True North Mortgage (TNM) has been an innovator since the company began in 1999. It was the first independent mortgage broker to create a national footprint of retail mortgage stores, an early leader in targeting online consumers through rate comparison websites and one of the first to leverage the buydown rate model.
It has now made another first as a discount broker by launching its own CMHC-approved lender. Named THINK Financial, the company sells insured mortgages exclusively to True North Mortgage customers. The Calgary-based lender approved its first deal on May 24 and has five full-time employees.
We caught up with the company’s CEO, Dan Eisner, for a rundown on this new project.
CMT: So, Dan, do tell, why did you want to go through all the trouble to start your own lender?
Dan: The same reason we do anything. To improve the customer experience while providing ever lower rates. This is not to say that our current lenders don’t provide a good customer experience or poor rates. But as a lender/broker combo we can control the customer experience to a greater extent and thus ensure a superior experience for the good credit clients we attract. In the past, much of TNM’s success hinged on hiring salaried high-quality mortgage specialists and Realtors. The majority of TNM employees are former mortgage underwriters with years of experience in the mortgage industry. This means we can operate without the need for BDM teams, tradeshows, sponsorships and other costly broker promotions.
CMT: How long did it take you from the time you first decided to implement the idea to the first approval?
Dan: That’s a hard answer to pin down. We first starting tackling the problem in 2013. We didn’t get really serious about it until the end of 2014. Our submission to CMHC took place in 2015.
CMT: Knowing all that you do about the process, how happy are you with the decision? Will the rate savings be worth it?
Dan: We are happy so far, but these are very early days. Things like this can take years to play out.
CMT: Who is servicing THINK Financial’s mortgages after closing?
CMT: As a CMHC-approved lender, you need at least two funders (one primary and one backup), correct? Can you talk about the funding model a bit?
Dan: Yes, we are a CMHC-approved lender, and yes, we have more than one funder as required. This designation we have allows us to underwrite and sell mortgage directly to funders/investors. Any mortgage issued by THINK Financial is sold to a funder in much the same way as First National or MCAP operates. In the end, something like 90% of the mortgages in Canada end up sitting on the balance sheet of one of the big banks in Canada.
CMT: What kind of capital did you have to put up to make this lender possible? Did this require bringing on new investors?
Dan: We exceeded the CMHC and Canada Guaranty required $5 million in capital by a good margin. Less than 10% of the shares of True North Mortgage are owned by third parties and we are proud to say that greater than 40% of the employees in True North Mortgage are owners.
CMT: At the moment, you can only submit high- and low-ratio transactionally insured mortgages to CMHC—no bulk insured business—correct?
CMT: How long until you can submit bulk insured deals to CMHC?
Dan: Two to three years in regards to CMHC, however, we have already commenced low-ratio portfolio insured deals with Canada Guaranty. Right from the start Canada Guaranty has been a strong supporter. They took the initiative to review the historical performance of deals brokered by True North Mortgage and judge us by the results. Clearly they were pleased with what they found and thus offered us low-ratio bulk insurance at launch, along with high-ratio.
CMT: What type of challenge does it present when a new lender has to wait two years to submit bulk deals to CMHC?
Dan: It is a significant hurdle for a typical new lender entering the market. From my understanding, the private insurers rarely work with brand new lenders…until they have seen [multiple years of] strong audit results. As a result, a typical new lender is left with CMHC as their only option. Although it is possible to submit low-ratio deals to CMHC while on probation, the transactional cost of doing so is prohibitive. Thus most new lenders are left to offer high-ratio deals only. Being a high-ratio only [broker channel] lender does not put you in good stead with many mortgage brokers and thus the resulting submissions will be of lower quality. In the case of Think Financial, we were able to provide both high- and low-ratio by having two insurer partners.
CMT: Thanks, Dan. Anything else you’d like to add?
Dan: Although it is very early we are pleased to see that our new lender has driven substantially more calls and many of these clients are ending up with mortgages from our current stable of lenders outside of THINK Financial. Of the $63 million we got approved in the last two weeks, less than 15% ended up at THINK Financial.
On the Product:The company’s primary product is a full-featured 5-year fixed called “The Works.” It’s currently marketed at 2.29% (according to the website) and has a normal penalty and 20/20 prepayments. All of the firm’s mortgages are registered as standard charges.
THINK Financial also plans to roll out a no-frills mortgage (called “The Skinny”). The product will feature aggressive pricing and be portable, but it will have no prepayment privileges and come with a penalty that’s the higher of 2.75%, the IRD or 3-months’ interest. With those limitations, the rate will have to be exceptionally low as it will be easy to sell against. Then again, in the online arena it often only takes a 1 bps lower rate to generate phone calls. Some customers completely overlook the rate details in the beginning.
On Other Brokers Trying the Same: True North Mortgage originated $1.1 billion in mortgages in the last 12 months. It has the scale necessary to pull off its own lender. For other brokers considering such a move, note that funders may be hesitant to support direct broker relationships unless they can expect hundreds of millions in annual originations (although some may entertain less initially, if there’s a big upside).
On the Lenders’ Perspective: This isn’t something that thrills lenders as they’d prefer brokers don’t compete head on. One worry is that they’ll get a lower quality of insured business from brokers who have their own lenders. The thinking is that a broker will keep its best deals in-house, since insurers put new lenders under intense scrutiny for arrears. But in True North’s case, the quality of business is above industry norms to begin with. Moreover, we suspect that Eisner, clearly an astute operator, is not about to jeopardize the company’s valuable lender relationships.
On What This Signifies: In this author’s view, True North would not have done this if it couldn’t price at least 5-10 bps lower than its existing lender relationships allow. Client experience aside, this move is mainly an answer to severe online price competition, a factor that’s becoming more pronounced with 44% of online consumers now using rate comparison sites. Other big brokers also see this writing on the wall. So, while this may not be a major industry trend, expect a handful of other $1 billion+ independents to follow the same path.