First National’s Commission Cut—Sign of the Times

broker-compensationThe vice keeps getting tighter on lender margins. We saw the latest effects of this last week when the second largest broker lender, First National, trimmed broker commissions.

First National cut broker finder’s fees on every term by 4%-10%. It also eliminated its “Wizard Spending Account” a popular broker incentive program that’s been around for years.

In an email announcement, the company attributed the change to “an increase in the cost of originating and funding mortgages.” We spoke with Scott McKenzie, Vice President of Residential Mortgages for more details.

“It’s not a good thing to do,” McKenzie acknowledged. “We never want to reduce commissions and be the bearer of bad news.”

“The biggest contributing factor this year was the reduction in allocations for CMHC bulk insurance, which has forced everyone in the marketplace to turn to private insurers.” Bulk insuring through private insurers is notably more costly than it was with CMHC, he said.

First-NationalMcKenzie adds, “Five years ago we were able to get a larger allocation in the Canada Mortgage Bond, a rather inexpensive way to fund mortgages.” With CMHC limiting this allocation, First National now has to use more expensive sources to fund mortgages.

Another factor pressuring the company’s margins has been pooling. That’s where multiple brokers submit deals under a single broker’s name, so as to benefit from volume-based status perks.

First National started its Wizard program more than seven years ago to create efficiencies and reward volume brokers. But McKenzie says, “With pooling, we started having to talk with five brokers on five deals (instead of just one broker for all of them), and we lost the efficiencies we once had.”

Pooling also forced First National to pay out more money on Wizard Spending Accounts than it anticipated.

In short, the overuse (some might say misuse) of the Wizard program ended up impacting the compensation of all brokers.

McKenzie notes that pooling works well when it’s done through a “hub” where:

  • The lender deals with only one person
  • The deal quality is good
  • There’s an application vetting process, and
  • Funding ratios are in line.

For brokers familiar with lender economics, this compensation cut may be disappointing but it’s not exactly shocking. Frankly, we’re thankful First National didn’t cut compensation more.

Some brokers will fear that this may spark a trend towards lower commissions. The truth is, that trend started long ago. It may not stop until brokers are paid near or just slightly above lenders’ internal sales forces.

Whatever happens, many brokers are none too happy. Among those who emailed us about this story, the common theme is that they’ll now think twice about sending deals to First National. It’ll be interesting to see if its volumes suffer as a result. In reality, First National’s cuts were small, its finder’s fees are still comparable to the competition, and its service is still excellent, so the effects will likely be minimal.

The good news is that competition is not dead. Certain lenders will undoubtedly maintain higher compensation levels and win some market share. But they’ll likely demand more efficiencies from brokers in return.


Side Note: Brokers have until December 31, 2013 to request redemptions from their First National Wizard Spending Account.


Rob McLister, CMT

  1. Before we (Broker/Agents) spout off about a reduction in commission splits… We should first look at the total compensation FN was paying out in the first place! All in, it was more lucrative than their competition. I just wish they were able to hold off until the end of October where all lenders programs are released at about the same time, where we can evaluate each lender’s programs in terms of product offerings, Service levels and compensation to determine their volume ranking within out Firm. Mortgage lending is changing, both for the Lenders as well as the Brokerages, so these changes (although regrettable) go both ways and we all have to find ways to create value…

  2. Thanks Rob or sharing this post and informing the broker community with more details behind First National’s changes to compensation. Brokerages & agents must evolve their business model too – 1 thing about this busines is change-none so much as this year. Brokers/agents check out Greg Williamson’s blog post re his take on First National’s changes http://doa180.ca/2012/08/16/where-do-you-think-this-ends/

  3. “All in, it was more lucrative than their competition.”
    Which competition? I can reel off a half dozen lenders that pay more than First National did on a five year term, with better rates to boot.

  4. interesting that First National is the first lender I am aware of that has (already) instituted qualifying a client at renewal, before issuing a renewal. Because my client is self employed, he is being requested to send in an application (thru his broker) for the renewal, and yes, he is quality credit with 5 years of perfect payment history with First National.
    I am a great fan of First National, until this, if it becomes standard in their procedures

  5. Hi drmortgage,
    My understanding in speaking with First National today is that it does not re-qualify “A” clients at renewal, even if self-employed. If it is an Excalibur (non-prime) renewal, however, then extra due diligence would be required for obvious reasons.
    If you’re seeing something different perhaps we can chat?
    Cheers…

  6. As a long time First National supporter I understand where they are coming from on this.
    I also feel that any way you slice it or dice it volume pooling is a cancer to our industry and needs to go…. when you have incentive programs that are meant for the top supporters yet some newbie to the business who joins the right team has the same access to rates and comp that is a problem. I think you would be hard pressed to find a single lender off record who would say that volume pooling is good for business.
    There is also next to no chance that First National is making someone requalify at renewal short of them being an Excaliber client.
    I personally would take .05% less to work with First National and know that the service and underwriting i will get is consistant with my brand and the back end support my clients deserve. A lot of lenders out there don’t even handle their own funding or servicing or even have something as minor as online access. so to make an extra .05% on my deal but have a client who is not wowed with the experience is not worth it to me. First National right now provides our industry with the bank alternative.

  7. Then why dont you?
    But remember to add up the Finders, the Volume bonus, the Funding percentage, the toaster pts am I missinag anything?

  8. I think there is an important distinction to make. Pooling is many people doing business under one submission name BUT the individuals all want seperate service, the individual agent wants to send the deal in by themselves, talk to the underwriter themselves, deal with condition settlement themselves………. on and on. Under this system all cost savings are lost to the lender and yet they pay top compensation. Bad system for the lender.
    Another alternative is central underwriting, one expert person studies and vets the submissions, one person communicates with the underwriter and one person supervises condition settlement. Decent system for the lender and deserving of higher compensation if high volume levels are present.
    There is no need to enforce one agent only sending in his or her own deals, but there is a need to have efficient underwriting systems that are profitable to lenders.

  9. Any lenders without online mortgage access should have their management replaced. This is 2012. There’s no excuse for not letting people check their balance and make prepayments online.

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