Client retention
Another point of contention with trailer fees is how they affect the client because, in effect, they encourage brokers keep clients with the lender they first signed a mortgage with. This can be seen as positive or negative, depending on who you ask.
Ken Lankin, a broker with Mortgage Intelligence in Niagara, is not onboard with trailer fees because he thinks it's a lenders way of getting brokers "not to bother the client" at renewal time.
"I'm not a believer in trailer fees," he says. "I'd much rather look at refinancing the deal or re-placing the deal somewhere else upon expiration."
While McLean isn't totally opposed to trailer fees - he deals with both Merix and Macquarie and says about five per cent of his deals are compensated this way - he also has qualms about getting clients to simply renew with the same lender when there could be better options available, dubbing it a "passive approach."
"We have a high percentage of clients who come back to us at renewal time and that's based on service and relationship," says McLean. "People are not just signing the renewals like they used to. They don't feel a loyalty to a lender and they're becoming more educated - I think that diminishes the value of a trailer fee."
There is, of course, the argument that placing a deal with another lender at renewal time means more money in the broker's pocket. But Marvis Olson says in most cases she sees this practice as "churning the account" - a term used in the stockbroker industry that means the broker is setting up lots of deals so he or she will get paid more (but to no extra benefit to the client). Olson also argues that lenders with trailer fees have aggressive retention programs that make it worthwhile for a client to stay put.
"They spend a lot of money on their retention programs and they undercut rates," says Olson. "With trailer fees, you're under no incentive to move to a different lender because you're partnering with that lender and you're sharing the client, as opposed to the lender owning the client by paying a one-time referral fee."
In response to the argument that a broker could end up making less money by encouraging a client to stay with a lender instead of shopping around for a better deal, Olson says that in her experience, trailer fees are much more financially beneficial to brokers.
"A lot of people shop, but they really only shop when they buy the house," she says. "At renewal time, they want to take our rate and use it to barter with their existing lender. Nobody wants to go through the hassle of re-qualifying and applying somewhere else - so we provide that rate environment for the clients, but we don't really get the benefit. With trailer fees, it's financially to my benefit if the client stays with the first lender."
What's next?
Both Canadian lenders who offer trailer fees have reported success with their respective programs. Before moving away from upfront payment models altogether, Merix reported 83 per cent of originators were opting for trailer fees. Macquarie Financial CEO Grant Mackenzie told CMP earlier this year that the company was paying out more than $100,000 a month in trailer fees.
In addition, both Merix and Macquarie have partnered with brokerages to release private label products with a trailer fee feature (Axiom is the most recent example of this with its Smart Trail Mortgage through Macquarie). The only other minor player is National Bank, whom Olson says has a partnership with Mortgage Architects to pay trailer fees on its All-in-One product (but only to MA brokers).
"I don't see a big shift toward trailer fees any time soon," says Kuyper. "I think it's going to remain a niche product unless we get more small lenders out there taking a more strategic approach with their originator customers."
And even if the topic of trailer fees remains a divided issue with brokers, there is - at the very least - the benefit of having another option for compensation as opposed to one similar model across the board. And as brokers further share their opinions and reservations about these models, there's a good chance lenders will take notice - and be convinced to come up with more innovative and broker-friendly solutions.
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