Monoline lenders (a.k.a. non-deposit-taking lenders) are an important cog in the mortgage market. Their mortgage products and low pricing improve consumer choice and force our dominant banks to be more competitive.
The power of monolines, however, has been chipped away by perceived mortgage risk and government regulations, both of which make it harder to obtain low-cost mortgage funding through investors.
Last Tuesday, leaders from four monoline lenders met at the CAAMP/Mortgage Brokers Association of BC conference in Vancouver. What follows are their frank sound bytes on how recent mortgage changes are costing monolines, brokers and consumers alike.
(All points are paraphrased except where quotes appear. Our comments appear in italics):
On government intervention in the mortgage market: “If the market is left on its own, it will make its own corrections and come into balance.” More regulation…could “cause some areas to pop.”(Norton states, however, that there is no bubble on a national basis.)
OSFI guideline B-20 (which imposed a series of restrictions on mortgage lending) has already been out for 11 months. But the changes aren’t over. We’ll continue seeing lenders’ guidelines being modified “for the next 12 months,” Norton says.
Banks too havelost market share because of the new regulations. It’s not just monolines.(When it comes to regulatory effects on prime lending, however, banks are left with a better funding position — irrespective of their ability to collect deposits and issue debt).
“I don’t mind competition (but)…I want a fair playing field.”
“We talk about rate wars. It’s a mature market. We’re going to have competition.”
The broker industry needs to convey a better “value proposition” to grow.
Mortgages are a “very profitable asset class for banks”(In a slowing market, banks will battle even harder for mortgage customers.)
Banks have the advantage of a very high retention rate(85%+ of bank mortgage customers renew with their bank at maturity. That’s partly due to the array of products that banks cross-sell to them. People are less inclined to switch institutions when they have multiple products with their lender.)
“The constant wave of (regulatory) change has affected far too many Canadians in the mortgage marketplace.”
On why Street is pursuing its bank licence: “We realized that there is susceptibility to our business model without a balance sheet.”
On how brokers can grow in a market that’s slowing: One way, says Grewal, is to “look like a bank branch,” which furthers consumer trust and confidence in your operation. Having an office “on the second floor in the back of a building was something that happened in the eighties,” he says.
“We look (carefully) at maturity and midterm liquidation rates.” His suggestion to brokers: “When the customer needs to refinance, don’t ‘refi it out.’ Doing so hurts a monoline lender’s “economics,” making it harder for them to deliver competitive offerings.”(Lenders earn very little on the initial mortgage term. They rely on keeping the mortgage past the first maturity date.)
Boris Bozic, President and CEO, Merix Financial
“It’s the monolines that drive innovation in this industry.”(Ottawa makes rules with the banks in mind, which is understandable given their dominant market share. But smaller lenders are vital to foster a competitive market. Policy-makers who don’t realize that do so at consumers’ peril.)
“The (politicians) controlling the levers (of the mortgage market)…have skin in the game…and it’s your vote.”
When tightening bulk insurance policy, Ottawa lumped all lenders in the same category. Unlike banks, however, “Monolines never used bulk (insurance) for capital relief.”(The feds are adamantly against bulk insurance being used for that purpose because it unduly transfers mortgage risk from banks to the government. By contrast, monolines rely on bulk insurance for liquidity—i.e., securitization—purposes, which is largely what it was intended for. Bozic says the government has been looking at bulk restrictions and how they affect smaller players in the marketplace.)
Because of bulk insurance limits, we’re seeing oddities in the monoline market where people with a conservative loan-to-value of 75-80% pay higher rates.(That’s because mortgage buyers are less willing to offer favourable terms when purchasing conventional mortgages above 75% LTV. Over half of some monolines’ low-ratio mortgages fall within that 75-80% LTV band, thanks in part to all the refinances at 80% LTV and to people scraping together 20% down to avoid default insurance.)
“All of my suppliers are regulated by OSFI.”(That’s true for most other monolines as well. It means that OSFI rules trickle down to the broker level, even though non-bank lenders are not directly regulated by the feds.)
“You need a degree from MIT to understand our rates sheets today.”(Changing regulations and risk perceptions are making mortgage investors more picky. As a result, small lenders must add more caveats to their rates like LTV limits, lending area restrictions and so forth.)
“We (as brokers) have to call ourselves one thing across the county.” How do we advertise nationally if we have different names in every province (e.g., agents, sub-mortgage brokers, mortgage associates, etc.)?(Hopefully the Mortgage Broker Regulators’ Council of Canada can address this legitimate concern and get all provinces on the same page.)
With business shifting to the Internet, we have to expect “more disintermediation” (i.e., people dealing direct with the lender).
“Macquarie left (the broker channel) not because they weren’t making money, but because they weren’t making enough money.”
It is mistaken to suggest that RBC and BMO are not in the broker market. “They just use different conduits.”(i.e., They provide mortgage funding to broker lenders behind the scenes.)
“As a monoline, the number one thing that keeps me up at night is, how am I going to fund my mortgages? Conventional lending is a real challenge to monolines.”
The other thing that he says keeps him up at night is, “What changes are coming tomorrow?”
As a small lender, (your) “investors don’t value insurers the same way.” You pay a premium to sell investors Genworth and Canada Guaranty products.
OSFI proposed requalification of borrowers at renewal in its original draft of the B-20 guidelines. Following industry outcry, that provision was dropped. In practice, however, some small lenders are still being forced to requalify applicants at renewal. It happens when they sell a renewing mortgage to a new investor. “If we do sell to that investor, the new institution considers it a new mortgage and it has to be requalified.” Radius and certain other lenders then have to re-underwrite that mortgage behinds the scenes. When a borrower is declined (and fortunately only a handful have been declined so far, says Swift), lenders in this situation must advise the customer that they need to pay off (i.e., move) their mortgage at maturity. That can be difficult to do if there are qualification issues.(This is a serious unintended consequence of B-20 for certain borrowers and lenders.)
“As an industry, where we’ve really failed is in not putting money aside to build our brand.”(Many would agree, given that 60% of customers don’t have a good or full understanding of a brokers’ function, according to Maritz.)
The market is slowing but there is still $200-plus billion of residential mortgage activity per year.
“Banks aren’t looking for another mortgage customer, they are looking for another bank customer.” If we can convince banks that distributing through brokers brings “more [with] it than just mortgages,” we’ll bring banks back into the channel.(As noted above, the more products a customer is sold, the higher a bank’s retention rate and profitability. As a ballpark, bank reps cross-sell almost two more products to mortgage customers than brokers do.)