He’s also a CFA and CGA and has significant experience in treasury with Coast Capital, one of the nation’s largest credit unions. As a result, his understanding of mortgage market dynamics is second to few.
We threw a lot of questions at him about mortgage competition, rates, and mortgage disclosure. He answered very graciously and shared several meaningful insights.
That interview follows here…
CMT: Geoff, Thanks for joining us. Let’s start with a conceptual question. Customers often ask for a bank’s or broker’s best rate. In your view, how should one define “best rate?”
GP: Best rate really means best rate for that particular client. Different clients may have different and specific borrowing needs. Prepayment flexibility, options for a line of credit, ability to port interprovincially (e.g., DND employees) are just a few examples of needs that are specific to a particular client. The information to make the appropriate recommendations comes from a thorough interview with the borrower, and of course from a broker that is well educated and trained.
CMT: Obviously not every broker or banker offers the “lowest” rate, and good service should be a given (you would think). Therefore, what is a reasonable rate premium to pay for quality advice, and what kind of advice is actually worth a rate premium (i.e. a higher rate than the lowest hypothetical rate available)?
GP: There is value for quality advice. An individual may not want to hire the cheapest lawyer, or the cheapest accountant, or the cheapest dentist for that matter. It stands that every client has their own price point and if they are willing to pay for quality advice then it works out for all involved. The only caveat is that the borrower must be aware that they are paying for the advice and any rate premiums must be fully disclosed and acknowledged.
CMT: On that note, one potential conflict in this business is when lenders offer higher-than-normal compensation for selling a higher-than-normal rate. Is that practice ever justified?
GP: You should give the best possible rate to the client. If not, regulations require you to disclose that you sold a higher rate. Not long ago, there was [a major bank lender] where FICOM took the position that you must offer the best rate (available to you) or disclose it to the client. There are circumstances where a broker may elect to charge a fee or accept higher compensation (in lieu of) rate from a lender. However, in both circumstances a broker must disclose either the fee or compensation premium to the client in writing and obtain a signed client acknowledgement.
CMT: Let’s consider a scenario if we may. Suppose your typical well-qualified borrower is shopping for a mortgage and comparing brokers to banks. Assuming the rates and product features are equal, are consumers better served by arranging their mortgage with a broker or directly with the lender, and why?
GP: Borrowers should always consult with a mortgage broker. The main reason is that, in reality, rates and product features are not equal among the various lenders and they never will be. Since, in the majority of transactions, there is no cost to the borrower, there is really no downside to using a broker’s services. Rates and features are constantly changing and it would be nearly impossible for a typical consumer to keep on top of the myriad options.
Brokers will also provide impartial advice. Though the staff at banks and credit unions are certainly professional and would look after the client’s interest, their ability to do so is limited by the fact that they can only represent their employer’s products and services. By contrast, brokers have access to dozens of lenders and can really provide the options and advice that clients need.
CMT: Why is it important to join provincial broker associations like MBABC, IMBA, and AMBA, and how do they differ from CAAMP?
GP: Broker associations provide a vital role. They serve as sources of continuing professional development, managing government relations with regulators and licensing bodies, encouraging industry networking, ensuring promotion of our industry with the public and media, and ensuring professionalism and ethical standards. Brokers committed to our industry all understand the value of these endeavours.
The different associations have many areas of overlap but there are also areas that are somewhat unique. Regional associations may have more local networking events and education that is province-specific. With respect to MBABC, it also maintains relationships with suppliers specific to B.C. — like with E&O insurance.
CMT: Where do you see broker market share in 10 years?
GP: I believe that change to our industry will be driven by the consumer. Mortgage brokering offers tremendous value to consumers and once they have used a broker, (they) are completely sold on the concept. As consumer awareness continues to grow, so will the market share of mortgage brokers. As a result, lenders that are not dealing with brokers will start to feel the pinch. In a sense they already are, and we know that since brokers are now being identified by those very lenders as the competition.
CMT: What advice do you have for new brokers who are competing in today’s fiercely competitive rate market and have no lender status?
GP: Lenders are imposing volume requirements and efficiency ratios and those totally make sense, but it does create a challenge for a new broker. New brokers need to work with a firm that has strong relationships [with multiple lenders]. Brokers who could access only four lenders, for example, create a challenge for themselves.
One of the main priorities of new brokers should be to establish a relationship with a mentor in the industry. The learning curve for new brokers is significant, even after completing the required licensing programs. It is often the case, as with many industries, that people new to the career don’t know what they don’t know. While rate is certainly an integral part of the offer to clients, it is not the only consideration. Having mentor resources can become invaluable to ensuring the borrower receives the best advice.
CMT: In your opinion, how much experience (in terms of years in the business, deals funded, or volume funded) is required before a broker can competently advise clients on what is likely the biggest debt of their lives?
GP: Obviously it depends on the background of the new broker. For example, brokers that have worked as a bank lender in the past will have a quicker transition. However, for a broker entirely new to the business, it would likely take 1-2 years before they reach the stage of being comfortable in their knowledge. As mentioned earlier, it is important to have mentoring resources during that stage of development. Having said that, our industry is constantly changing and even brokers in the business for years will come across new scenarios. So, learning is really a continuous process.
Rob McLister, CMT
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