Rate Wars in the Broker Channel

Mark Kerzner
Mark Kerzner, TMG

Mark Kerzner, Special to CMT

Competition in the mortgage origination market has benefited consumers, full stop.

Two years ago I wrote this column. It provided evidence that a strong broker channel keeps lenders competitive, thereby benefiting consumers. The same holds true today.

While broker share is approximately 30% of the total market, it operates as a check on the system, forcing all channels (including branch and mortgage sales force reps) to sharpen their pencils.

According to Bank of Canada research cited in that column, customers who used a broker saved an average of 19 bps on their mortgage financing. On renewals, where incumbent lenders retain anywhere from 70 to 90% of customers, broker clients saved significantly more.

But while consumers are reaping the benefits of a strong broker channel, there is growing competition amongst ourselves, and it’s driven largely by rate. A rate war in the brokerage channel may ultimately serve to undermine consumers, not help them.

I want to make two things clear:

  • I do not equate “online” mortgage brokers to low rates, although that is a popular connection to make. Brokers can (and ought to) have strong presence online and in social media. But they do not have to lead with rate.
  • I am not disparaging rate discounters. I can fully appreciate the importance of multiple models and offerings — especially within our small mortgage community where experts have told us time and again to differentiate.

I understand that some discounting will occur, however how much should brokers discount?

For context, to provide an additional 10 bps rate discount, a broker will give up approximately half of the gross finder’s fee earned on a typical 5-year fixed or variable mortgage. For many brokers who earn volume bonus as part of their compensation, that discount shaves approximately 35–40% off their total gross income.

The other side of the question is equally important. For a broker to give up 40% of their earnings, how much does the average consumer actually save over a 5-year term?

Consider a $300,000 5-year fixed mortgage with a 25-year amortization. Comparing 2.89% to 2.79%, a borrower would save about $982 (factoring in the slightly lower payments and increased reduction in principal) depending on which duration is used. Keep in mind, the average 5-year mortgage only stays on a lender’s books for roughly 3.4 years. Using a 4:1 buydown ratio and an average gross total income of 105 bps, the cost to the broker was $1,200. The ratio of broker buydown to customer savings is 0.81 (based on a 41-month duration). The customer incentive is not of relative value.

Considering today’s historically low rates, the amount of discounting in the current market is less significant to a mortgagor than if rates were in the 4.79% range.

Some would suggest that in saying this, I am not a consumer advocate. I say the exact opposite. If we fail to maintain a strong and vibrant brokerage channel in Canada, Canadian borrowers will suffer as a result.

For a typical AAA salaried borrower who gets a 2.79% 5-year fixed mortgage from a broker, they are saving approximately 20 bps off the lowest advertised bank rate. That is still meaningful savings.

Furthermore, what other industry would provide consumers with a rebate that was disproportionately less than the income the sales rep was sacrificing to provide it? If a Realtor rebated 40% of a 2.5% commission, that would equate to a cash incentive to the customer in the same amount (e.g., $4,200 using a $440,000 selling price).

The ratio of broker buydown to client savings is excessive in light of other industries. The risk to the consumer is that buydown rate wars lead to reduced competition, which leads to less overall discounting in the mortgage market.

A few last points to consider:

  • For companies that are marketing themselves as providing the best rates, are they also brokering non-prime and private mortgages? If so, do they discount those rates and fees as well? Shouldn’t all their consumers be entitled to the lowest cost of borrowing?
  • Should insurance brokers give up part of their earnings to buy down premiums? The Financial Institutions Act says no and section 79 (1) outlines to what extent rebates of premiums are prohibited. It establishes 25% as the maximum rebate payable.

Lastly, many companies entered various markets with an eye to be the low-cost provider. One in particular stands out as a tremendous success story: Southwest Airlines (LUV). For many years it gained market share by competing on price. To do so though it had to simplify its operations, serve new markets and cut services to consumers. Usually there is only room for one low-cost provider in an industry. As multiple companies start competing on price they do have the effect of creating a price war, but in the end the model becomes unsustainable and businesses have a difficult time operating on reduced margins — often pushing some companies out of the market. In an effort to enhance margins, even Southwest has introduced fees for checked bags, preferred seating, etc., to remain financially viable.

The current historical low rates being offered are maintaining a vibrant housing market in Canada. Even if rates start to increase, it is choice that fuels competition and that underscores the essence of the broker value proposition. For choice to be available — a variety of companies need to be active — and to stay in business, the financials need to be sustainable.

Given the relative value to the customer of rate buydowns, engaging in this practice may jeopardize and marginalize the value of a brokerage proposition predicated on choice and competition.

About the author

Mark Kerzner is President of TMG The Mortgage Group Canada Inc. (mark@mortgagegroup.com)

  1. With all due respect to the author, how do lower rates create less competition? Those with the best value offer will thrive and uncompetitive providers will wither. It is the natural evolution of business.

    As people get more informed, there is less need to pay a premium for advice. Sure maybe subprime or investor customers need more guidance, but your average person who can read Google is usually better off saving .25% on their rate. If banks won’t give out those discounts and brokers do, it should be positive for the industry on whole.

  2. This article was informative and well thought out. Like some lenders of old: money connect, maple trust and ING. I believe success in the mortgage broker market is predicated on two key aspects. Innovation and Effeciency. Success for me is not having the best rates/products in ideal times, but having the best rates/products in less than ideal times. If this can be consistently offered by a “low-rate” mortgage provider then the mortgage brokerage industry is in good shape and will always compete with the banks. This competition is ultimately what the consumer will appreciate as it affords them another choice.

    1. The only thing makes him worried is the portion he cuts from the brokers.
      If the brokers buy down the rates, he earns less and this is bothering him.
      Let’s ask him if he has ever stand for mortgage brokers’ industry?
      Has he ever dared to call OSFI to disagree on the biased pressure they put on broker channel but not on the major banks out of the broker channel?

  3. Good to know how much this series of middlemen are making so we can add it to how much the realtor middlemen are making. Everyone wants a piece of the pie. When things reverse, you’ll be hoping for a deal nevermind squabbling about 10 bps at the lowest rates in history.

    1. @Concerned…my guess is that you don’t think your boss pays you too much for doing your job. Why is it you think that people – namely Realtors and Mortgage Brokers – who don’t have the security of a weekly pay cheque and who have committed a significant amount of THEIR OWN money and time to build a business for themselves are being paid too much? Lets see you do it; instead of complaining about it why not get your license and you too will immediately share in the millions we all make.

      Ya thought so…just another uninformed opinion. Then again if this is the key point in the article that you feel the need to comment on then your opinion makes sense.

      1. Geoff,
        You are way off base and “Concerned” is completely correct. I was a realtor and I can tell you it is the biggest joke of an “industry” in Canada. When the correction comes (some day) we will see realtor commissions nose dive as they eat each other alive to get business. The same could happen in the mortgage broker industry.

  4. The natural evolution of business is that unrealistic revenues through rate discounting etc lead to the failure of business and therefor competition which in the long view reduces choice for consumers. Any basic business course teaches the overwhelming down side to unrealistic revenue streams. “rate whoring” diminishes the value proposition of the broker channel. In my considerable time in this industry I find that those who think they know by web searching actually know very little and tend to do themselves no service by trying to self diagnose and write their own prescription. Consistant rate buy downs is simply not a sustainable model and those who entertain it need to do do things: be prepared to work for less than you’re worth while others continue to earn a decent living based on providing good service as opposed to taking the easy/lazy way out and then start planning for the next career because with rates so low lenders may start pulling back finders fees anyway. Compound that with rate buy downs and those business will fail. = Less competition for the end user.

    1. Hi Adrian,

      Your post takes me back to 1997 when, as a young trader, I watched analysts on CNBC debate Amazon.com’s IPO. Expert after expert doomed the company to mediocrity with founder Jeff Bezos not predicting profitability for years. Amazon’s business model was “unrealistic” by any conventional definition.

      20 years later Amazon.com is not only a dot.com survivor, it’s the largest Internet retailer in the world. That’s despite operating income of just 2/10ths of one percent of revenues. It built a dominant $173 billion market capitalization by leveraging technology, economies and efficiencies to provide customers with a satisfying alternative to traditional retail.

      But as successful as Amazon is, it still has thousands of competitors, made possible by the sheer enormity of the market. Canada’s residential mortgage market is over $200 billion a year. That leaves plenty of room for creative competitors to keep challenging the establishment. And today, that’s easier than ever. With online mortgage comparisons, a single broker’s prices can shift rate expectation for tens of thousands of mortgage shoppers.

      Traditional brokers provide valuable advice and service and are here for the long haul. But it’s a new dawn in financial services. Not everyone needs or wants to visit an advisor to get a mutual fund. And the same can be said for home financing. Rate discounters aren’t appropriate for everyone, but for certain well-qualified mortgage-savvy consumers, they offer convenience, selection and savings. Labeling providers who serve that consumer demand as lazy “whores” speaks more to one’s desperation to maintain the status quo than to the prospects of those companies, or the industry at large.

    2. I tried to buy the “rate whore” domain at GoDaddy but it had been taken. Adrian your post is senseless, many of the rate discounters you are talking about have been doing it for years and their businesses are growing and thriving. Once again you are entitled to your opinion but 39% of the adult population of the United States believes they have a personal guardian angel watching over them 24/7. Widely held beliefs can still be stunningly wrong.

  5. @ Concerned : You seem to take great delight in villifying Realtors and mortgage brokers as nothing more than unnecessary middlemen. According to CREA’s latest data, 481,162 homes traded hands via the MLS® Systems of Canadian real estate Boards and Associations in 2014. Many thousands used a mortgage broker to help close the deal.

    Why would so many Canadians put their trust in the services of a mere middleman when it comes to selling / buying their most valuable asset; surely in a market such as this, houses and mortgages sell themselves?

  6. Concerned, I understand that, as a consumer, you want to get the lowest price possible. With all due respect, I find your thinking is flawed in this case.

    First, because the rate is one of the many conditions in a mortgage contract. Rate is price, and conditions are quality. These days, it´s possible to get best quality at the best price. But it´s not always the case . My job as a broker is first and foremost to inform the client about the fine print he will have to abide to, once the deal is signed.

    When one focuses on the rate alone, it´s easy to see a mortgage as a commodity. However, during the ten years I acted as a broker, I saw too many horror stories, like people getting ripped of their money because of ridiculous rate differential penalty charges. So not all loan contracts are created equal and choosing the right fit for your own situation can save you thousands of dollars.

    The non-bank lenders often have the most flexible conditions and rely on independant brokers to distribute their product. My view is that fair compensation is needed to keep professional individuals interested in the industry, as it would be the case in any other. Praying for lower compensation would ultimately decrease the broker ranks and therefore give the banks the room they need to act as a cartel once more. Then, you would still be able to pit each of them against the other, and get a decent rate, but at what conditions?

    Like it or not, I think we brokers are the last rempart against banks.

    Philippe Beland B.Sc., M.Sc., AMP
    Mortgage Broker

  7. As someone looking for a mortgage I just want the best rate I can get with good service. If the rate or service are bad I’ll just move to the next bank or broker. Sorry but I am not going to pay a higher rate to save your industry. You’ll have to figure out how to do that without taking more money out of my pocket.

  8. Full Disclosure: Firstly, I know Mark, he is a smart, hardworking guy who has done a great job at TMG. Secondly, my company is one of the deep rate discounters with a largely online model so we represent what Mark is talking about.

    With that out of the way, let me say that Mark is definitely entitled to his own opinion but he is not entitled to his own facts. The concept that deep rate discounting will eventually harm the consumer is just pure blarney. His example of the airline industry is actually a good one but for the opposite reasons than he cites. The airline industry is extremely price competitive and for the last 25 years, mainly does not make much money for it’s shareholders, great for consumers, lousy for many of the airlines but by Mark’s logic that could be bad for consumers long term. Based on his thesis; consumers should pay more for air travel so the airlines can make more profit and therefore have a brighter long term future and therefore offer more consumer choice, with more financially healthy airlines in the mix that somehow that will serve the consumer better over time: that’s hogwash. The consumer wants lower airfares; PERIOD, the public could care less about the financial health of airlines .

    Let the free market rule, let old inefficient models adjust and let new more efficient models thrive and if there is room for high advice, high commission mortgage brokerage; it will do just fine.

    We are not realtors, real estate agents are the total conduits for buyers and sellers; their group represents the whole matrix of their business space. As mortgage brokers we are NOT that; we have many competitors that function outside our own group: bank branches and mobile sales forces are huge players, totally outside of our own sphere. Comparisons of mortgage brokers and realtors are apples and oranges. Realtors sell a pure service, we sell a product with a service component. Therefore, there is going to be discounting on the product side.

    Look; the biggest drivers of mortgage rate discounting are NOT brokers: BMO has for the last two years had by far the biggest media following of their rate discounts although they are decidedly lousy discounts compared with what brokers offer every day. Investors Group offered by far the lowest discounting on a product last year and they are not brokers at all.

    Rate discounting is here to stay.

    I have to point out a deep fallacy in another of Mark’s statements “why don’t discounters offer big discounts on “B” business and private mortgages” once again apples and oranges. Mark really knows that private and “B” mortgages are hand made products that eat up a massive amount of a broker’s time; triple “A” clients are totally different with 15 lenders actively competing for that business through rate and product incentives and ultra efficient underwriting platforms that add speed and cost savings all along the way.

    I also have to call shenanigans on the concept of network and super broker bosses attacking rate discounting for purely “industry” reasons. Most super broker and network bosses have an agenda of their own on this subject. While these executives share common ground with brokerage owners and individual brokers and agents on many issues there are many areas where our interests completely diverge and clearly this is one of them. Brokerage owners can fashion there own models and work to make them a success in the face of rate discounting and individual brokers can make their own rate discount calls based on many factors as to whether or not the retention of the client justifies deep rate discounting; is the mortgage big enough? could there be huge referral potential? many considerations; but the majority of networks and super brokers are simply hurt by reducing commission revenue. Most of them have built a business model based of small slices of broker commissions in aggregate and the wholesale reduction of that assumed cash flow is simply harmful to their business models. Worse yet many super brokers geared their projections to lots of individual agents doing mid-level volume and rate discounting is often a direct attack on small production brokers. Lets face it: if a broker is only doing 35 deals a year, 40% less commissions on 20 deals is a big problem, maybe a career changing problem and that is a big deal to super brokers who depend on lots of bodies being in their systems. So a super broker boss attacking deep rate discounting is disingenuous at best.

    The bottom line is: even if you preface your remarks by saying you are a consumer advocate, if you are developing a convoluted thesis about how rate discounting will eventually harm the consumer; the only person you are fooling is yourself.

  9. Ron. Thank you for taking the time to respond so thoroughly to my post. I am truly pleased to see the level of engagement and conversation to ensure we continue to develop a channel that will bring great value to consumers. Just as I believe that the broker channel has brought great value to consumers I believe it will continue to do so for many years to come.

    In fact, given that interest rates and the housing market remain front page news, I think now more than ever it is absolutely vital that mortgage consumers seek out the expertise of a broker to navigate their mortgage financing needs.

  10. Change leads to a lot of companies going under. When we as ( real estate) brokers met to complain that other companies were stealing our salespeople by offering them 75% commission to our 50% commissions, we “knew” they couldn’t last. Of course, when Remax came in at 95%, we “expertly” predicted both their quick demise, but also forecasted the untold damage to the consumer by these actions. Yes, many companies did go out of business, but most were my colleagues at that time, who offered excuses, and looked for persons to blame rather than searching for better and more efficient ways to deliver their services to the public
    (PS. this comment is not to suggest support to Remax, or the real estate industry as something to aspire to; the real estate industry today is way past its time as an operating model for delivering efficient and properly priced real estate services to the public)

  11. “Let the free market rule, let old inefficient models adjust and let new more efficient models thrive and if there is room for high advice, high commission mortgage brokerage; it will do just fine.”

    This is it! The Butler said it perfectly. As mortgage originators, we must adapt to the changing times… or risk being left behind. When’s the last time you purchased and eight-track? Rotary phone? Polaroid Camera? VHS Recorder? Companies that produced these products had to adapt… so do we.

    Your AAA business model going forward will NEED some sort of online presence. Social Media. Discounted Rates, Mortgage Tips. Monthly Newsletters. OR all the above.

    Time will tell.

  12. I just negotiated a mortgage and can honestly tell you that all I care about are rate and terms. I think the idea that I need some kind of service after the fact is lunacy, I think most people of my generation can find any information they need off google. I spoke with Mr. Butler on the phone when I first started looking and he filled me in on mortgage basics (good on him he didn’t need to do this, I wasn’t even a client). But I took the base info he gave me and read for hours online, then approached my bank with 3 offers and got a rate match, which had better terms. I think like many industries it’s sink or swim, the companies offering the best product (the mortgage, not the advice) will survive.

    1. Anthony,

      I guess this is one of those situations where preference, comfort, value and loyalty play part in the decision. You are happy with rate and term, and may not require the personal knowledge, advice, support or loyalty of a broker.

      In my opinion, a bank is just “ok”, having dealt with both bank and broker. Through experience, we found the only similarity between bank and broker was rate and term – it pretty much ended there, leaving the only point of difference being what? Service.

      What service could a broker offer that a bank couldn’t?

      If you haven’t experienced what a good, trustworthy broker can offer you, then it could be hard to imagine for you and terms such as “lunacy” as you used could be possible – I guess. But in all honesty, IMO you can’t be more wrong.

      We are still happily experiencing how valued we are as a client, how personal our brokers service is, how catered it is to our family, our exact needs, our financial position today and in the future. Our broker knows who we are – he talks to us regularly, he knows our comfort and risk levels, he offers so much personal advice beyond our mortgage that it seems as if we are his only client or more importantly to us, as though he is our friend. Trust.

      He is a wealth of information who strives to make this as easy as possible for us, stress free…he is afterall an expert in the mortgage business making his living based on a culture of service (cuz you can get rate and term anywhere right?)

      Our broker spent 45 minutes on the phone talking us out of purchasing a home where he stood to make much more money, because he knew who we were. He knew the house, he knew the area, he knew all of the home owners on that street. He knew the house needed renovations to suite our needs and ran down all of the costs, challenges with the city and inconvenience associated. He suggested that wasn’t the house for us, and that we weren’t ready to take that particular project on at this time in our lives. I thank him every time I talk to him, because he was right…that house wasn’t for us. Would your bank offer this service?

      And it goes beyond a simple mortgage with this broker. He cares, and it shows. He wants every mortgage we have, now, or in the future and he is willing to do what it takes to earn our loyalty and trust to ensure we have no reason to go elsewhere…his livelihood depends on it.

      Are we lucky enough to have the ONLY broker out there who would do this for their clients…I doubt it….I doubt it very much.

      I’d pay for piece of mind and expertise, but somehow I’m not…crazy huh?

      So why wouldn’t you want more than just rate and term, especially if it is free? That’s seems like lunacy to me.

  13. Anthony,
    First you wasted Mr. Butler’s time. He gave you free advice which cost you nothing, only cost is to him. You took it back to your bank? Already we know that the mortgage you got is inferior to what you could have had.
    Full service brokers do not cost more. The lender pays us, our service is free. Mr Butler buys business with his income. He obviously feels that his unique value proposition is to use his own income to buy your business.
    You have just shown us how successful this model can be by describing your own story. I see two people in your story that did not get what they could have. Mr Butler probably deserved your loyalty based on what he gave to you, honestly and quickly. Your bank already knew what others are offering and insulted you and Mr Butler by making you waste his time.
    Your bank sells financial products for a profit. They are not obligated in any way to look after your well being. You talked to someone who’s license depends on taking care of you, and used his time and knowledge to enable your bank to make more profit. Remember this when confronting an ugly penalty they will charge you on your way out.
    Your last line of your comment
    “I think like many industries it’s sink or swim, the companies offering the best product (the mortgage, not the advice) will survive.” Banks offer inferior mortgages to other lenders all day long and yet they still exist. Mortgage Brokers don’t offer a product, we perform a service to help YOU find YOUR best mortgage. We are not selling a product because our employer has us on a quota system. And our service is free to you. I hope you will think about this again when your next opportunity for a mortgage comes up.

  14. Anthony, many thanks for the comments but the truth is I am fine with it. Part of working online is giving information to people that allows them to get a better deal with their existing lender, that is actually okay, we will get a referral, we will do a deal in the future when the person does another purchase. We help consumers every day get better rates even when we don’t get the business and its okay with me.

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