Manulife had a big decision to make: how to enter the broker channel as quickly and efficiently as possible.
Part of the challenge was how to scale its underwriting operation to handle the flood of new broker business. That led to a conversation with Paradigm Quest, a firm that processes, funds and services mortgages for third parties. That conversation ultimately resulted in Paradigm handling all of the underwriting for Manulife’s brokered residential mortgages.
It was the second bank announcement of its kind, following First National’s successful underwriting partnership with TD in 2014. For firms like Paradigm, First National and MCAP, 3rd-party underwriting presents a key strategic growth opportunity, and they’ve made material investments to service new lenders.
In our crystal ball, this is just the beginning of underwriting outsourcing. It’s a matter of time before more lenders realize the economics for themselves. In turn, it seems likely we’ll see more lenders enter the broker space in this very same manner.
For more on this trend, and the Manulife deal in particular, we spoke with Paradigm Quest CEO Kathy Gregory. Here is that interview:
CMT: This is the second household name bank to outsource its broker underwriting. Is this becoming a trend?
Kathy: Outsourcing business services is common practice already…[and it] isn’t new to the Canadian mortgage market…We currently have multiple clients who outsource their underwriting and servicing business too, for both mortgages and lending…If you look back over the past 20 years, closing services, appraisal management, collections, payroll services, call centre activities, credit card processing, etc. were all conducted internally across most lenders. Much of these services are outsourced today…Outsourcing other service elements of the mortgage process can only enhance the evolution and innovation of the mortgage experience for borrowers via new technology. This is what we are solely focused on and [it] will ultimately benefit the entire market, including the originator and borrower.
CMT: What is so appealing to lenders about offloading the key function that mitigates their risk (underwriting)?
Kathy: Outsourcers are specialists in the services they provide. Their focus is to provide their partners with optimal business solutions. We are the domain experts in the mortgage space, both from the borrower and originator experience as well as risk management. It is expected that business process outsourcers (BPOs) will perform much better than corporations who decide to outsource.
BPOs continually strive towards process improvement and these improvements translate to big wins for their corporate partners and their borrowers. Bottom line is, we aren’t competing for IT resources within a larger organization. Paradigm has placed huge emphasis on investing in our technology and processes and this has demonstrated significant value to our corporate partners in enhancing their day-to-day operations and ensuring their portfolio’s consistently outperform the market.
CMT: In general terms, what are the economics that make outsourcing underwriting so attractive?
Kathy: I won’t compare actual cost savings, as they vary significantly by client. It is obvious that when you outsource, you are looking for a lower cost solution. However this isn’t generally the only key driver. There are two other key elements and improvements for organizations looking to outsource. First, speed to market in terms of technology development and process change. Our end-to-end platform is a lending platform and has a rules-based configuration. Thus providing the ability to better execute new initiatives, improve the originator and borrower experience. Second, our key focus and expertise on a single market, along with our domain expertise allows us to singularly focus on mitigating specific risks associated with the [mortgage] business
There are a lot of friction costs associated with revamping internal processes to meet regulatory requirements, or for cost savings. Often there is a learning curve associated with process engineering. [Lenders] typically incur huge costs with hiring consultants, forming internal process engineering committees and training staff. When you outsource to a BPO, much of that friction is taken away…
CMT: Do you think lenders will ever underwrite offshore, in places like India or the Philippines?
Kathy: It’s one thing to outsource non-customer facing processes outside of Canada, e.g. IT development, but it is much more difficult when you [must] have contact…with both borrowers and originators. There are not only language issues, but cultural issues depending on where overseas you outsource to. Additionally, there are significant offshoring regulatory restrictions when it comes to customer data that make this difficult. When you layer on the unique regulatory requirements of the mortgage business in Canada, I am doubtful that customer facing outsourced processes will become a trend. As for Paradigm, we are very proud of our roots as a Canadian Company, and…as the founding CEO of this company, outsourcing jobs away from Canadians is NOT an option for me.
CMT: How far away are we from fully-automated underwriting for clean AAA deals?
Kathy: I think Canada is very close to seeing the introduction of much more mortgage automation in the very short term, as it relates to the client experience. PQ has emphasized the importance of digitizing our process for the last several years because we understand the importance that technology will play in the upcoming years. This market evolution is evidenced by the recent Quicken Loans launch of the Rocket mortgage. Canada is very close to seeing something similar.
However, fully automated underwriting with little or no touch points in the due diligence process seems unlikely in the short term. After the U.S. crisis where common sense lending took a back seat, risk mitigation is critical across this market and will continue to be…
CMT: Thank you, Kathy.
B.C.’s mortgage regulator confirmed today that it is moving forward with its proposal to require brokers there to publicly disclose compensation details, possibly as early as this summer.
“My office is proceeding with plans to implement improved disclosure measures for mortgage brokers in British Columbia,” Carolyn Rogers, Registrar of Mortgage Brokers and CEO at FICOM, said in an email sent to media.
“We have reviewed feedback received from industry in response to the open letter sent in January and appreciate all the comments. I have asked the staff to begin work on the implementation details, and that work is underway.”
Since FICOM proposed the changes last fall, brokers from B.C. and across Canada have been vocal in their opposition to the plan. They contend that the amount of money a broker earns on a deal is of little value to consumers without consumer education or context, and actually confuses some consumers into choosing higher-cost financing.
Broker trade groups Mortgage Professionals Canada and MBABC have taken the position that the changes will harm the industry and consumers, and both submitted written comments to FICOM.
“In our continued discussions with FICOM, we always understood that their intention was to proceed with some form of enhanced disclosure requirement,” said Paul Taylor, CEO of Mortgage Professionals Canada. “The consultation was, to our minds, a means for FICOM to gauge our industry’s appetite for, and solicit suggestions and feedback on, various methods to achieve their stated goal of making consumers aware of any potential conflicts of interest that may arise. As such, the comments made by Caroline Rogers do not surprise us.”
Taylor added that they will continue discussions with FICOM and “wait to see what the final requirements are once released. At this point it would be premature to make any statement regarding the requirements because they have not yet been prescribed.”
FICOM says it will release more details in the next 30 to 60 days, and that it expects a transition period of “at least several months” once its disclosure plan is released.
“My office continues to welcome feedback from industry on implementation and I have received a number of offers in this regard that we will be following up on,” Rogers added.
The Canadian Association of Accredited Mortgage Professionals (CAAMP) was in Ottawa twice these past four weeks. Its missions: to share mortgage market data with policy-makers, support consumer access to more mortgage options and keep issues facing mortgage brokers front and centre.
CAAMP President & CEO Jim Murphy, along with Government Relations Chair Eddy Cocciollo and Chief Economist Will Dunning, met with both the Financial Consumer Agency of Canada (FCAC) and the Conservative Housing Caucus, where CAAMP presented its latest research and housing numbers to 20 MPs. The presentation’s message was to maintain current housing economics by avoiding further mortgage restrictions.
It’s not synonymous with the “lowest mortgage rate.”
The best mortgage rate corresponds to the mortgage and advice that saves (and in some cases makes) you the most amount of money long-term.
Mortgage professionals routinely advise, “It’s not all about the rate.” To some, that sounds like evil sales-speak meant to boost commissions. The reality is that mortgage flexibility, contract restrictions and advice all have a definitive impact on borrowing costs. And most people don’t discover how much impact until after their mortgage closes.
That said, consumers are obliged to negotiate the very best deal they can. Three years ago, we asked ourselves, what kind of mortgage comparison website would we want if we were shopping for a mortgage ourselves? We thought up RateSpy.com.
With stricter mortgage guidelines suppressing volumes and competition squeezing margins, mortgage brokers are increasingly on the lookout for new business generators.
“Our retention rate on mortgages is well into the 90s…”
-Scotiabank’s CEO Rick Waugh (Source)
It’s getting tougher to woo customers from their lender at renewal. Banks in particular are doing an exceptional job at convincing borrowers to stay on board, as the quote above confirms.