What do you do when your competition has a 32-year head start?
If you’re Equitable Bank, you pay brokers 150% more than normal.
That’s the surprising move Equitable has made to build momentum in its reverse mortgage business. This degree of compensation is virtually unprecedented in this sector.
“…The promotion is intended to encourage broker trial of the PATH product and to raise broker awareness of reverse mortgages,” said Paul von Martels, Vice President, Equity Release and Prime Credit. “Equitable is new in this market and has ambitions to grow its presence.”
And encourage broker adoption it better. According to the latest OSFI data, Equitable (which relies almost solely on broker originations) had just $1,693,000 of reverse mortgages on its balance sheet, adding virtually none in the month of August. That extremely slow start is in contrast to rival HomeEquity Bank, which is pacing towards $750,000,000 of new business this year.
Equitable could have chosen to compete on rates and undercut HomeEquity, with less hit to short-term margins. (From a consumer standpoint, we wish it had.) Doing so might have led to more mainstream media coverage as well, since the reverse mortgage market is one that’s badly needed price competition for decades. But instead, it chose to pay brokers more—much more.
As a consumer you might be thinking that this degree of pay could sway a broker’s recommendation. And in many cases you’d be right. That’s the point.
But that’s not necessarily a consumer risk. Brokers generally have a legal obligation to recommend suitable products. “Naturally, Equitable Bank expects brokers be ethical in their dealings with this and all other products,” von Martels adds.
But compensation influence is less of a concern in this case because available product options are pretty similar, assuming the customer qualifies at both banks. Indeed, some brokers may use a part of that extra pay to offset client fees (a good thing).
And Equitable’s PATH product brings other key benefits to consumers. For one, it’s healthy for competition. So far that competition hasn’t brought down rates, but eventually it might. For now, however, Equitable is sticking with oligopoly pricing to protect its margins.
Rates aside, Equitable does have lower “setup” fees ($995 versus $1,545 to $1,795 at HomeEquity Bank). But HomeEquity’s setup charge includes legal fees so it’s roughly a wash.
So far, HomeEquity Bank hasn’t countered Equitable’s compensation offer. From a guidelines perspective, however, HomeEquity’s CHIP Reverse Mortgage still has a clear edge (which is partly why Equitable has to pay so much). Among other things, CHIP applies to more borrowers than PATH, as its loan-to-values and loan sizes are higher and its lending area is larger.
That said, Equitable has made several improvements to its product since it launched in January. It has expanded its lending areas to more cities and surrounding areas, increased its maximum loan size to $800,000 and reduced its prepayment charges (it now has no prepayment penalty in the event of death and a 50% discount if the borrower moves to long-term care).
But HomeEquity Bank has far deeper roots in the industry. “We have built very strong relationships with major brokerage houses and brokers across Canada,” said HEB’s Chief Marketing Officer Yvonne Ziomecki. “They put a lot of value on education, training [and the] support they get. A short-term incentive will not sway them; they are in it for the long run; that’s who we want to do business with.”
Indeed, Equitable markets that brokers don’t need to be certified (like they do at HomeEquity) to sell its products. But to be fair, that “certification” is easy to get.
“Perhaps a handful of brokers will pick commission over client needs but we are not concerned,” Ziomecki adds. “We haven’t seen [a] slowdown in our mortgage business since the promotion was announced.”
As for Equitable, it’s seen a noticeable boost in uptake. “Brokers are most excited about having another option to present to their clients and the 250 bps [compensation] has encouraged brokers to invest time in learning about the PATH offering so they can present it to clients with confidence,” von Martels tells us.
Equitable’s promo is presently available in Alberta, B.C. and Ontario. It applies to advanced funds only and will last up to March 31, 2019.
“How the finder’s fee program evolves post that date is to be determined,” von Martels says. “We have big ambitions for the PATH Home Plan product, however recognize that it will take some time for the market to adjust to having another option in PATH. We’re in this business for the long term and are patient, yet intensive with our growth efforts.”
As an industry watcher, Equitable’s move seems positive overall. Yes, some analysts might call it desperate (it could have gotten away with paying brokers “just” 100 bps more), but the company had to do something to make a splash and jump-start its reverse mortgage business.
The fact is, consumers need Equitable to gain share in this market—and so do brokers.