Another Commission Squeeze

DowntrendIf you weren’t sure whether mortgage broker commissions are trending down, you can be sure now.

Scotiabank, the biggest participant in the broker channel, is the latest major lender – after First National and MCAP – to cut broker finder’s fees.* The bank lowered its compensation today by five basis points on 5-year terms.

“The economics of the business are changing. We’re looking at what appears to be a sustained low-rate environment,” said David Stafford, Managing Director, Real Estate Secured Lending at Scotia. “All the banks are looking at compressed margins. As long as we’re in this sustained low-rate period, there has to be a bit of give and take.”

In addition to record low mortgage rates, there’s also “steep competition for deposits,” notes Stafford. With deposits still the top source of mortgage funding, that’s put lending margins in a vise.

Here’s a chart we ran on the spread between the estimated “typical” 5-year fixed mortgage rate and the 5-year GIC rate. When Bay Street analysts talk about lending margin pressure, they’re not making it up.

(Click chart to enlarge)

In reality, there are many other sources of mortgage funding besides 5-year GICs, but this gives you a sense of how deposit-based lending spreads are changing.

Stafford says that funding costs have also risen because of the liquidity credit premium that’s been baked into mortgage pricing since the credit crisis. On top of that, lenders face higher securitization costs thanks to both CMHC insurance changes and new accounting rules.

Meanwhile, overall broker compensation on 5-year fixed mortgages hasn’t changed much for years.

“We’re fully committed to this channel but we’ve all got to be realistic about sustaining it,” Stafford added. “Other lenders have looked at the economics of the market and simply walked away. We have no intention of doing that but we also have to be realistic about it at the same time.”

On a gross basis, Scotia’s compensation cut will save it roughly $5 million a year for every $10 billion of volume in related mortgages. But the move will also cost the bank business from less loyal brokers who shift to higher-paying lenders. Fortunately for Scotia, its range of mortgages (which arguably leads the broker market) and end-to-end service model make demand for its products somewhat inelastic.

Another force working against brokers is Internet-driven competition. “Brokers have proven that they’re willing to advertise a lower ‘bought-down’ rate in an effort to compete,” says broker Peter Kinch, of Dominion Lending Centres Peter Kinch Mortgage Team. “In other words, they’ve said ‘I’ll work for less money as long as you give me a more competitive rate.”

“We’ve always said that selling rate instead of creating a true value-add proposition is simply a race to the bottom. Scotia’s decision is not only a trend – it’s predictable and inevitable.”

With FirstLine dropping out of the broker market this year, Scotia and First National (ranked #1 and #2 respectively) hold some powerful cards. “You’ve got two lenders that are now pulling down 40% of the
market,” says Geoff Willis of Origin Mortgages. “They are the market makers.”

Willis suspects that today’s changes are partly related to the costly effects of pooling (which helps smaller brokers benefit from the lender “status” enjoyed by larger brokers). Pooling has caused Scotia to pay out more compensation than it anticipated when it designed its broker incentive programs. “Until it figures out how to crack down on that, the only other place (management) feels they can gain savings is with the finder’s fees,” Willis reasons. “I think First National’s management had that same discussion.”

Looking forward, it’s not a leap to expect that more lenders will cut commissions. Volume bonuses and pooling will come under particular scrutiny. As one example of this, more lenders may start checking to see who pulled the applicant’s credit bureau. The goal being to confirm if that broker is registered and qualifies for status incentives.

“Right now, lenders don’t know who they don’t know,” Willis says.

* Note: First National reduced commissions across the board in August. MCAP reduced commissions only on one- and two-year terms and it was partly offset by a lower rate. MCAP Spokesperson Jack Shapiro states, “We have worked hard not to
cut our 5-year compensation.”

Rob McLister, CMT

  1. If lenders look at pooling as a possible source of expense reduction then that is not a good news for brokers.
    Not only brokers the bigger lenders will start targeting the smaller mono-lines too – as an indirect to way to reduce cost of competition.

  2. I was never a fan of pooling , what ever happened to being rewarded for hard work and dedication to the industry you are in . Why should a rookie or a lazy Mortgage agent/broker benefit in commission . The lenders need to look in the mirror they caused this . Everyone forgets this is a sales job and when you receive a reward for reaching a status you earned it and it actually means something to the individual something you can be proud off .By getting rid of pooling you would create a better sales person as they would actually have to get up in the morning and work harder to reach higher commisions.Don’t get me wrong I own a 40 agent firm so more dollars helps the brokerage but dedicated and harder worked sales people would greatly assist the brokerage better and themselves for their future in the buisness . Go ahead lenders have at it maybe it will clear up all the part time agents > just my thoughts>

  3. I think the lenders have no choice to cut commissions in order to remain competitive and counter-attack “pooling”. I say to renumerate the high producing brokers which will entice the small producers to work harder for their money. It may not seem fair to the small producers….but if they all have the same advantages, where’s the challenge? The market is fairly saturated with incompetent brokers and I think controlling the pooling help clients see who the competent brokers really are.

  4. One benefit of going to a mortgage broker instead of negotiating a mortgage directly with one’s own financial institution is customers often will get a lower rate. Another benefit is that independent mortgage brokers/agents often provide a deeper level of experience to help their customers save money. Mortgage brokers in the USA charge their customers regardless if they are a “AAA” client or “B” client. That may be the future of mortgage brokering in Canada.

  5. “We’ve always said that selling rate instead of creating a true value-add proposition is simply a race to the bottom.”
    Truer words were never spoke!

  6. Lenders introduced volume bonus to reward higher volumes, but then allowed super brokers to evolve drawing agents from other firms to get to the higher plateaus faster- end result .. same overall volume to the lender but coming from one company vs 100 individual brokers with higher end commissions being paid out. So then lenders adjusted to individuals rewarding higher volumes but allowed pooling as it would (supposedly)lead to higher efficiencies. But of course this lead to one name on the file but a multitude of agents related to the deals, and interacting with the underwriters, ultimately reducing efficiencies. We can focus on blame, but the issue is to improve efficiencies and costs on both sides and both sides have lots of ways they can improve the process

  7. I am high producing broker ($100 MM +) and been in the Mortgage business for over 10 years. The biggest problem with our industry is that everything we do is based on “Greed”! Our Firstline basis point where we put our innocent clients on a high interest rate mortgage so we can pocket points and get to travel Greedy Agents pushing higher split from the brokers, the brokers asking more money from the super broker and super broker squeezing more money from the lenders! The list continues with signing bonuses to join the new firms, kick back on marketing dollars to franchise owners, using marketing dollars on signing bonuses,…. 95% of brokers move, hire, recruit and push their clients to different lenders based on the GREED and Money factor!
    That greed is also reflective on the business model of National Networks,.. and other Volume Pooling models that exist in today’s market place! Why Scotia or any lender should pay more to Broker “A” who is member of Verico and sends 1 deal per month VS. Broker “” who sends in 5 deals per month but is independent? Most of the industry’s lenders treat broker “A” different and better then broker “B”!
    The Term Volume Bonus was created as a LOOP Hole, so brokers could screw their agents and Super Brokers could screw their brokers! So companies like TMACC and Invis kept it quiet for a very long time from their agents and their agents felt that they were getting 100% even though it was 75% of the whole thing! Now that loop hole has come back to bite the industry in the _ _ _.
    Have only 1 simple payment called Finder’s fee. (No more Volume Bonus). Allow every broker to send you a deal but if their efficiency drops below 65% ATF (Application to Funding), cut them off! If a broker knowingly sent you a fraud file, call the Police, charge them and suspend them from CAAMP and other organizations! It’s about time for this industry to take accountability for its problems and issues!
    Here is One simple question, Can we handle the truth?

  8. its nice to have low rates for us mortgage holders, but very tuff to read about ‘compensation cuts’ for the brokers.

  9. It would be interesting to know if the mortgage specialists for Scotia are taking any sort of hit in their commissions as well.

  10. More cuts are coming – and rightfully so. The lenders need to make a reasonable return on their capital. If they don’t, we are all out of this industry. Personally, I’d rather see them cut our commissions if this meant they will remain in the channel. The alternative is they no longer see value in the broker channel and leave and we are left with a few mono-line lenders (that is, until they also get squeezed out this channel).
    If we are honest with ourselves, we must admit that we are grossly overpaid for our efforts. Think about it – we do a $500,000 mortgage and pocket $5800, all for less than an hour of work. If this is not grossly over paid then what is??
    I would like to see the industry eliminate volume bonuses and rather shift compensation to efficiency bonus. This way, the lender is getting value and paying us for such. Under the current pooling and volume bonus structure, the lenders are paying brokerages for nothing. Wake up lenders – kill volume bonus and get back to a more fair compensation program.

  11. Pooling is not the problem. Bad pooling is the problem. If there is one submission agent and efficiencies are maintained, there is no issue.
    I can’t speak for what you make Jim but I disagree that brokers are overpaid. I once calculated my hourly wage at $38 an hour. That accounts for time spent on cancelled files, time spent with clients who didn’t apply, follow-up with existing clients, overhead – which I must pay, not the lender, technology costs, marketing costs, taxes and so forth. That is not an unreasonable wage for the value we provide to customers and lenders.

  12. @Jim,
    This is an honest question. What kind of value-added service could you possibly be giving your clients by only spending an hour on their file? Surely your support staff spends additional time closing the deal and servicing people after closing?

  13. Higher levels of production leading to higher percentages of commission or trailer fees is illegal in the mutual fund world… I fail to see why it should be sanctioned in the mortage brokerage business.

  14. What is this “value-add” service that brokers are always referring to?
    Lets be honest. 9 times out of 10, rate is all that really matters. Its nice to have someone explain everything for you, and find the best deal, but come on? does it really justify the amount of commission being paid?
    And if your broker is not getting you the absolute rock bottom rate, then why would you use them? It just seems like an unnecessary middle man at that point.
    I am not trying to criticize anyone. I just fail to see the logic in the current structure. It would seem that there is a lot being paid to people that do very little. For $5000 bucks I can have someone tile my entire kitchen. My accountant does my taxes for only $250.00
    A Mortgage Broker gets paid $5000 to put me into a mortgage? which may not even be at the best possible rate? Obviously something is amiss.

  15. wow, what deals do you have that only require less than an hour of your time/work?? A mortgage file is an ongoing amount of work from inception to funding & after. If you’re really evaluating someone getting paid far too much for their minimal efforts, consider what a Realtor makes for selling a cookie-cutter home that doesn’t even get a sign up and is sold as soon as it hits MLS! Now THAT’S something worth evaluating in the market.

  16. All this looks like it is happening whether you like it or not. I offer these vague pieces of advice.
    – Work smarter, not harder.
    – Fire your bad customers.

  17. Five bps won’t change my opinion of where to send a client. The best lender with the best product will still get the app.
    Where it does matter is when two lenders offer equal rates and conditions. The higher paying lender will win in that case.

  18. I have seen so much whining about our comp on a couple of different sites the last few days. It’s horrible. We serve our clients not ourselves.
    As for Jim T’s comments – I work hard on every deal I do. Yes, some are easy, some are hard, some are damn near impossible. Regardless, there is no way I have ever spent less than an hour on a deal. That is a complete joke. The comments on comp are also ridiculous. Are you not Mr. Buydown? For someone who is as “recognized” in the industry to be so belittling of it is embarrassing.

  19. Mark, I am not belittling anyone. I am a realist. I don’t work on B deals, only AAA deals that are cookie cutters hence the hour at max per deal. I am also very very efficient in what I do. I won’t apologize for being good and efficient at what I do. Sorry to hear that you are having difficulty closing deals. Its only going to get worse so get ready. Now stop whining

  20. Jim, a realist who lives in a world of AAA deals? Doesn’t sound very real at all. I agree efficiency should and will become very important in our business. I don’t need to pat myself on the back to be satisfied with my accomplishments. The happiness on the faces and in the voices of my clients gives me all the satisfaction I will ever need. I will take the high road on the unsubstantiated personal attack at the end. I believe it speaks well enough of the character of the person who wrote it.

  21. I think sometimes those of us who use the rate comparison sites to generate business can become a bit thin skinned because we are under constant, anonymous attack about the way we do business.
    I absolutely know that the description of sophisticated AAA clients quickly accepting mortgage offers and efficienty providing condition settlement docs is very real and that both Jim and Dan Eisner are very intelligent, professional and honest in the way they operate their businesses.
    Its just a different world. Some of us are becoming mortgage merchants instead of consultants and I know that can upset mortgage brokers who believe that everyone MUST be a value added consultant in this business but sorry, times change, businesses change and if the public wants this mortgage merchant service that produces very low rate offers at reduced commissions they will get it. No one can stop it from happening.
    There will always be full service, consulting, mortgage brokers. Its a needed service but it makes no sense to say the mortgage merchant is doing something wrong.

  22. I agree with you Ron. If you have a business model that works, then all the power to you.
    Hopefully people realize that Tourloukis’s comments about being overpaid apply to guys like him only. For the rest of us who actually spend time with our clients and add value besides the interest rate, he is doing us a disservice.

  23. Mr. N,
    Are you aware that your interest cost is not dependent on your rate alone? If you fixate only on the rate you are guaranteed to pay more interest than necessary.
    As a broker, I do things most people cannot do on their own.
    First, I find them the best rate from over 50 lenders. You can’t do that yourself because you can’t see what rates lenders offer to brokers.
    Second, I advise them which lenders to stay away from based on their 5 year and 10 year plan. If you think you only pay a lender based on the rate, you are sorely mistaken. Lenders have very different and sometimes costly rules on penalties, porting, prepayments and refinancing.
    Third, I create a long-term relationship and follow up with clients. I am always looking for ways to help people tweak their financing to lower their interest cost.
    Unlike Jim, my team actually spends time with our clients and helps them save as much as we earn. The best part is that our services cost the client absolutely nothing.

  24. I remember back in the day when you used to get extra bps for sending in a complete package, I’m pretty sure it was with MCAP. They should bring back programs like that.

  25. Hi Missess00,
    You’re right that it’s a great incentive and efficiency driver. FirstLine, for example, used to pay extra Points to brokers who submitted complete document packages. It was apparently widely adopted and improved throughput and turnaround time.

  26. We always strive to get all supporting documents upfront for the lender’s review. It makes sense that you send in a deal for approval only when you have the docs to back it up, yet I’m surprised to hear from lenders that we’re the minority.
    It must boost efficiency and at least if the broker isn’t aware that a document won’t suffice (job letter not “guaranteeing” hours, lender won’t do the deal, etc) the lender won’t spend hours underwriting it then declining it because of mis-matching docs.

  27. Thanks Kyle, Re: efficiency, FirstLine’s program reportedly translated into measurable efficiencies and paid for itself. So while it’s not always possible to collect complete packages before application submission, it sure does help (the lender, broker and client).

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