Canada’s most candid business personality has a strong view about what’s wrong with mortgages. It’s so strong that he decided to start his own mortgage company.
On Friday, I spoke with CBC commentator, multi-millionaire, Dragon and Shark, Kevin O’Leary. I asked him what makes his new “O’Leary Mortgages” so unique. He outlined a two-pronged strategy: to add transparency to the mortgage process and to help Canadians pay down their biggest debt faster.
Kevin has been scoping out the mortgage business for almost two years. He was kind enough to share his mortgage philosophy and business plan with CMT in his first interview about O’Leary Mortgages.
(Our comments in italics)
First, the basics…
Kevin aims to launch around mid-December. He’s starting in Ontario with one product, a 5-year fixed, branded as O’Leary Mortgages—likely with 20/20 prepayment privileges and standard 3-month interest/IRD prepayment charges. His mortgages will initially be insured only and geared to those with fully qualifying (provable) income.
“This product is very simple. It is a fixed rate mortgage with a very competitive rate and very, very easy to understand documentation…That’s how we’re starting.”
Kevin acknowledges that his mortgage “is not all things to all people. It’s a very, very specific product that probably addresses 95% of the market.” (There may have been some playful hyperbole there. I suspect Kevin knows that 5-year terms aren’t right for 95% of Canadians. His offering seems most geared to first-time buyers.)
His stated mission is to streamline the mortgage process and help people understand the obligation they’re taking on. “That’s where I’m going to be very competitive,” he says. “When I bring a product to the mortgage market…I’m going to try and simplify [the mortgage process] to the extent I can, and I will.”
The second ingredient in his secret sauce is what he calls “the plan,” which he gives every customer. “Everyone who takes on a debt obligation needs guidance and needs to understand what they’re getting themselves into…You don’t go into a mortgage for hundreds of thousands of dollars and not understand how you’re going to get out of it. My mortgage comes with a (written) plan.”
“My whole thing is that a mortgage is part of a long-term asset planning strategy. When I sell somebody a mortgage, I want them to have…the ability and a plan to pay it off. I don’t want it to get in the way of them becoming wealthy.”
(Other lenders don’t provide a comprehensive mortgage plan, he says. And he’s generally right. Most lenders’ mortgage reps don’t provide mortgage planning, apart from maybe a pamphlet or two, a prepayment calculator on their website, etc. Mortgage budgeting, term analysis, and integrating a mortgage with your financial plan is where independent and professional mortgage planners have always added value.)
On the mortgage process…
Over a decade ago when he last had a mortgage, Kevin says, “I remember spending all weekend and then all Monday reading the docs to get that mortgage…with a magnifying glass. It was ridiculous.”
“(As a customer), I want to be able to talk to somebody who understands what I’m getting into. To me, understanding the document and making it very simple is the biggest challenge. That’s what we’ve been working on the most.”
“The package that you get from O’Leary Mortgages when you start the process, I believe, is going to be something you’ve never seen before, not in this country…It’s so thin and so easy to understand and accompanied with so much planning. I spent a year writing a book just for this business.”
With intense competition, why is now the right time to start a mortgage business?
“It’s a very confusing time. There’s a tremendous amount of angst among consumers. There’s concern about rate hikes. All of that makes it a great opportunity to launch a brand that I think has clarity, honesty and is very direct.”
“Make no mistake; I understand this is a brutally competitive market…Clearly the banks own this market, or the majority of it…It’s one of the most competitive markets in financial services, no question. That’s what makes me excited to be in this. You’ve got to be good and execute customer service very, very well.”
Why launch with a limited reach and one product?
“This is not my first rodeo launching a business. What I like to do is start in a small demographic and determine my customer acquisition cost, look at my compliance systems and all the back office metrics and make sure that they’re working. Then when I know what I know, I accelerate.”
“I’ll learn a lot” in the beginning, he says. “You can model this out any way you want on a spreadsheet. That’s easy. I’ve never seen a spreadsheet that I didn’t like until I put it into reality. Then I learn a lot about what we’re doing right and wrong.”
“By the time we’ve done six months of this, we’ll be ready to roll it out nationally and I think it’ll be very successful.”
“If you can service your first 1,000 customers and understand what you did wrong, then the next 10,000 are going to have a much better customer experience.”
On variable rates…
“This is not the time to take that risk (of a variable-rate mortgage). If you don’t know what your costs are on a monthly basis, I can’t give you a plan.”
“I won’t be playing in that game initially. If you want to roll the dice on variable rates, I’m not your man.”
Will O’Leary Mortgages be a broker or lender?
“We’re starting by providing origination,” Kevin says. “At the end of the day, my long-term plan is to do both and I want to work with brokers as distribution.”
O’Leary Mortgages will begin as a mortgage brokerage licensed by the Financial Services Commission of Ontario, says CEO Alex Kenjeev. Underwriting and back-end servicing are outsourced. (Kevin wouldn’t say who that outsourcing company is, but if it’s who we hear it is, it’s a company all brokers know well.)
“Ultimately right now, I’m helping people get a loan,” Kevin says. “Maybe I’ll do a few thousand that way and then when I expand, I’ll work with brokers because I think the brand adds value there.”
And no, he won’t broker/sell other lender’s mortgages. Says Kevin: “You come to me for an O’Leary mortgage and that’s it.”
On his pricing strategy…
“My attitude is, offer a fair and direct—as I call it, an ‘honest mortgage’—with tremendous simplicity…and be competitive with price. You don’t have to undercut competitors.”
“Some people will use a shopping bot…to go get the absolute lowest rate. They’re a more sophisticated customer in some ways, because there is more to a mortgage than just pricing.”
On his market share potential…
“This market is expensive to gain share in. I make the assumption that my brand gets me 2-4% of a market, but not without spending a fair amount of money getting there.”
“In this business, customer acquisition is a big question mark. Everybody I’ve seen going into it has made assumptions that never panned out close to what their forecasts were. You could put a fair amount of money into the ground here, and be unsuccessful if you don’t know what you’re doing. And I’ve seen that many times.”
“People say, ‘Oh, it’s so competitive. You’ll never get any market share.’ If you bring better customer service to any market, you get market share.”
On any tie-in with O’Leary Funds…
O’Leary Mortgages won’t get its funding from O’Leary Funds. “This is a completely different business, different team, different metrics, and different regulators,” he says. “I don’t have a problem raising capital. I have the option to go get capital wherever I want.”
On Dan Eisner’s True North Mortgage…
Back in 2007, Dan Eisner went on Dragon’s Den to raise capital for his young brokerage, True North Mortgage. He struck a preliminary deal with the Dragons, including Kevin, but the deal later fell apart.
“The valuation on his business didn’t make any sense at the time,” Kevin says. “I’m all about value. I’ve been doing Dragon’s Den and Shark Tank for 11 years combined. I’ve seen thousands of deals and the mistake that most entrepreneurs make is that they try to get you to buy a future value at today’s price, when the risks are huge.”
“So, there’s nothing wrong with (Dan). He was a really interesting guy and he certainly knew the industry very well. But it’s the same thing in buying a house, don’t overpay. We could never come to an agreement on the value of what he had. That’s not a bad thing. It’s just that I’m a very disciplined investor…”
(In Dan’s defense, he tells us his valuation at the time “was less than cash value.” Since that Dragon’s Den episode, he’s built a national mortgage brand with eight offices across the country and $412 million in volume in 2011.)
On self-employed mortgages…
O’Leary wants to eventually service self-employed borrowers with non-traditional proof of income. These are folks who legally tax-manage their income, pay themselves via dividends or via shareholder loan repayment, and so on.
“I’m telling you now, my goal in short order will be to support entrepreneurs in this country by providing them mortgage services. Some people call that subprime. That’s not the case. They’re not subprime people. They’re the ones who create all the wealth, ultimately. I have thousands of emails from those people (about) how frustrated they are, and I’m the ideal guy to help them. They’re my kindred spirits.”
On the declining relevance of branches…
O’Leary Mortgages will be a branchless business. “Young people today don’t think in terms of brick and mortar,” Kevin says. “They think about the experience online and the backup service afterwards.”
“I’ve done lots and lots of research on this, talking to my potential customers…I get thousands and thousands of emails…I’ve got 70,000 people following me on Twitter. I ask them what they want and they tell me.”
In the next six months, we’ll follow this story closely. It’ll be interesting to see how many people pay for a simplified customer experience and Kevin’s mortgage planning advice. He’ll certainly have the capital, connections and loads of free publicity to kick-start volumes.
Two side notes:
Kevin O’Leary will be a keynote speaker at the CAAMP Conference in Vancouver on Monday, November 26, at 2:30 pm PT. He’ll be met there by his TV partner Amanda Lang, whom he lovingly calls “the most attractive communist on television.”
There’s a lot more to Kevin’s mortgage plan. In this week’s Globe column, I’ll analyze more of his views on debt, rate hikes and self-employed borrowers.