Canada’s mortgage industry is vastly more stable and competitive than its Australian and U.S. counterparts. But we can never take our enviable position for granted.
For that reason, it’s important to examine trends in other countries to see if/how they could materialize here.
On Monday, CAAMP’s international mortgage panel provided a glimpse into the U.S. and Australian markets. It underlined just how strong Canada’s mortgage industry is in comparison.
Here are some key points that stuck out. (CMT notes in italics).
Australian market report (Facts provided by Phil Naylor, CEO, Mortgage and Finance Association of Australia)
- Non-bank lenders have a paltry 3% market share in Australia. The top four banks have an extraordinary 90% share.
(This is largely due to the banks’ ability to fund mortgages without relying on Australia’s dried-up securitization market.)
- Australia has no equivalent to CMHC to back its mortgages. As a result, many non-banks have encountered life-threatening liquidity problems.
- The Australian government “needs to move in the next couple months" or "it could be all over for non-bank lenders," says Naylor.
(This comment struck us as quite dire. If CMHC didn’t exist, Canada’s non-bank lenders would have also fared significantly worse during the credit crisis.)
- "Those with the gold make the rules." When securitization disappeared in Australia, several non-bank lenders were unable to access funding and competition dwindled. In turn, banks slashed broker compensation by 1/3 “overnight.”
(Naylor hinted at bank collusion, albeit with a smile on his face.)
- With compensation reduced dramatically, more Australian brokers are now “selling” advice and acting as professional consultants. Professionals generally don’t act for nothing, Naylor said. “Brokers should be entitled to charge for (advice and mortgage planning services). Naylor said some brokers are nervous about that, but there is “virtually no consumer resistance if you can convince the consumer you add value."
- Broker share is 40% in Australia.
(Interestingly, despite falling compensation, fewer broker-centric lenders, and the advent of consulting fees, Naylor expects broker share to climb to 50% in coming years.)
US market report (Facts provided by John Courson, CEO of the Mortgage Bankers Association)
- Three years ago, there were 54,000 mortgage brokerage firms in the U.S. Today there are 8,000. This number may shrink further as state and federal governments add net worth minimums and slather on a heavy layer of regulation.
(The Americans obviously needed more regulation, but some accuse U.S. regulators of going to extremes, to the detriment of competition and consumers.)
- There is “no liquidity in the U.S. market,” Courson said.
- New rules that take effect on April 1, 2011 will “prevent loan originators from increasing their own compensation by raising the consumers' loan costs.” (Source) For example, brokers won’t be able to make more by selling the same mortgage at a higher rate.
(While not as prevalent, rate-based compensation still exists in Canada, in both retail bank and broker channels. In other words, certain lenders allow bank and/or broker originators to make more based on the rate they sell. It’s not as insidious as it sounds, however. A mortgage is a product and “sellers” of this product are free to determine their own margins. Fortunately for consumers, competition is increasingly keeping margins in check.)
- The next 12 months will see the creation of 300 new U.S. laws on mortgage lending.
Canadian market report (Facts provided by Jim Murphy, CEO, Canadian Association of Accredited Mortgage Professionals (CAAMP))
- Consumers should know that brokers are compensated, but there is no need for them to know exactly how much, says Murphy. This type of specific disclosure is not required in other industries and CAAMP has discouraged it here.
- Trailer-fee compensation models can add value. However, "Most people like to be paid upfront."
(There are two primary payers of trailer fees in Canada: Merix Financial and Macquarie Financial. Most major banks aren’t too keen on the idea, from the sense we get. However, if banks paid something (however small) it would greatly alleviate the concern brokers have with bank retention practices. That would, undoubtedly, increase bank volumes in the broker channel.)
- We "need to do more" to standardize broker rules on a national basis. It’s “hard to compete across provincial boundaries." For example, brokers must refer to themselves as something different in every province (e.g., “Agent” in Ontario, “Sub-mortgage Broker” in BC, “Associate” in Alberta, etc.). In addition, every province has its own disclosure rules and forms, and each province has different educational testing requirements.
(The differences in provincial regulations, while necessary in some cases, do inhibit nationwide competition. A reputable, highly experienced, and licensed broker in one province should be able to service clients in another province without undue red tape. The vast majority of knowledge that brokers need, to effectively serve consumers, is not province-specific. While there are real estate and legal differences in each jurisdiction, this information can quickly be learned by brokers licensed elsewhere, and easily tested for.)
Robert McLister, CMT