We recently chatted with Andrew Moor on a variety of issues that included the subprime market, competition for deposits, and prospects for mortgage brokers.
Andrew is President and CEO of Equitable Trust, a federally regulated lender in the alternative mortgage market since 1970. Prior to joining Equitable, Andrew was President and CEO of Invis Inc., one of Canada’s largest mortgage brokerages, as well as Chairman of the Canadian Association of Accredited Mortgage Professionals (CAAMP).
Andrew’s diverse experience and industry prominence always make his viewpoints noteworthy.
Here are his perspectives…
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On the size and growth potential of Canada’s non-prime mortgage market:
(Non-prime mortgages accounted for up to 5-7% of Canada’s mortgage market at one point, but that proportion has dropped since the credit crisis. Equitable Trust is a major player in the non-prime space.)
Andrew: The share of non-prime lending is determined by a couple of factors: the credit policies of the mortgage insurers and “A” lenders; and the degree to which non-prime lenders are prepared to lend beyond the credit criteria of the A players. Changing career paths with more contract and BFS individuals in Canadian society is creating more opportunity for high quality non-prime lending, but, if this market ever made up significantly more than 5% of the total it would likely demonstrate some dangerously imprudent lending practices on the part of the non-prime lending community. A stable share of around 5% of the market for non-prime feels about right from my experience—it is still a huge market.
On the opportunities and challenges facing today’s mortgage brokers:
Andrew: Opportunity lies everywhere for brokers. There is still not enough understanding of what brokers can do for their customers, and this message needs to continue to be communicated. Brokers are getting more sophisticated and organizations like CAAMP and websites like yours whose messages are then getting picked up by the press are dramatically improving the quality of the dialogue on mortgage issues.
I do have a strong view that brokers should focus on mortgages (and choose either residential or commercial mortgages but don’t try to do both). There is no big win to be had on selling complementary products and it only confuses the broker’s position in the market. A broker that can be really really good at offering mortgage advice will never be short of customers.
On whether broker market share will make new highs, or be thwarted by banks:
Andrew: I am optimistic for the broker channel over the longer term and new highs in market share will likely be made. The banks have strong capabilities to build their distribution with their brands and through the branches and mobile sales forces. But, just when things are going well, they have also shown a tendency to overplay this strength. The entrepreneurial talent on the broker side of the market seems like a strong match for this more institutional approach.
On the difficulty of generating deposits for lending purposes:
Andrew: It absolutely has not been a challenge. Deposit brokers provide a really good source of deposit funding. Much like in the mortgage market, deposit brokers can access better GIC investments for their clients than is typically available by walking into a branch and trust companies like Equitable can access these deposits. I expect this to continue to be the case. Today GIC’s look like a good investment with a 5-year GIC offering around 2.90% compared to 1.90% on the 5-year Government of Canada bond—a good yield pick-up for the same underlying credit quality.
On the effect of new competition in the deposit market:
(Some have speculated that new online competitors, and new banks [e.g. Walmart Bank], and more aggressive [possibly nationalized] credit unions could drive up deposit rates over time.)
Andrew: It’s possible that new entrants could drive up deposit rates, but at least in the short/medium term this is unlikely to be a significant issue. There are plenty of competitors for deposits already including all the big banks, ING, HSBC, CWB and companies like ICICI and State Bank of India. It does not seem very likely that OSFI will license many (or any) new entrants as deposit taking institutions because of very reasonable questions of viability and stability of new entrants operating at below the necessary scale to deal with the cost of operating as a regulated entity in a prudent manner. Given this dynamic, it does not seem that new entrants will really drive up the spreads over benchmark Government of Canada bonds in a significant way.
On the impact that rising deposit rates could have in the fiercely competitive prime mortgage rate market:
Andrew: It really seems like the CMB is setting the mortgage spread in the prime lending side and that seems to be stable. The big banks focused on prime mortgage lending seem to have strategies more focused on cross-selling other products like everyday banking services. They are probably a little less sensitive at the margin to spreads on mortgages compared to brokered deposit rates.
On whether a replacement for asset-backed commercial paper (ABCP) will come along anytime soon:
(ABCP was formerly a vital source of funds for subprime mortgages. The ABCP market was then wiped out in 2007 at the beginning of the credit crisis.)
Andrew: Certainly, if a substitute for ABCP does emerge it will look very different. The fundamental problem with the market was that term mortgages (say 3 or 5 years) were being funded with short term paper (30 or 90 days). This mismatch is a huge problem if confidence falls in the quality of the assets. The nature of the non-prime market is that it is difficult to create homogenized pools that investors can have confidence in. Certainly a more natural home for this market is within a deposit taking institution where the loans can be looked after using more of a stewardship mentality and not an “originate to sell” model. I am pretty certain that deposit takers (banks and trust companies) will be the dominant players in these markets for at least the next decade.
On Equitable’s strategic plan for the next two years and where growth opportunities exist:
Andrew: Our strategic plan is really simple: step up and provide truly great service to our broker customers in both the residential and commercial markets. In the non-prime part of the market the most value we can add is to make sure our underwriters and BDO’s are accessible to our brokers to talk through a deal and see what we can do. We have deliberately overstaffed with underwriters to make sure brokers can get hold of someone and get answers to their questions. This strategy is working well and we’re trying to listen to our customers to identify where we have room for improvement. This alone gives us plenty of room for growth.
Our traditional lending areas have been Alberta and Ontario. We have significantly expanded our lending areas in Manitoba recently and launched softly in BC earlier this year. There are other obvious areas of the country that we see opportunity in – but we want to maintain a relentless focus on service with our existing customers – and do not want this to suffer as a result of having too broad an ambition. Sometimes the simplest plans are the best.
