How do you get Canada’s #1 lender to send you business when you’re the country’s smallest mortgage insurer?
One way is to offer outstanding service and an atypical $140 per closed mortgage.
In fact, that may have been the deal that Canada Guaranty (CG) pitched to RBC when it won its business in Q3 2012. The $140 per mortgage is especially interesting.
According to this disclosure, “RBC Royal Bank receives a one-time fee in the amount of $140 for each mortgage insurance application approved by Canada Guaranty, provided the mortgage to which the mortgage insurance relates is funded.” This is the only case we know of where a Canadian lender gets paid cash to route mortgage applications to an insurer.
Canada Guaranty President & Chief Executive Officer Andy Charles told CMT, “This is a commercial relationship between RBC and Canada Guaranty with no consumer impact on the service or cost of their mortgage insurance premiums.”
A casual observer might call it paying for business—not that there’s anything wrong with that. It may very well be smart business for CG…that is, unless all lenders start expecting cash inducements.
CG battles well-entrenched incumbents, so it’s forced to go the extra mile. Its top competitor, CMHC, commands an estimated 65-70% of the default insurance market, with Genworth taking most of the rest. CMHC also has a 100% federal guarantee, which reduces lenders’ theoretical risk compared to CG’s and Genworth’s 90% backstop.
CG is obviously hungry to rip business from both of these rivals. RBC, which it added as a customer in Q3 2012, is a huge win. (It’s unknown whether the $140 per closed deal was the carrot that enticed RBC into its fold.)
To be fair, we don’t know the details of what RBC is offering CG in return (besides deal flow). RBC says it provides Canada Guaranty with “services necessary for the effective credit adjudication/underwriting of mortgage insurance applications as well as services necessary for the ongoing administration of mortgage default insurance policies.” Thus, it’s unclear how much RBC is netting from this $140 in extra revenue.
Canada Guaranty seems to be setting a precedent among the current mortgage insurers. In speaking with CMHC, it confirms that it does not engage in similar cash payments in return for business. We’re fairly certain that Genworth doesn’t either.
In a way, this is potentially a smart customer retention strategy for RBC. The reason: fewer lenders offer free switches on Canada Guaranty-insured mortgages. Therefore, if consumers find it more expensive to switch CG-insured RBC mortgages to other lenders, RBC keeps more renewal business.
RBC’s disclosure says, “The bank, not the borrower, selects the mortgage insurer.” So this is something consumers may want to consider when evaluating an RBC mortgage. Mind you, as Canada Guaranty adds more lenders (and it will), concerns about switching limitations should diminish.
About Canada Guaranty
Canada Guaranty is owned by Ontario Teachers’ Pension Plan and National Mortgage Guaranty Holdings Inc. (the private holding company of Stephen Smith, co-founder of First National Financial LP). These two partners bought AIG United Guaranty Mortgage Insurance Company Canada in 2010 and changed the name. (See Canada Guaranty Launches.) CG is thus the only 100% Canadian-owned default insurer in Canada.
Robert McLister, CMT
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