1. Well done! Thank you for spending the time. Service Fee? Will never happen! Only if you are in the alternative lending business – i.e. sub-prime situations. The bulk of the borrowers only cares about 2 things: Whether they get the money and what the pricing is. They don’t really care nor understand advice. Remember, one out of 4 people in Canada are functioning illiterates. They go to the bank for BS for free.

  2. “They don’t really care nor understand advice.”
    What an insulting generalization. If you don’t value helping people make the right decisions, you’re in the wrong business.

  3. I agree with Tim. I go to a broker for more than just rate-shopping: I go to be well informed about the variety of different products that are out there. Now, this website gets me most of the way there, but local advice is still valuable.
    If you’re not able to help clients better understand their needs, options and then maybe even tailor an offering to them (by sourcing different parts of the mortgage from different vendors, for example), then you’re in the wrong business.

  4. Perhaps its controversial for me to say and possibly not directly linked to this article but no one has mentioned the stifling mortgage restrictions placed by the “government guidelines” (guideline being a loose word) which have lenders chomping at the bit for a larger share of the 5 year closed market.
    It allows them a “quick” turnover when the beacon score is not the desired level allowing them to concentrate on more desirable business, which is not always the case as the Beacon Score was originally designed as a very good indicator,now being used as a red or green stoplight .. like at the customs in Mexico. Ha ha, I’m not telling you anything you don’t already know Where has common sense lending gone ( I feel like I am dating myself lol)
    Guidelines that see clients with excellent credit and a low beacon score refused for funds. Yet someone with a prior bankruptcy and 2 paid collections have a beacon score of 630 or higher. But sadly still refused. Seems no one can win.
    What of those in a one time life important situation where credit is escalated due to necessity but plummets the beacon score?
    2 Months delay to increase the score can be life impacting for many people.
    How is a broker is supposed to “educate” clients on their beacon score as per one MBABC article a few years ago, when in reality, we are not supposed to discuss the bureau with the client at all? Ever asked your local credit union or financial institute what your score is? They wont tell you…( or they shouldn’t) as they are not supposed to..
    Self Employed individuals who paid astronomical fees to CMHC during their 3 year Simplified run.. now to be denied a refinance or the privilege of paying the top up fee? Now of course without warning Canadians must produce proof of income as per pre 2007, Yet most people always and will continue to avail themselves to those deductions that are available to large corporations. If the Government wants small business to pay more taxes why not change the tax laws?. Because they would have to change it for large corporations too. Small Business is a huge industry in Canada and the people wont know the extent of that so called small change in policy until they are informed..by a broker or a lender… that now they have to look to another insurer if they want to add $75k( and repay the high insurance premium) to the existing insured mortgage as the program they qualified under has been canceled. Or perhaps we can arrange some high interest second mortgage financing for them. This however is good for the secondary market!
    For brokers to be told( by CMHC directly) that “the program( CMHC Simplified) was never set up to be used in the fashion it was” Or “The program was instituted to help those businesses new and getting going? So you can be untested yet qualify .. but if you are truly tested by many years in the business with excellent credit you don’t qualify? Where did it state that in the 3 years they allowed it? The 3 years they made billions of dollars in insurance premiums that now certainly are not ( and never have been ) refundable.
    Historically people “trust their banks” It is an acceptable practice to many people in this current age. Still I agree the times they are changing and the internet will have a large impact on future market share, simply due to convenience and the expanding education to our upcoming generation. You will probably see an increase in fraud .. ahh the ups and downs of new business practices, and then more laws on internet protocol.. but such is life.
    Thanks for listening to my rantings but I truly believe all of this has an impact on our overall “market share”
    Lorilee

  5. People usually have only a vague idea which term to select based on something they read online or in the paper. Good advice on the right term is worth the price of admission, which happens to be free in the case of brokers.

  6. Lorilee, is it written that brokers and bankers are not to reveal beacon scores or discuss credit reports with their clients? What would be the purpose of such a restriction? I wonder if that is one of those falsehoods perpetuated by ignorance.

  7. It’s not a falsehood. Equifax prohibits disclosure of credit scores by brokers and bankers. Equifax wants people to buy their own reports.

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