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.”
“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.”
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