Brokers Showing Their Hands. The Repercussions.



Showing cards FBThe public is increasingly aware of what mortgage brokers make per deal. And now, courtesy of pending regulatory change, they’re about to become even more aware.

Should that concern you as a broker?

If you like making full commissions, you bet.

Everyone from the CBC and Globe and Mail to trade magazines and consumer forums have published how FICOM (B.C.’s broker regulator) wants to force brokers to reveal their compensation (more on that). In time, other provinces may follow.

What Happens Next

If/when these rules pass, it could take just a few years for a critical mass of borrowers to realize: a) how, and how much, brokers are paid; and b) how they can use that knowledge to negotiate lower mortgage rates.

As this information comes to light, savvy price-shopping consumers will have a field day (savvy being the key word; more on that below). It’s kind of like knowing your car dealer’s invoice cost. It provides a basis for negotiation.

For many brokers, that is unequivocally a problem, a big problem. Tamsin McMahon at the Globe writes, “traditional brokers…argue that revealing their commissions will push clients toward discount brokers offering the lowest fees and rates.” You better believe it will.

Countless borrowers will gravitate to the obvious savings and increasingly opt for brokers who cough up more of their commissions. Who wouldn’t want to save an extra $1,000 or $2,000 in interest?

Where Things Take a Wrong Turn

Choosing the right mortgage isn’t just about the obvious savings. Anyone can compare a three-digit number.

Minimizing one’s borrowing cost relies on finding the unobvious savings, for that has the biggest potential impact on borrowing cost.

Unobvious savings come from:

  • more flexibility (e.g., not having refinance restrictions when you need to refinance, blend and increase restrictions when you need to borrow more, insufficient porting timeframes when you need to port, etc.)
  • lower fees (e.g., avoiding or minimizing prepayment charges, legal fees, appraisal fees, discharge fees, reinvestment fees, title insurance fees, credit line fees, etc.)
  • better strategies (e.g., optimal term selection based on one’s family, employment and financial circumstances, refinancing tactics to lower overall interest expense, early renewal to lock in or average down on one’s interest rate, timing one’s application to get better rates, prudently utilizing debt to invest, structuring rental portfolios to maximize future financing options, etc.)

Unobvious savings come from detailed product comparisons and careful client analysis. Will deep discount brokers, who typically can’t afford to spend 3 to 4+ hours advising clients, offer this same degree of counsel? Likely not, at least not one-on-one.

And if you’re a well-qualified, experienced, financially savvy mortgagor, you may not even care. You might save just as much with that no-frills online rate you found yourself. But that’s not the majority. There’s a reason why the majority of investors prefer advice, despite 30 years of online discount stockbrokering. Likewise, most mortgage consumers want and need guidance. They don’t have the time, skill or inclination to learn the lingo and make detailed comparisons of mortgage features and restrictions.

FICOM’s plan puts online discounters in the catbird’s seat. “It’s really simple,” Ron Butler told the Globe. “I operate on one-third the income of the average mortgage broker, so I don’t mind it being showed to people.”

For the most part, this author (who also has an online mortgage business) doesn’t mind either. For one, brokers should have nothing to hide when it comes to compensation. And second, FICOM’s rule will boost volume for Internet mortgage models materially, for at least a few years.

Ultimately, however, compensation disclosure will lead to bigger buydowns and it will drive down commissions industry-wide—faster than the Internet alone would have done.

This worries more than a few broker network bosses. Any business that takes a percentage of agent commissions—as opposed to a flat fee—is destined to take a haircut.

What’s Wrong With FICOM’s Plan

There is nothing inherently wrong with more disclosure. Various professions disclose their pay in black and white. But with most other businesses, there is less chance of people drawing conclusions about the product/service based on the compensation of the salesperson.

For example, all traditional realtors in a given province make about the same commission percentage. Knowing a buyer’s agent makes 2.5%, for example, shouldn’t cause you to doubt that realtor’s recommendations. The market, not the realtor, sets prices and their commission percentage doesn’t increase if they sell a higher-priced home.

With mortgages, however, compensation varies and is directly linked to price (the rate), term, short-term lender promotions, etc. Knowing the originator’s compensation alone tells you nothing about that mortgage. At any given time the best mortgage can pay the highest commissions and the worst mortgage can pay the lowest commissions, or vice versa. Not surprisingly, research shows that choosing a mortgage based on originator compensation can lead to costly mistakes.

It’s a Start

FICOM’s plan is on the right track. There is no question that a minority of brokers sell worse products for greater personal gain, and we’ve argued for years that something should be done about it.

But implementing this rule, as is, would be detrimental to hundreds of thousands of Canadians. Its flaws first need to be addressed.

For example:

  • It proposes disclosure of all economic benefits to the dollar. How do brokers know what they’ll be paid when lender bonuses are often contingent on future volumes?
  • It mandates this disclosure, but arms consumers with no information to interpret the data.
    • How do average consumers know if a 110 bps finder’s fee plus 7.5 basis points efficiency bonus plus $175 marketing dollars is reasonable for a 5-year fixed?
    • How do consumers know if their broker could have sold a lower rate for a similar product, and still made a normal commission?
    • How would consumers know if a mortgage that generated a lower commission actually entailed the lowest cost of borrowing?

If FICOM could provide benchmarks for these comparisons, that would be useful. That would put this disclosure in context. If FICOM had clear suitability guidelines, that would reduce self-interested mortgage recommendations.

Without this information, FICOM is delivering but one thing to consumers: more ammunition to negotiate rates. FICOM’s actions will expedite commission reductions in the mortgage broker business. In turn, brokers will need to close more deals to earn the same living. That means less incentive to spend 3-4 hours counselling clients and poorer choices for consumers who rely on that advice. That shouldn’t be a regulator’s decision to make, not unless their solution is bulletproof.

Only a minority of knowledgeable consumers with negotiation skills will benefit from this policy change, to the detriment of less educated consumers who arguably need the most protection. The proposed rule, as is, is not the answer. It is like a shovel with no handle, an incomplete tool.


Sidebar: Today, February 20, is the last day to send FICOM comments on these rules. You can do so at brokerconsultation@ficombc.ca.

 

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Comments

  1. Comment avatar

    Philippe Beland    

    To prevent this kind of race to the bottom, the insurance industry doesn’t allow using comp to buy down premiums. As well, in Quebec anyway, an advidor cannot subsidize a client’s premium from commissions.

    Maybe lenders could look in that direction? If they would not accept rate buydowns, Darwinism would come into play and only the best advisors would survive.

    Call me naive, but isn’t the best advice possible the real objective the regulatory bodies should target?

     
    1. West Coast Broker    

      Some lenders position their liberal buydown policy as a competitive edge. You will never get all lenders to ban them.

      Besides, even if you prohibited buydowns, brokers would just give some of their commission to the client and advertise a lower effective rate.

       
      Comment avatar
  2. Comment avatar

    Alexander Mouriopoulos    

    It is in no one’s interest to have a broker who has to work harder for less money. Bad things start to happen.

    When the mortgage illiterate client finally gets hit with the hidden fees and penalties in the mortgage they chose based only on rates and less commission, who then is responsible when the client claims compensation or complains to the regulator if they feel aggrieved?

     
    1. Ron Butler    

      Alexander, do you tell prospective clients when they first contact you that they are “mortgage illiterate” ? Just checking.

       
      Comment avatar
  3. Comment avatar

    Chris Stones    

    This is a really good thing. The real savvy consumer will realize very quickly how much profit is available to the banks …. for doing little to no work. If handled correctly by the broker community such a move will bolster there numbers even more substantially. Consumer are already paying 5-6% to the real estate companies – I don’t think that 3/4% to their mortgage professional will be a big deal except to move consumers to a more value added proposition – especially since that 3/4% doesn’t come out of their pocket nor does it affect the deal – the mortgage broker stream will benefit if they play their cards right

    Chris

     
  4. Comment avatar

    Steven Porter    

    I came into mortgage brokerage with 30 years experience as a real estate broker. Over the years I’ve seen the real estate model change together with changes in the the travel industry through so called Regulator imposed transparency. Some changes good, some not so good. A lot of negative impact stemming from the media hype of commissions and the overall perception that all commissions are negotiable. Unfortunately in all industries, such as the two previously mentioned including the Mortgage Brokerage industry where salespeople are compensated by commission, there lies the issue. As one of my revered real estate trainers once said, “there’s a lot of real estate agents out there, hungry agents I might add.” It’s these sales people, that for whatever reason aren’t making it in their chosen profession, be it the absense of proper sales training or lack business experience. For whatever reason their value proposition becomes price. And in my experience there will always be a company or individual who will always do it cheaper whether it makes good business sense or not.

    The unfortunate part of this Pandora’s box is that the lesser individuals tend to leave the business. The public’s perception of the professionalism and integrity of the business suffer fuelled by newer and more competitive discount brokerage models and more media hype. Is it ultimately better for the consumer in the long run? Maybe from a price standpoint but as Mr. McLister explains above, price isn’t everything and sometimes the consumer and the reputation of an industry suffer.

    My point here is, Industry and Government Regulators rarely interfere once. The squeaky wheel will always get oiled whether it’s good for an industry or not. The problem is it tends to be the individuals or groups not making it in the industry that do the complaining while the top professionals tend or be too busy in there business to be as involved.

    Respectfully submitted,

    Steven Porter, Mortgage Agent

     
  5. Comment avatar

    Concerned    

    The middleman, offering little value, gets squeezed in a free market. *Shocker*. Things are working as they should, survival of the fittest — go!

     
  6. Comment avatar

    Old Tyme Banker    

    Is this a possible politically motivated cull of mortgage brokers with less than stellar business practices for the benefit of the consumer (voter)? Feel free to discuss….hmmm. Could it be a possible reaction to complaints received about some brokers?

     
    1. Robert McLister    

      Hi OTB, Our understanding from FICOM is that it received no specific complaints that prompted this change. They maintain that this is a proactive measure intended to head off conflicts arising from broker incentives provided by lenders.

       
      Comment avatar
  7. Comment avatar

    Ron Butler    

    Sometime mortgage brokers worry too much. I agree with Rob that there will be a group of consumers who use commission information to negotiate lower rates but I think those folks will be a small minority. Many consumers will not even notice the full disclosure of compensation. From a selfish point of view as a discount broker I am pleased for consumers to see how little our company earns to complete a transaction but again; I believe most consumers will not notice. People are busy in their lives, give a great rate, make the transaction convenient, answer questions honestly, give unbiased advice and be helpful: that is what clients really want. The minutia of commission is not that important in that context.

    I tell you what I think is dumb, mortgage brokers need to stop crying that commission disclosure is bad for the public and studies show consumers are worse off when they learn adviser compensation. Honestly guys, give the consumer some credit, the more mortgage brokers yell about compensation disclosure the more we look like we have something to hide. If you are a full compensation broker show your commission income with pride because Lord knows I am always hearing full commission mortgage brokers say their great service and brilliant advise is worth every penny of commission. So put your money where your mouth is and shout your income from the rooftops. The truth will set you free.

     
    1. Robert McLister    

      Hi Ron, No question. Some brokers want to kill this idea, purely out of self-interest. That’s not what we’re talking about here. There is research on comp disclosure, and dismissing it out of hand would be perfunctory at best and negligent at worst. The evidence and our experience both suggest that a material number of consumers will misinterpret compensation data, to their detriment. Conversely, there is little evidence that mortgage consumers will make better decisions simply by knowing the dollar value of lender incentives, unless they can readily gauge those incentives. The obvious consumer benefit from this change, as noted, is that some will use this data to successfully negotiate fees and buydowns. That’s terrific for those specific consumers, but FICOMs place is to protect all consumers, not make de facto changes to industry-wide revenue models without addressing the side effects. We sense that regulators want to leave the heavy lifting (i.e., how to compare and assess incentives) to borrowers. As smart as consumers are, that’s asking far too much. It’s hard enough to compare the fine print of mortgage contracts, let alone weigh that information against compensation. If this rule is implemented, folks will need guidance and the body enacting the rule needs to provide it.

       
      Comment avatar
  8. Comment avatar

    Bill E D    

    Sorry – they want to head off conflicts that they haven’t had yet???

     
    1. Robert McLister    

      Hi Bill, FICOM believes these conflicts exist today, and with some brokers they do.

       
      Comment avatar
  9. Comment avatar

    Lee Perry    

    The disclosure is coming so now it is a matter of how we handle it. Yes there needs to be more discussion around how to accurately state what the commission will be given so many factors like volume bonus and efficiency bonus to mention a couple of them. Some brokers make a volume commitment to certain lenders by pooling under one person’s name and maximize volume bonus, which should also be disclosed to clients and the reason why. What happens come September and the broker is $15 million dollars short for the year of hitting target with the lender. Some will say well it wasn’t the right fit for that lender and we fell short on the commitment which is a good thing but some will request their team try and send as much volume as they can to the specific lender in order to reach target which may not be the right mortgage for the client. Will the implementation also lead to less efficiencies for a lender? What happens if someone wants to cover themselves from possible litigation down the road…..will they make sure they have 3 or 4 commitments to fan out in front of a client and go through each one and keep them all on file as evidence they showed a client the options? If this happens then some lenders will eventually look at the efficiency ratio for those brokers that do not fund the deals and make the judgement call to cease doing business with the broker which could negatively impact a client from possibly getting the best mortgage product. All I know is we in the industry have always been entrepreneurial enough to adapt with changes and we will once again to make the broker option the most viable for clients.

     
    1. pharoah6    

      Unless you are a small time broker who doesn’t have status or a big time broker who has maximum status everywhere, there is NO POSSIBLE WAY to know your pay on every deal. Period.

       
      Comment avatar
  10. Comment avatar

    Mark R    

    I don’t see this any different than a realtor disclosing his commission or a financial planner disclosing his trailer fees.In both scenarios, the fees or commissions are paid indirectly by the client, yet, the consumer will still negotiate on a house purchase, on investments and ultimately, why not on a mortgage?

    I think brokers should focus more on educating consumers regarding mortgages rather than convincing them they can offer the best rate. I’ve come to realize consumers have very little knowledge when it comes to mortgages. How many times have we heard, “I have my mortgage with (broker banner here)”, rather than stating the lender its with?. This is the reality, so divulging the commission can only be used to strengthen the reason the consumer is dealing with an expert in the field. Good advice does not come cheap!

     
    1. Paul McAllister    

      I agree and I think if you’re providing good service to the borrower, they won’t mind that you’re getting paid for it.

       
      Comment avatar
  11. Comment avatar

    Curious Underwriter    

    I thought that the fees had to be disclosed in the disclosure for quite some time now? It this something different? Just curious, anyone want to clarify for me? Thanks

     
  12. Comment avatar

    Barb    

    Publishing a dollar figure of gross income is misleading to the client. Will the client stop to consider that the broker may be paying for office rent, utilities, land line, cell phone, internet, advertising, marketing, CRM, salaried assistants, E+O insurance, membership fees, licensing fees, often appraisals, a split or desk fee to their brokerage and for some an additional split to their team leader and at some brokerages monthly marketing fees, and then… also have to pay for his own personal roof over his head and home expenses from what is left. What if a licensed salaried assistant prepares the docs and signs the client? Do they have to disclose their salary? A Bank mobile specialist is also on commission and has the ability to buy down rates from their commission as well. Why do they not have to disclose?
    We are all about privacy protection for the client- why is that being waived for the broker? Why is privacy protection only a law some of the time? It’s really none of anyone’s business how much their broker earns.

     
    1. Mark R    

      We all know what a public servant such as a politician makes and while it may frustrate some, others will appreciate to know. You also know how much a real estate agent makes when you purchase a home. And you will know how much your financial planner and accountant makes for rendering their service. What does the mortgage broker have to hide, really? If I were to be a broker, I would gladly divulge to my clients what they are paying for – they would understand what quality and professional service costs as well as why it was a wise decision to hire me in the first place.

       
      Comment avatar
  13. Comment avatar

    Debt Slayer    

    As a mortgage agent I make fantastic commission whether it was the full bps or I had to buydown using 75% of my commission .. In both cases the client get my standard ‘always available to you’ best service.
    Even with a huge buydown I’m still making $50-$100 an hour for the ‘work’ (is that not good enough for a short meeting, few phone calls and handful of emails??) sure it’s nice to make $500 an hour, but if you are just ‘hunting for the next commission’ and not trying to build a career then you won’t make it !
    Building relationships for future referrals is my goal regardless of the commission made now. Once closed they are MY clients now, therefore I am their sole advisor for the life of the mortgage, and these are now MY renewals/refinances in the future … And who are they going to refer their database to? Me !
    Prospect, serve, and bend now …. Win later !!!

     
  14. Comment avatar

    Debt Slayer    

    Oh and I don’t care if we need to disclose our commission, won’t phase me in the slightest. Let them see my worth !!

     

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