Broker Boot Sparks Questions

RateHub was the talk of the industry last week when it kicked Spin Mortgage, a Vancouver mortgage broker, off its website. (That story)

The drama made national news, leading thousands of consumers to ask questions they had never pondered before, including these:

#1 – What on earth is a rate comparison website?

That’s not a joke. Millions of Canadians still don’t even know what rate sites are.

As of last fall, only 16% of customers used them to research mortgages, according to a CAAMP survey. Slowly but surely, the media is spreading the word about these sites (that they aggregate mortgage rates to facilitate comparison shopping).

(Full disclosure: This author operates a separate mortgage comparison site where my own brokerage advertises, as well as Spin Mortgage and others.)

#2 – Why would a broker get booted from a rate comparison website?

Like most such sites, RateHub bills itself as having the “best mortgage rates.” Whether Spin Mortgage’s 5-year fixed rate was the “best” is debatable, but it was certainly the lowest on several occasions.

But that wasn’t enough for Alyssa Furtado, RateHub founder. She claimed that Spin’s rate applied to only 10% of borrowers. RateHub asserts that the offer misled and disappointed too many RateHub visitors, who called the company to complain.

At least one or two big-broker advertisers also complained to Furtado. They didn’t like how Spin Mortgage would jump on the site for an hour or two and then hop off after getting its fill of leads. The practice threatened the brokers’ application pipelines and margins.

On top of this all, one broker customer, Ron Butler, accused Spin Mortgage’s website of attempting to “bait” customers with a low rate and then “switch” them into a higher rate.

#3 – Are the lowest rates just bait and switch tactics?

In this case, the product Spin advertised had virtually the best combination of rate and compensation in the market. There would have been little economic incentive for Spin to push customers into another mortgage.

What this really boils down to is something else: price segmentation. All brokers employ price segmentation by offering a range of mortgages—some at deeper discounts with fewer features and some at higher rates with more features. The product in question was sold at 2.44% and had less “frills” (e.g., only 5% prepayment privileges versus the industry average of 15%, and a 30-day rate hold versus 90 days or more).

In and of itself, advertising a readily available low-rate low-frills mortgage and then educating customers on alternatives is categorically not bait and switch. Price segmentation is routine in an array of industries, from airlines (advance fares vs. last-minute fares) to investment brokers (self-directed commissions vs. full service) to gas stations (87 octane vs. 94 octane) to bookstores (online prices vs. in-store prices). Lenders and brokers upsell people into more flexible, more suitable mortgages all day long.

#4 – Will I even qualify for those low rates?

The Globe quoted Furtado as saying only 10% of customers qualified for Spin’s rate offer. That’s so far off the mark, we thought it was a misprint. The majority of prime customers would have easily qualified for that deal (rate sites primarily cater to prime customers). Albeit, some customers would have had to wait until 30 days before closing to apply, which rate site shoppers often do.

More to the point, qualifying for a mortgage is not a right. You always have to meet the lender’s guidelines. Thus, there is no justification for censoring a rate because only a minority qualify. That would be like telling a bank it shouldn’t advertise prime rate (2.85%) credit cards to people with 800+ credit scores because people with lower scores would be disappointed.

Without question, borrowers have a right to see restricted rates and lenders/brokers have a right to advertise them, as long as the key conditions are clearly disclosed.

#5 – Is there more to RateHub’s story?

RateHub’s manifesto is to help consumers “make smarter decisions with complete information.” Yet, it does not allow rate advertisers to display restrictions on their rates. This is something competitors like RateSupermarket.ca and LowestRates.ca do to avoid misleading consumers and to save brokers from paying for irrelevant leads. But it also generates fewer paid leads for a rate comparison website.

Also of note: Spin Mortgage got no warning it would be removed from RateHub. Nor did RateHub give it a chance to disclose its rate conditions, which Spin does on both its website and all other rate comparison sites.

“We believe in financial transparency and not allowing teaser rates or bait-and-switch rates…” RateHub’s chief marketing officer told Yahoo Finance. Yet, the company reportedly allows other brokers to advertise the same product, with the same hidden conditions at almost the same rate (5 bps higher).

Brokers on message boards accused RateHub of double-dealing in order to protect its own brokerage (CanWise Financial) and other large advertisers from competition. We won’t speculate on that but one can see how circumstance does not favour RateHub, at least on the surface.

#6 – Can I really get the best deal from a rate comparison website?

Sometimes yes. Sometimes no.

Certain well-informed AAA borrowers do okay on rate sites. But those who simply gravitate to the lowest rate and don’t compare contractual terms often wind up with expensive penalties, refinance restrictions, porting limitations and/or lack of liquidity when they really need it. In the absence of good advice, those limitations can cost people many times the upfront savings from a lower rate.

Then again, someone’s odds of finding a suitable product online may be just as good as they would be walking into a bank or credit union. A lender sells only one line of mortgages and there is seldom an objective comparison of alternatives.

Either way, a national media outlet has now shown Canadians that rate sites may not always have the lowest rates. Many such websites have policies that exclude some of the country’s deepest discounters. That will certainly make some mortgage shoppers a bit more skeptical of these sites.

#7 – How much are brokers really getting paid?

The Globe wrote that Spin sacrificed part of its commission to offer a lower rate. A lot of consumers don’t even know brokers can do that. You can imagine how price competition will evolve if/when consumers start expecting broker buydowns as a matter of course.

*****

Apart from consumer questions, the Globe‘s story also ignited a mini debate in the broker channel. Some well-established full-service brokers opined online that discounters are “ruining” the industry. By ruining, they meant lowering broker compensation and thereby discouraging investment in service and consumer education. Giving up half of one’s commission and offering comprehensive advice and personalized service just isn’t possible, they argue. And, exceptions aside, they’re generally right.

But offering less for less is exactly the discounter’s strategy. And it’s precisely the reason net commissions are falling in our industry, to the benefit of well-informed consumers.

But what about consumers who are less informed or have higher service requirements? Will they be disadvantaged because brokerages don’t earn enough to service them properly?

In the medium term, anything’s possible. Long term, it’s less of an issue. That’s because two things will happen: a) the brokerage industry will figure out how to provide cutting-edge mortgage advice at a lower cost through technology; and b) mortgage professionals who provide the best personalized advice will refine their ability to differentiate their service and sell it at a fair price, albeit to a smaller audience.

  1. Rob and I rarely disagree and I do agree with many of his points in this article. I do stand by my statement that Spin Mortgage employed and continues to employ high tech bait and switch. Their website is designed to cast non-traditional mortgages in a negative light. It is done cleverly and subtly but it completely intellectually dishonest to suggest that it is not a planned action. The site is designed to steer clients away from the mortgages that have different terms than traditional mortgages, the reasons may not be just compensation, the reasons may be based in the added difficulty of underwriting at some lenders or whether or not there is another lender insisting on their quota being filled to maintain status; I don’t have those answers. I maintain there is one key element to client satisfaction in a rate driven space: embrace the best rate product, encourage the consumer to take advantage of it once all of the conditions are fully explained and close the mortgage at that low rate. Anything else degrades what we as discount mortgage brokers are here to do,

  2. Very good article Rob. You tip toed through the minefield very well.My own reaction to this news was surprise, as I have always felt most of the low rate specials on these sites have restrictions of one type or another. So why pick on one offering in particular?

    I am contemplating testing the waters with a rate site, since I feel more and more prime consumers will demand lower rates and could care less about our margins. Getting in front of the problem is wise.

    I was a full service stock broker in the eighties when discount brokerage houses were beginning to make their mark.This had a sustained downward pressure on all commissions to the point where they are now ridiculously low.. Those of us who did not adapt or have a ready answer for increasingly sophisticated consumers ended up struggling or leaving the business.

  3. Just in time for lunch! To add on to what Rob has said, many of the best rates for regular mortgages are not advertised on rate websites. The reason is because brokerages who have access to those rates are contractually prohibited from publishing them. A few years back Lendwise came up with rates that were ridiculously lower than everybody else and participating brokers were instructed not to publish these rates publicly. Surely enough 30 seconds later a whole bunch of people advertised them to get an edge over the competition.

    That’s why I almost choked on my Coke Zero last week when I saw all the fuss about 2.44% for “no-frills” 5-year fixed. Why would any perfectly qualified person take that route to save $7 a month when one can secure a completely regular mortgage for a mere 5 bps more and where the penalty is a small fraction of what a bank would charge for early payout?

    There is no question that some of these sites need to provide more information to consumers about the details behind the rate and keep the lingo as simple as possible so that even the most novice mortgage consumers can make an informed decision. This of course goes against their business model because giving out too much information means less clicks and that ultimately means less revenue to the website and less leads for the brokerages who use them and pay for those leads.

    Now let’s briefly touch on bait and switch since it was raised in the article. In the interest of transparency, rate websites should indicate in big bold letters if the mortgage rate being published is the actual contract rate and not the “effective” rate where brokerages are selling a higher rate but publishing a lower rate because of a small cash-back component to the client. The websites should also include information about a fee that the consumer may have to pay if they apply and do not close the mortgage.

    The bottom line is the more transparency there is the better off the consumer will be. Unfortunately transparency in the online leads world is not always present to the extent that it should be because being more transparent and providing more information upfront means making less money. I understand the pressure that brokerages who rely on these sites are facing. After all you’re paying for leads and buying your comp down to peanuts so you have to find intricate ways to make the phone ring. That said consumers deserve full disclosure up front no matter where they get their mortgage from.

  4. Spin Mortgage has one of the better rate quoting tools I’ve seen and I imagine competitors will emulate it. It engages people and helps whittle down the choices without any personal information. Most broker and lender rate pages are just plain Jane rate tables with no disclosures whatsoever.

    I went through Spin’s system and chose a “restricted rate”. It quoted me 2.44% and stated:

    This is an effective rate for insured purchases and transfers only & includes a cash back | Contract rate is 2.49% | Conventional deals will be 2.49% and will not include include a cash back | close in 90 days | 20% pre-payment | can’t refinance to another lender during term

    Like I said, this is way more disclosure than most brokers put on their web pages.

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