FICOM CEO on Mortgage Size Recommendations

The great thing about regulators is that they ask the questions many of us in the mortgage industry do not.

Take head B.C. mortgage regulator Carolyn Rogers, for example. On Tuesday she questioned the motivations of some in the mortgage business.

Speaking at the Mortgage Brokers Association of BC (MBABC) conference in Richmond, B.C., FICOM’s CEO said,

“…There is no question that borrowers are stretching ever further and taking on more and more debt to purchase a home in this province. I worry that the compensation structures in place for both lenders and brokers can make this worse.”

She added:

“Compensation in [the broker] business is largely volume driven. Every dollar a broker or lender puts on the books puts money in their pockets. So I wonder what the chances are that anyone ever has a conversation with a borrower about whether they can really afford the home they are buying, and the mortgage that goes with it, particularly if interest rates rise. How often does a broker talk a borrower into a smaller mortgage, even if that is really what is best for them?”

That’s a good question since nobody wants clients going underwater on their debts, especially regulators entrusted to protect the public.

The answer is anyone’s guess but it’s certainly a small minority of cases where a mortgage originator talks a borrower into a smaller loan. Usually there’s no need because the person readily qualifies (based on lending guidelines and personal budgetary guidelines).

But some originators (brokers and bankers) do close mortgages for people who can’t comfortably afford their payments today, let alone if rates surge. And let’s be honest; that sometimes happens because the mortgage originator cares more about their commission than protecting the client. Mind you, this may be less of a concern with successful mortgage advisers who aren’t struggling to pay their own bills.

Alternatively, some originators simply don’t consider it their job to assess client budgets. They’re feel it reasonable to apply industry-standard debt-ratio guidelines and leave it at that.

But brokers who purport to be “full service” or “mortgage planners” absolutely have an obligation to assess client budgets. In some provinces (hopefully more in time) it is a regulatory requirement.

Best practice is for a mortgage adviser to “stress test” a person’s after-tax budget to ensure it can withstand a minimum 2% rate increase, factoring in potential risks to their income. It’s a straightforward calculation and stress-test calculators exist to make it easier. Spending even 10-20 minutes on this exercise can open a client’s eyes to potential risks—something that’s even more critical when the client has minimal liquid savings.

“Getting borrowers into mortgages they cannot afford or lenders into deals they otherwise would not have made may feel like a win in the near term, but it will absolutely hurt your industry and potentially even the economy in the long term,” Rogers said.

“It is a practice that will come home to roost. We need only look to the south to remind ourselves of this.”

  1. If a mortgage broker is going to promote themselves as a Mortgage planner or full service, then it should be manadatory that they have a financial planning designation.

  2. I think that first off, mortgage brokers have the right to offer a transaction based approach that does not suggest we are “planners” or “advisors” or “consultants” Why can’t we just be honest brokers who put lenders together with borrowers in an efficient, low cost manner? In Ontario the regulator recognises this is a viable option. Although it is required the mortgage broker reviews the suitability of the mortgage product for the borrower the regulator does not demand we act as financial planners; a profession for which we are not trained, licensed or insured.

    The other critical issue is that many people firmly believe they have the right to make their own decisions about their own financial future. They reject the nanny state concept that they need a government licensed “advisor” to review what they want to do. Consider this: 5 years ago anyone who decided to buy the most house they could possibly afford has been rewarded with substantial equity growth in many major cities in Canada. I will not debate how that equity increase will work out over the next 5 – years but factually the person who got the biggest house they could possibly afford has done okay so far in many cities. How about the concept that the buyer has the right to believe in their ability to better their income prospects in the coming years? Who are we or the government to be the ones who say “no, you will never do better”

    Finally we are not the ones who really make these decisions, realtors calculate what they think is the most house the client can buy and recommend that target, our competitors, the bank branches tell the client the max possible mortgage every single time and clients also focus on their own aspirations. I would say 75% of the time that we see a purchase it has already happened! We don’t really have any input on that transaction, we are just asked to supply a solution.

    If the government is worried that Canadians are over leveraged on property debt the government has many levers they can pull to change that outcome. Please do not dump the responsibility at the doorstep of mortgage originators.

    1. Hi Ron,

      Thanks for the post. This is one of the timeliest debates in our business right now.

      In financial services (not just mortgages) there is a segment of the market that demands self-directed solutions in exchange for upfront cost savings. So in a reasonably free market, you’re absolutely right that the advice bar should be lowered for those clients. This is despite the fact that bad mortgage choices can cost folks far more than the upfront rate savings.

      The main problem occurs when an originator holds themselves out as providing “trusted full-service mortgage advice” or “mortgage planning.” Those folks have a much higher duty of care (in some cases a legal obligation) to not put people in mortgages they potentially cannot afford. Determining present and future affordability is not a science, but making a reasonable good faith effort is sufficient, and it’s not difficult. It requires no special degrees or certifications to estimate a person’s net cashflow, just some common sense, basic match and simple stress testing. But again, this obligation depends largely on what sort of originator one is purporting to be.

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