Mortgage spreads can’t get much tighter, right?

Wrong.

DUCA Financial, Ontario’s 5th-largest credit union, has launched a strikingly competitive program for mortgage brokers. How competitive? We’re talking 5-year fixed rates currently priced just 115 basis points above the 5-year bond. That is unheard of pricing in today’s market.

If DUCA can maintain such spreads, the 60-year-old credit union could siphon hundreds of millions (perhaps billions) in mortgage volume from Ontario competitors.

The real story, however, is how DUCA can offer those rates.

By default, DUCA has to be ultra-competitive. That’s the only way it can execute on its new model, which is to use brokers to rapidly build its membership. That, in turn, allows it to cross-sell a variety of financial products to new people.

In fact, it’s so dedicated to brokers that it has eliminated its own mobile sales force. Brokers are now a virtual extension of its branches.

“We want to be a top-10 broker channel lender by the end of next year,” notes Andrew Ramdeholl, AVP, Commercial Lending & Broker Services, and the brainchild behind this program. That would be quite a feat for an Ontario-only lender, but DUCA may just have the goods to do it.

Asked why DUCA is investing so heavily in brokers, Ramdeholl says, “It makes a great deal of sense to us here at DUCA to concentrate and focus our efforts on the mortgage brokerage community. It is enormously more efficient to originate the volumes we are targeting with this model. Mortgage brokers have a larger reach and larger circles of influence…”

Here’s more of what makes its broker offering different:

• It’s highly exclusive
  • Only five brokerages are now in the program. DUCA says it will keep the number small and limited to top producers.
• Pricing is guaranteed
  • It’s so aggravating when a “me-too” lender (i.e., one with few product and rate advantages) asks brokers for a big funding commitment in order to sign up. DUCA requires brokers to guarantee a not-insignificant $25 million in funding, but it offers a predictable competitive edge that is largely unmatched.
  • Here’s something of a rarity: DUCA actually guarantees its rate discounting in its broker contracts. That way, brokers know it’s serious about staying competitive. And its rates are guaranteed to be below that of even its retail branches. (How it will avoid infighting with its retail channel is beyond us.) What a stark contrast this is to some banks and credit unions who miss no opportunity to undercut their broker “partners.”
• Brokers underwrite their own applications
  • Yep, you heard that right. Unlike virtually every other broker-channel lender in Canada, DUCA doesn’t have underwriters. It has “adjudicators” who basically do fraud and number checks. (It has highly sophisticated anti-fraud systems.) These adjudicators either approve or decline files. They don’t help brokers “make deals fit.” This system allows for the efficiencies necessary for DUCA’s unequalled pricing.
  • Brokers are responsible for ensuring applications meet DUCA’s guidelines precisely. DUCA imposes a three-strikes policy on brokers who don’t follow its procedures.
  • It wants brokers to meet a 90% approval-to-fund ratio (very high by industry standards and probably unrealistic, but DUCA depends on efficiency).
  • Brokers have to call the applicants’ employers themselves.
  • Documents can be sent in with the deal submission to receive “no-condition approvals” by the next business day.
  • To maintain efficiency, DUCA deals with a maximum of two contacts per broker firm. It does not employ traditional business development managers (BDMs) for training and sales support.
• Borrowers don’t have to be rock stars to get DUCA’s industry-leading pricing
  • Stated income is not available with DUCA’s best rates, but as long as you can prove stable income, have a 620+ credit score, and meet reasonable debt ratios, you’ll find that its guidelines are reasonable. That said, it rarely allows for exceptions to those guidelines.
• Mortgages are mostly funded from its balance sheet
  • Other deposit-taking lenders also fund off-balance sheet, but not having to rely on more costly securitization gives DUCA an edge over the non-bank lenders who do. How long it can maintain that funding edge is the question.
  • To maintain liquidity, it is heavily promoting deposit referrals from brokers.
• Brokers receive full compensation in a lump sum when clients renew.
  • Again, this is very uncommon in our business.
  • DUCA actually refers the deal back to the broker at renewal (another rarity).

All this said, you can’t build a broker business solely on rates and compensation. DUCA has to bring it with products as well. On top of rates that are up to 10-20 basis points below the best in the market (paying full compensation, mind you), customers get a full-featured mortgage with a:

• 120-day rate guarantee
• Float-down option
  • Unlike some broker-channel lenders, DUCA lets brokers reset a client’s rate lower, if rates drop.
• 20% annual prepayment option
  • Makeable anytime in multiple chunks.
  • Accelerated payment frequencies are also available, but there is no payment increase or double-up capability.
• Reasonable IRD penalty
  • DUCA’s interest rate differential (IRD) is based on its everyday retail rates, not inflated posted rates like the big banks.
  • Note: This applies to fixed-rate mortgages. See the not-so-great variable-rate penalty below.
• 90-day gap when porting
  • This refers to the number of days between the sale closing of the borrower’s old home and the purchase closing of his/her new home.
  • 90 days is decent. Some lenders — especially those relying on securitization for funding — restrict you to only 30 days, which makes it harder to coordinate closing dates.
  • Ports are limited to within DUCA’s Ontario lending area. If there’s a good chance you’ll move outside these bounds before maturity, DUCA isn’t for you.
• Excellent blending policy
  • DUCA offers blends–to-term (if you’re adding new money to your mortgage) and blends and extends, both with no penalty.
• Online account
  • For checking your balance or making prepayments via the web.
• Standard charge
  • This means you can potentially switch to a new lender at renewal without legal/registration fees.
  • Those fees are common when you change lenders with a collateral charge mortgage.
  • Note: Not all lenders accept credit union mortgages on assignment, even if they’re standard charges.

DUCA is also rolling out a new automatically readvanceable mortgage under this program. It’s called the Flex mortgage and it can have up to four borrowing components (e.g., a fixed-rate portion, variable-rate portion and/or line of credit). Given DUCA’s features and pricing, this puts a potent new product in brokers’ hands — one that will challenge National Bank’s All-in-One and Scotiabank’s STEP.

Other notables:

• DUCA uses all three insurers.
• Maximum amortization is 30 years on a conventional purchase and 25 years on a refinance or insured mortgage.
• GDS/TDS ratios of up to 39%/44% are allowed with credit scores of 680+.
• Second mortgages are permitted on conventional loans, up to 10% of the property value.
• Unlike some lenders, there’s no rate premium on rentals or second homes.
• Pre-approvals are not available through DUCA Broker Services.
• DUCA permits rental clients to own three other properties, in addition to the subject property.
• Customers don’t have to trek into a branch to sign anything. ID verification and account opening are all done by phone and online.
• Borrowers must purchase title insurance.
• Unlike the banks, DUCA’s variable rates are qualified on the discounted 5-year fixed rate (currently 2.99%), not the Bank of Canada posted rate (currently 4.79%).
• DUCA does not have bridge financing.
• DUCA’s just-announced retroactive rate reduction feature (whereby customers get rate drops up to 30 days after closing) does not apply to brokered mortgages, which have a 30-day longer rate hold to begin with.

And now for the fine print:

• Most variable-rate mortgages come with a three-month interest penalty for early termination. Not DUCA’s. Breaking its variable-rate mortgage early will ding you with the greater of a six-month interest penalty or IRD charge. That is, unless you first convert it to a fixed rate (which comes with the standard three-months’ interest or IRD, whichever is greater).
• There is no DUCA Profit sharing with these deeply discounted rates. (Consumers would likely make out better with the deeper discount anyway.)
• The subject property must be within 75 kilometres of a DUCA branch.
• The discharge fee is $500. (That’s about $200-$250 above normal. DUCA understandably wants to discourage borrowers from switching if it’s giving away the farm on the interest rate. Fortunately, there’s less reason to leave DUCA, assuming it makes good on its promise of deep discounts at renewal. Up to this point, DUCA’s client retention rate has been in the mid-80% range.)
• Brokers must submit applications by secure email. (DUCA is evaluating other submission platforms like D+H Expert and MorWeb).

Our main hope is that DUCA maintains its pricing edge, which relies heavily on its funding capabilities. To that end, Ramdeholl adds, “DUCA is a well-capitalized Credit Union that has been known for superior deposit rates…We have built up a great deposit business to help us fund this program…Securitization is also available to us.”

With only five brokerages, DUCA has generated $70 million in residential origination in just six weeks. Its target is $500 million of annual origination within 12 months and $2 billion annually within 24 months. If it keeps its pricing advantage, it could shatter those targets.

Full Disclosure: DUCA is one of many lenders this author’s brokerage firm has dealt with over the years, and we continue to do so.

Robert McLister, CMT (email)

Last modified: April 26, 2017