A trailer fee is a commission that a lender pays to a mortgage broker when his or her client renews with that lender.
It’s basically an incentive for brokers to keep their clients with the lender after the mortgage matures.
But trailers haven’t worked out as hoped for Street Capital, the broker channel’s third-largest lender brand by market share. Four years after launching its “Loyalty Program” with trailer fees, the company says “…We have not seen any material impact (of trailers) on either mid-term liquidation or retention.” As a result, it is doing away with trailer fees on new applications, effective July 1, 2015.
As is the honourable thing to do, Street is maintaining trailer compensation on all existing loyalty mortgages submitted by brokers, subject to the normal conditions of that program.
Some brokers will undoubtedly be surprised that trailers didn’t pan out for Street, but one man who’s not surprised is broker Ron Butler. He suggests that many brokers are more motivated to move a client to a new lender than to get a trailer fee.
“Client churn is broker heroin,” Butler says. “They cannot give it up, even if the lender provides methadone commission payments on renewal. That’s why every monoline lender has now designed low-rate products that prevent churn with big penalties or the inability to refinance without going back to the same lender.”
“…Brokers churn the clients in a way that does not exist in bank branches or with road reps,” he adds, calling it especially prevalent with certain brokers who spend the bulk of their time working large databases of existing clients. “Churn is actually the whole case against brokers, not fraud, not a degraded credit profile for the book, not even pricing…”
Of course, countless brokers do, in fact, do the right thing, which is to not move clients at renewal when it’s not in the client’s clear interest. Moreover, not all lenders are finding trailers ineffective. “Our mid-term liquidations and retention levels meet organizational benchmarks,” says Boris Bozic, founder of Merix Financial, a lender that helped pioneer trailers in the broker channel.
“We believe our success in this regard is a reflection of our efforts, and our ability to clearly communicate the benefits of a trailer fee model…To be absolutely clear, Merix is undeniably committed to the trailer fee program…and building future wealth for mortgage brokers…”
Back to Street Capital: It’s hard to measure the potential impact of this news on Street Capital, primarily because there’s no way to know how many brokers submit deals to Street primarily to get trailers. It’s likely a minority, as the majority of brokers industry-wide still support the bird-in-the-hand model of upfront compensation. That said, we will certainly monitor market share numbers in the next four quarters to see how this all plays out for Street.
Street is also in the midst of applying for a bank licence. Pending approval, it tells us that it plans to announce further value-added products to the mortgage broker channel.