The 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.
McKenzie 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.