Online Mortgages Exploding in the U.S.

Internet connectionThe volume of mortgages sourced on the Internet shot up 75% last year in the U.S.

Branch-sourced mortgages dropped 16%.

These numbers reflect a clear trend and they are not an aberration. Nor is online mortgage growth a U.S.-only phenomenon.

South of the border, 60% of online banking customers get their mortgage from a lender that is not their primary bank, according to Accenture. We don’t have similar data from Canada but we know the percentage here is less. (Canadian banks are more concentrated and dominant, and U.S. originators are well ahead of us in the online space.) Despite that, the above stats suggest that loyalty to one’s home bank is not a given among “e-mortgage” consumers.

Stages of growing tree for your designIn the next 24-36 months, online origination volumes (consisting of mortgages that are applied for and processed online) will steadily grow in Canada. Catalysts will include:

  • Rate competition and margin compression (which will force lenders to find cheaper ways to acquire customers and more efficient ways to process applications)
  • Consumer acceptance of online security
  • Compelling online user experiences
  • Intuitive interactive self-help
  • Live support
  • Simplified user interfaces

No one knows how much of the pie online mortgage models will take. The numbers are minuscule at the moment. But given enough time, it’s not unthinkable that online mortgage market share could track that of the discount stock brokers. In that industry, about one-third of Canadian investors are now advising themselves and trading only with an online discount brokerage. In terms of accounts, there are 4.8 million online/discount brokerage accounts in Canada versus 5.8 million full-service accounts, according to Investor Economics Retail Brokerage and Distribution Advisory Service, Winter 2014.

Some will refute the online stock broker/mortgage comparison, arguing that managing your biggest financial obligation requires more advice and hand holding than picking securities for a retirement account. This author has done both (for a living) and would submit that choosing the right mortgage is decidedly easier than beating the market.

Rob McLister, CMT (email)

  1. Robert do you think the large banks will target the online mortgage market, and if so when? CIBC seems to have tried and failed with PC Financial and BMO wasted its opportunity with MBanx.

  2. Online banking and online mortgage origination are two very different things.
    The big impediment to growth in online mortgage sales in Canada is ferocious competition from the big 6 banks. I don’t have all the answers for taking on the big banks successfully, I wish I did.
    That being said the online investigation of mortgage rates and information will grow and grow. Old marketing systems will fall away and the concentration of marketing dollars will scale up online.
    I spoke to a veteran mortgage broker last week who has been very successful for many years. He lives in an area with very low home computer ownership, less than 50% of households. I asked him if he thought the online investigation of rates would grow even in his area. He believed it was a certainty as the non-computer users die out they are replaced by future home buyers who are thoroughly tech savvy.
    I asked him (and he is less effected by rate sites in his area than most mortgage brokers) whether he thought rate compression and aggressive rate offerings would be the future of our business and this man who has worked in a mortgage brokerage model based on high touch and local market knowledge and small town interaction with his clients said: “it will happen for certain, WHAT WOULD STOP IT?”
    That was a moment of clarity for me, someone who had zero reason to believe that change was inevitable knew that change was inevitable. A smart person can see the future coming even if it’s not really in their interest. Full service, full price mortgage brokers will always exist. But change is coming.

  3. If the broker channel can grow from the current 30%-35% market share, it may be because customers go online ? Sure, it’s possible.
    Since borrowers need people behind the computer screens to drive the closing ratios, it will be interesting to see what happens in our industry. If Banks could sell financial products without people, they would love it. Lucky for us poor so-and-so’s, the banks need sales people and so do borrowers.
    If a third of all mortgage originations happen online ? Wow, that would be something to see. It’s like someone creating a vessel that could fly. Won’t ever happen. ;-)

  4. It’s called a flying boat and Howard Hughes built the biggest one in the world 70 years ago. By the way; all on-line mortgages have live persons talking to the applicants at many touch points in the process. So I guess we may see more online mortgage origination after all.

  5. Mr.Butler, you make an excellent and important point about the difference between online banking and online mortgage origination. Moving money between accounts, transferring money via email, buying short term investments and even stock trading have all become acceptable ways of the Canadian consumer to interact with their day-to-day finances. However, I feel that when dealing with the largest financial decision a homeowner makes regarding the mortgaging of the largest asset they most likely own, the ability to look across the desk and into the eyes of an actual human being and trust that every aspect of this incredibly important process will be handled professionally, efficiently and correctly is and will always be paramount.
    Online information as a resource regarding mortgage financing will definitely continue to flourish in supply as today’s mortgage consumer becomes more demanding, sophisticated and tech-friendly. It is our role as licensed mortgage professionals to educate our clients. There is however a major difference between a customer or “lead” and a client. Clients, handled professionally, are advocates for your business and will help build your practice by referring other like-minded clients to you for the same exemplary service. My experience has shown me that customers or “leads” are transactional. Most online inquiries are from customers, not clients. Customers make mortgages into commodities. Customers call you from your paid ad on a rate website to exclude you – the same as the customer who calls you from your yellow pages ad. They are only looking for the lowest cost and will keep calling around wasting your and their own time, until they think they have found it. As a mortgage specialist you need to decide – do you want to deal with customers or clients?
    Now some may say that customers can become clients – and they are absolutely correct.
    However, for every customer you are spending time hoping to convince not to call the next listed “Best Broker” from the rate site they are staring at, you could be closing a client in your office and building a business. Especially when you find out that they live in a rural community somewhere and they have just put an offer on a mobile home built in the 70’s that closes in a week, on leased land in a provincial park and have a 50% down payment and refuse to pay CMHC fees…and it’s a rental…and they want you to pay for the appraisal.
    Clients build businesses. Customers who decide to use you for rate, will leave you for rate…every time…because it’s a one-sided relationship.
    Online rate advertising that solely focuses on a number, that may or may not be applicable to the customer inquiring, is a dangerous game altogether different. In my opinion, both our national CAAMP organization and our provincial regulators should be taking a larger role to regulate online rate advertising and its disclosure to ensure that facts are represented upfront to the consumer about the limitations that may be attached to these available mortgage products.
    Full disclosure regarding who the lender is, what the prepayment penalties are associated with the rate advertised, whether the mortgage is blendable or portable and what the other important parameters are that may affect someone’s interest in the product should be displayed – and not in “small print”. Full disclosure on the lender should prevent some of the companies out there from advertising “bought-down” rates. If your business model is predicated on reducing your company’s profit margin by telling your suppliers to pay you less then I bid you farewell now…
    As a mortgage professional you need to decide on your business model. Customers or clients? For me personally, if the discussion starts over the phone or via email with rate that is fine, but if it ends on the phone or email about rate…that’s my fault. I prefer clients who become raving fans once they have signed with me in person, knowing everything will be taken care of and leave as part of the family. Call me old fashioned…

  6. Hi Dland,
    At some point Big 6 will heavily invest in online mortgage origination, I just don’t know what it will look like or when we’ll see serious direct-to-consumer competition from banks. I want to say it’ll be a very long time before they cannibalize their current channels, but that would risk under-estimating them.
    The banks’ distribution mechanisms work quite well at the moment. They may need to feel pain from multiple online upstarts before they move into this frontier.

  7. Wake up mortgage brokers! It is online world. Most mortgages will be fully online sooner than most of you retire. Money for my house is a commodity, no personal attachment to bank, CU, trust or mortgage broker. Who gives me the best deal wins my business. I do not have even time to meet you. Very few variables in this business: rate and terms. Believe me, most people can figure it out despite your all efforts to complicate things. I see a time soon when I submit my docs to a website (here is an idea for you) and banks compete for my business.
    If I were a mortgage broker, I would completely go online, mobile applications, no office overhead. Bank will figure out a fully online model very quickly.

  8. One thought – besides the likelihood that online origination spiked because more people want to do online mortgages than previously, as the headline implies…it also likely represents MORE ORIGINATION in general because US housing and origination overall is picking up.
    I don’t have any proof, but I’m sure you’re not a ‘correlation = causation’ guy – right Rob?

  9. Borrowing money is a commodity and certainly a process in personal finance that you can easily learn, just like everything else. You guys are kidding yourselves if you think your broker industry will expand, haha. Let’s tighten CMHC on Friday. Good luck.

  10. Yeah, I will call you old fashioned Mr. Sparrow. You don’t even have mortgage rates on your website. I think that says it all.

  11. I wonder if FSCO et. al. would ever consider a more thorough “know your client” policy than what we have now. With Butler never having met most of his clients, and with mortgage fraud rather rampant, it would sure be a nice salute to that business model. Putting people in mortgages they may not need/want/can’t afford after a 20minute discussion on the phone, having never met them, is probably incredibly not prudent. But, I digress, because prime-65 is prime-65 after all, right?

  12. Gord & Jake:
    Overall U.S. originations grew about 7%. *
    Online U.S. originations grew 75%.
    * Source: Mortgage Bankers Association. Data is for the last reported 12 month period. Compare that to the prior 12 month period. Link

  13. Jake, I just don’t get where this insanity comes from, really I don’t. Butler Mortgage Inc. has done several Billion dollars in mortgage volume over the last 10 years, Billions with a “B”. We deal with some of the very toughest underwriters in this business and for a long time too. Give me a break, you talk about fraud….. seriously, that’s crazy, lenders love us because the business is so perfect: average Beacon Scores in is 767 most of the volume is purchase and renewal. Seriously now: fraud on renewals??? don’t think so.
    I have to say all this stuff about KYC and fraud is just plain goofy. The people who come to us are people looking for a great deal, they study every rate, check every cost, review all the docs and so they should; the consumer deserves the best deal. Jake, fraudsters could care less about rate, they are in the fraud business not the rate shopping business. Please no more of this silliness, our clients are intelligent, informed consumers coming to these sites seeking the lowest rates and efficient, quality service. They don’t want a coffee, a meeting, a pen or a fridge magnet. They want value and that’s what we deliver. That’s why online commerce grows and Jake, no matter how much you want to throw dirt on it to protect the “old school way” it’s coming whether you like it or not.

  14. I agree with you Ron as technology evolves mortgage origination will to. The tried and tested ” Bank Bad, Broker Good & buying rates down is bad business mantra” is getting lame. If banks can find a cheaper way to find mortgage clients they will jump all over it to cross sell other more profitable products, the race for them is to become the primary financial institition for the client. Like it or not broker commission is an in built cost to fund the mortgage, so why not have broker commission included on the disclosure statement, see how much the client appreciates your fridge magnet when he sees how much you got paid for finding the perfect mortgage, lets hear it for FULL CLIENT DISCLOSURE

  15. Hi Jake,
    When someone opens a brokerage account with iTrade, Questrade, InvestorLine, etc. they explicitly accept no advice and the risk of total loss…in exchange for a substantially cheaper commission.
    Requiring homeowners to use a full-service mortgage broker is like requiring millions of online traders to use a full-service stock broker. Canadians speak loud and clear on this principle. They want, and deserve, the right to be self-directed.
    Note: I say that in the following context: 1) My brokerage firm caters, in part, to online consumers; 2) Despite that, experience suggests that most consumers are better served with personalized mortgage planning (mind you, future technology may change that opinion.); and 3) It’s my personal view that suitability regulations and their enforcement should be strengthened in cases where customers seek, and don’t waive their rights to, full-service advice.

  16. >>>”it will happen for certain, WHAT WOULD STOP IT?”<<< FSCO. In fact, they are already in discussions with brokers about how they are advising their clients and going through all the conditions and disclosures. FSCO recognizes that some brokerages who advertise on rate websites run a lean assembly line operation because of the high cost to acquire a lead and converting that prospect into an actual client. In fact, I would really like to know if the email they sent out earlier this year was because of consumers who got their mortgages through these websites ran into problems with high penalties or no bridge or portability or whatever, and complained to the regulator about not being told about thoroughly advised about certain things. NOT saying this is what happened but I am wondering if that's what led them to send out that email to the industry earlier this year.

  17. Potentially at my own peril, I am shifting AWAY from the online model. The online leads I have had are almost always rate shoppers, and as a practice, I do not sell rate.
    I am focusing more on the personal relationship, long-run, full service model and so far the results are good. Today’s market is tough, even for us “experts”. The analogy to online stock brokerages is quite good – those who go that route do so knowing full well there is nobody on the other side asking them, “Really, are you sure you want to do that?”.
    Just yesterday I successfully overcame a RateHub/True North rate objection. My client was comparing the deep discount rate to the 5 year rate I got for him, without understanding the risks/reduced privileges of the bargain rate he’d seen online. His loan is conventional, and this particular rate applied only to high ratio, so he couldn’t get that rate anyway. But he didn’t know that. And in an “online” model, he’d apply thinking he’s getting that bargain basement rate, and end up with the same (or close) rate as if he’d used a full-service broker in the first place, except without the full service.
    I’m the kind of consumer who wants to do my own research and find the best solution myself. Or, I used to be. And it is undeniable that the “lowest common denominator” is more knowledgeable now than even a couple years ago, but I’m seeing more that that knowledge is almost universally limited to RATE.
    There is no replacement for sitting across the kitchen table from someone, sending them a housewarming gift, a personal happy birthday email, congratulating them with a hearty handshake and a cigar on the birth of their first child. No computer will ever do that (YET!! Hah.) and I’m finding that my clients appreciate the extra mile, and many of them happily and KNOWINGLY are not getting the best rate out there, but have me at their side.
    I’m going the contrarian route on this trend.

  18. Hi Andrew,
    Thanks for the post. I genuinely hope I’m wrong and that full-service brokers flourish in the next decade. There’s no question that it’s hard for a streamlined automated ultra-deep discount model to replicate the personalized service of a mortgage professional like yourself. That said, I am worried about the growth prospects for full-service brokers given the trends I see.
    On a side note, you bring up an important point. So many Internet-focused brokers quote rates online without even attempting to disclose the key conditions of those rates. It’s an enormous disservice to consumers. Some purposely quote eye-poppingly low rates with no details whatsoever, just to get people to call them. When the client doesn’t qualify for that rate, they try to push them into another rate. I mean, really, how hard is it to put on your website: “For insured mortgages only” or “5% prepayment privileges” or “Not available on 75-80% loan-to-values” or “18 year minimum amortization,” etc.
    My hat comes off to the brokers who don’t play these games and fully disclose all key rate limitations.

  19. If the bank mortgage specialiest is paid by commission then why shouldnt that fee be on the Disclosure Statement. Why would it be wrong to have full disclosure for the client on what is a built in cost for the mortgage for both broker & bank Mortgage rep

  20. Honoured to receive a reply, Rob. I truly cherish this site.
    It’s easy for me to say I’m going contrarian when my volume is still growing steadily – I haven’t hit the plateau I’m told is coming. Don’t be fooled: I’m still handily in the sub-$10mm category and have other means of income in the meantime.
    I’m curious about your take on the (T)he (N)ameless (M)ortgage broker, or TNM for short… the big orange rate-buyer-downer, for good-credit only, soon to be making a big push in Ontario, brokerage.
    This particular outfit does indeed disclose some of the things you mentioned in your reply. But consumers, by and large, have no idea what those things mean. So they call anyway, and likely end up with a deep-discount rate they’re going to pay through the nose to break, or with a rate that is on par with what a full service broker would get them anyway.
    One part of me is upset at what seems to me like a bait-and-switch. The other part is maybe just a little jealous I didn’t think of it first.

  21. Kind of you to say Andrew. Thank you.
    Regarding the broker you mentioned, it is better than average at disclosing the key terms of its offerings. Its rates include descriptions like this:
    • 30 year amortization maximum, 25 year on High Ratio
    • $250,000 minimum mortgage amount
    • 15% lump sum payments & 100% payment increase
    • 120 days rate hold
    Most of these points are readily understandable, save for “high ratio” and “payment increase.” And if you don’t know what “amortization” means, you’re probably not this broker’s target market.
    Obviously, a reference to the lender’s port, blend and penalty policies would be more ideal for the consumer, along with definitions for some of the jargon. But give the serious online players some time and you’ll see this evolution occur on their websites.

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