The economic outlook for the year ahead is better than it was this time last year, but it’s not overly optimistic either. Taken together, the predictions from bank economists, real estate boards and brokers themselves paint a picture of slow, but steady growth, with little upward movement in interest rates and flattening home sales and a corresponding stability in home prices.
It’s not exciting by any means, but after the roller-coaster ride Canadians have experienced since 2008, it’s certainly a relief. Welcome to the new normal.
“What we’re going to see in 2011 is a complete change to the marketplace from what we’ve seen the past five years,” says Mortgage Alliance
president Michael Beckette. “Brokers capitalized in an environment of decreasing interest rates and a high transactional real estate market with lots of renewals and refinancing. It’s not going to be quite as easy for the individual broker as it has been in the past.”
Although to look at the situation you wouldn’t think there would be room for mortgage professionals to grow their business, according to Verico
Financial Group president and CEO Colin Dreyer
, you’d be wrong in that assumption. “To me, the new normal means there are still going to be approximately 450,000 home sales next year and upwards of 60 per cent of Canadians own homes and if you look at that it becomes clear that there is opportunity for brokers and the question becomes how do I involve myself in a percentage of those financial transactions?
“What it comes down to is the fact that this isn’t the kind of environment where just by being a licensed mortgage broker I can make a living. This is the kind of environment where if I’m a really good mortgage broker and I do the right things then I have a chance to compete effectively. There is an opportunity for those good mortgage brokers to show their value.”
Mark Kerzner, president of TMG
The Mortgage Group agrees there is some market share to be had for brokers, despite some reports to the contrary. Why?
“I look at it as simple math,” he says. “If a lot of brokers are working with first-time homebuyers (40 per cent) and they’re doing a good job, which is supported by recent surveys, then it would hold that they are going to get a bigger share of the refinance and renewal business when it becomes available.”
If rates do increase at some point in the future, according to Vince Gaetano, vice-president and principal broker at MonsterMortgage.ca, there may be opportunities for brokers as “some mortgage holders may break their mortgages in cases where penalties have been lowered because of the rate differential.”
While there may be some opportunities available for brokers in 2011, there may also be some roadblocks put up by the government. After holding interest rates in its December announcement, Bank of Canada Mark Carney
then spent the next few weeks warning Canadians about their personal debts, which now sit at 148 per cent of disposable incomes, eclipsing the U.S. for the first time in 12 years.
Following that, Finance Minister Jim Flaherty
said if necessary Ottawa would tighten the mortgage rules further. In the spring, the federal government fine-tuned the rules on mortgages, requiring borrowers to make higher down payments in some cases and forcing banks to ensure that borrowers could handle higher interest rates before approving a loan application. But there is rising pressure to do more, including forcing homebuyers to pay a higher minimum down payment, or extending the qualifying rate to six or seven years from five.
Dreyer believes Canadians aren’t being given enough credit when it comes to fiscal responsibility.
“It seems to me that Canadian consumers are somewhat self-regulating in terms of being fiscally responsible,” he says. “I think a further tightening of the mortgage rules at this time is not necessary as residential sales are already moderating based on the existing economic conditions.”
Beckette compares the situation to trying to close the gate after the horse is already out. “Consumers are starting to become more aware of paying down debt and because of that I think their behaviour tends to follow.
Kerzner is concerned that additional changes may affect the housing market, which would affect everyone from first-time homebuyers to those looking to refinance. He believes the issue is more than mortgages—it’s also about credit card and other revolving debt.
“If it’s consumer debt that’s driving this household debt ratio, limiting the ability for a mortgage consumer to refinance because the threshold was lowered could actually encourage them to take higher interest debt than they would have to,” he says. “I think a mortgage can be a very effective tool for debt management, because consumers can lower the effective interest rate they pay on all of their debt. I would be concerned if there were too many restrictions that paralyzed the customer’s ability to do that.”
“Borrowers have become used to low rates and are borrowing more money, thinking that these low rates are sustainable,” says Margo Wynhofen, Verico
One Mortgage Corp. broker and president of the Independent Mortgage Brokers’ Association (IMBA
) of Ontario. “When mortgage rates go back up to 7.5, eight per cent, those payments will not be sustainable.”
Wynhofen asks her clients if they’ll be able to afford the mortgage when the rate does eventually return to normal levels. But she sees other types of consumer debt as the bigger issue.
When Flaherty’s comments were reported on CMP’s website, MortgageBrokerNews.ca, the reaction was swift. “Credit card debt is the issue,” said one comment. “The policies are way too loose in the first place. Every credit application should have to qualify on its own merits. There should also be support documents required and verified.
“The Canadian banks rake in huge profits off credit cards, lines of credit and loans. Of course the banks are not going to want tighter restrictions on the higher interest-generating business. Why ask them? Killing the mortgage industry is not the answer.”
, a partner with Axiom Mortgage Partners concurs. As the co-founder of an affordable housing project back in 2001 Cameron believes home ownership should be available to all responsible, hard-working Canadians and he’s opposed to making that more difficult.
“If I look at any clients that I have run across in the past 10 years that have run into difficulty it is not typically because they have had more mortgage than they can handle,” he says.
Gaetano has a slightly different take on the issue. “I think educating consumers about debt level and warning them of the pitfalls of debt levels is a good thing. And I don’t think it will cease the lending machine.
“Instead of fighting the change, we have to embrace it. This isn’t a situation where we’re being picked on; it’s nothing more than the facts. We need to start working with the government and being proactive rather than digging in our heels and trying to protect our position. We know credit cards and auto lending can be predatory in nature, but I think we should be proud that our lending practices are very conservative; this is not the Wild West as it was south of the border.”
Who owns the client?
The broker-lender relationship is always a hot topic of discussion amongst brokers and some say the adversarial posture taken by certain parties needs to go the way of the dinosaurs.
“There’s only so such much pie that is available. This industry has to come to the realization that lenders have to be profitable in order to survive and we need more lenders as opposed to less,” says Gaetano. “We need to start looking at ways to make these lenders profitable and more efficient and we have to start looking at a true partnership in the sense that sustainability needs to be the goal.”
Kerzner agrees and emphasizes that the trend of partnerships between brokerages and lenders needs to continue. “We need the banks as part of the value proposition, but having strong monocline lenders who understand the broker channel is vital. We need a balance.”
“Trust is an issue that needs to be addressed as well says Gaetano. “Our industry hasn’t moved forward over the past decade because we’re still arguing about who owns the client,” he says. At the recent CAAMP
conference in Montreal, Gaetano had a conversation with the owner of one of the largest independent broker firms in Australia.
While broker market share in that country has climbed to 40 per cent since 2003, here in Canada it has remained virtually unchanged and Gaetano attributes this stagnation to the unwillingness of brokers and lenders to come together.
“If that doesn’t stop, lenders aren’t going to care and they’re going to do what they need to do to survive and that may mean cutting commissions, adjusting their compensation model and putting us in a position where we’re going to be in a reactive situation as opposed to a proactive one where we can try to come to some sort of understanding of how we’re going to deal with this relationship moving forward.”
One of the things that could bridge that gap, according to Gaetano is looking at ways to reassure lenders that brokers are not going to pull away mortgage holders when the term is up. New GAAP accounting measures now require lenders to take on the full cost of a mortgage upfront.
“They’re in the ditch profitability-wise for the first three to four years,” Gaetano says. “They’re under pressure to protect that client from leaving. There’s a belief that they have to fight for that business.
“We have to work together and we have to look at going to a different model that accommodates both parties. That could be trailer fess, taking a lower commission upfront; it’s providing representations and warranties, possibly clawbacks if deals are pulled inadvertently before a certain date. These are things that have to come to the table as discussion points to ensure sustainability long term.”
Each party understanding the challenges faced by the other are crucial says Beckette. “Then the responsibility becomes trying helping each other meet their own objectives. And I don’t think we’re there yet. We need to get to the point where we’re strategically cooperating because then as brokers we will understand what’s important to lenders and they in turn will understand what’s important to us as brokers.”
What you don’t want to see happen is competition based solely on rates. “Rates are a slippery slope,” says Dreyer. “If everyone just competes on rates, then at the end of the day we become just a priced commodity.”
Brokers shouldn’t just be improving relationships with lenders, they should also being be fostering a better understanding amongst themselves.
For Cameron the vicious game some brokers are playing by undercutting each other to acquire deals is extremely worrisome.
“If we continue to whittle down our value proposition to that of order-takers offering the lowest rate, we run the very real risk of becoming irrelevant. It is becoming a game of who can work for the least amount of commission in order to buy down a rate by the most.
“Why are we beating each other up?” he asks.
Cameron feels brokers need to speak with a louder voice to lenders instead of looking out for their own best interests.
“Why are [brokers] not working more closely together to grow our business? If we stay fragmented our growth is largely limited by what the big banks are comfortable with.”
Cameron also thinks brokerage houses having to compete on increasingly thin margins has meant that there is very little to put back into the industry. “It is difficult to grow market share when we have our sales force taking out a substantial amount of overall revenue.
Historically, those at the brokerage level have acquiesced to those demands, again leaving little left over to re-invest in compliance, training and technology.”
For Gaetano, awareness is good no matter where it comes from. He points to the recent television advertising campaign from DLC
, which features Canadian icon Don Cherry and says it should be applauded by the industry as a mutually beneficial initiative that brings awareness to the mortgage brokerage space in Canada. MonsterMortgage.ca invested similarly with a Doug Gilmour advertising campaign six years ago and Gaetano believes it increased awareness.
“It’s unfortunate that more firms don’t spend this type of money promoting their business and the industry. We have to work together to bring this industry to a different level. You have to realize that you cannot grow your brand or your business by giving all the commissions to your agents.”
He is also adamant that it’s not the responsibility of industry associations to advertise on behalf of brokers. “It’s the broker/owner’s responsibility to do so,” says Gaetano.
For Kerzner, throwing money into national advertising is not the only answer. “Advertising builds a brand, but word of mouth leads to sales,” he says, quoting sales guru Jeffrey Gitomer. “Brokers need to continue to do a great job with consumers. The more people they work with, the more advocates they build. They have to toot their own horn, which doesn’t necessarily mean spend a lot of money on advertising.”
Beckette feels brokers have lost focus of what’s truly important. “As an industry we’ve done an absolutely appalling job of telling consumers of what we do on a wholesale basis. We’ve been totally focused on deals; we have not been focused on the consumer and we haven’t been very sophisticated in our strategies of informing consumers in a simple way of what exactly it is they can ask a mortgage professional to help them with.”
Consumer awareness and satisfaction
Recent research by Maritz Canada reported that the AMP designation resonated with 17 per cent of respondents, a number that is too low for Kerzner, considering “the value proposition a broker represents, but it is moving in the right direction.
“They represent choice, they take the pain out of the process, they are experts,” he says. “Given all that, it’s a pet peeve of mine that the broker awareness level with consumers is still not where it needs to be.”
For Dreyer, it still comes to down to personal relationships. “What if every broker went back and actually engaged with every consumer they’ve dealt with over the past decade?” he asks. “What would be the impact of consumer awareness?”
Doing a good job is still the best form of advertising as far as Dreyer is concerned. “At the end of the day, it’s the value of the business you do with the consumer which will continue to grow independent broker share.”
He thinks ongoing education and training, including professional designations are important.
“The consumer is knowledge-savvy and the only way that you’re going to be able to interact with them is to be more knowledgeable than them,” he says.
Making designations more challenging to obtain is twofold for Cameron: it raises the professionalism of brokers and acts as a barrier to those who may not have what it takes to be a full-time broker.
“It is easy to become a mortgage broker while still maintaining another job. Given the complexity of the products and services we offer it is not realistic to expect that one can keep a high standard of professionalism without putting forth a full-time effort. There are far too many individual agents who do not have sufficient training, expertise, ethics or discipline to convey a professional image to the consumer.”
This is hurting the industry a lot more than people think says Gaetano, who as a participant on CP24’s Hot Property call-in television show for the past 10 years, has heard first-hand the horror stories of people dealing with inexperienced or poorly trained mortgage agents.
“When you have a lot of part-time brokers the chance for a client to have a good first impression is not good. Some clients using us for the first time may have had a poor experience and went back to a bank. Now we’re behind the eight ball with those clients, trying to get them back and trust what a broker does for them.
“People who think we’re growing as an industry are wrong. We’re not. We’re actually regressing because we’re not investing in proper training and we’re not demanding that people take this as a full-time job. We need to clean up the image of the mortgage professional. You either take it seriously or get out.”
Dreyer’s message for part-time or ill-equipped brokers is slightly less caustic than Gaetano’s, but no less clear.
“Good people in the industry have always done well and will continue to do well,” says Dreyer. “Those who make a dedicated and disciplined approach to being a broker as a profession will do well. For those who don’t have the dedication, this is not a good time for them.
“It’s not about everybody should be a mortgage broker, the right people should be a mortgage broker.”
Designations in general don’t cut it for Gaetano, who says the industry needs to look at ways to certify documentation. “We need to drill down and look at the paper because the quality of paper is what’s being sold in the mortgage-backed security market. We have to be accountable for whatever we deliver to that lender.”
According to Gaetano, his company was the first firm to ask Genworth
in 2008 for an audit. “I have a mirror image of the file that the lender has because I provide them all the content and documentation,” he explains. “Insurers on a regular basis audit their lenders’ files to make sure they are complying with the requirements under the insurance act and I’d like to know how my paper performs in an audit. I think this is the basis for certification of brokerages in Canada.”
To Kerzner’s thinking, full-service brokerages are one way to ensure a more complete mortgage broker is engaging the public.
“We treat regulatory compliance issues very seriously, making sure we have systems, manuals and processes in place to protect our brokers and the consumer. That’s a value-add that a full-service brokerage offers,” he says.
“If you’re an independent trying to figure out how to row your business and where your business is going to come from, to also have the expertise in the area of regulatory compliance is difficult. I think there is an opportunity for the full-service brokerages to continue to demonstrate their value in that area.”
Value is what brokers, whether independent or affiliated, have to offer consumers, says Dreyer. When the number of consumers who use the Internet to acquire mortgage information is substantially higher than those who apply for a mortgage online, the void should be filled by brokers he says.
“What [consumers are] looking for is validation of what they’re doing. And they need advice for that. What they’re saying is ‘This is a tricky place to be and yes, I’d like the best rate, but I also need to know the decision I’m making on my mortgage is accommodating my financial needs.’
Our niche is the fact that we are reliant on that relationship on an ongoing basis; we don’t pass the baton off to someone else and hope they will take care of it.”
For Beckette it’s a matter of getting back to basics. “We’ve have been so focused on other brokers, other networks and lenders that we’ve forgot about the person who actually pays the bills, which is the consumer. I think in 2011 we’ve got to return to fundamentals and understand that our business is about serving consumers. We have to have processes in place for brokers that make it easier to stay in touch and stay top of mind with consumers.”
There is no doubt that there are issues the mortgage broker industry in Canada needs to deal with in the face of continuing, although improving economic conditions, but things are looking better and that’s sometimes easy to forget.
“As we talk about all of the economic concerns it’s too easy to lose sight of the fact that we live in a great country, something I think as Canadians we take for granted,” says Kerzner. “It’s too easy to lose sight of everything that is great.”
Flaherty pulls the trigger on mortgage changes
As this issue of CMP went to press, Finance Minister Jim Flaherty announced a second tightening of mortgage rules in the past 12 months.
The three main changes are maximum amortization periods will be reduced to 30 years from 35; the refinance limit of a home’s value will be lowered to 85 per cent from 90 per cent; and the government is also withdrawing insurance on home equity lines of credit.
The new rules will go into effect March 18.
“Canada’s well-regulated housing sector has been an important strength that allowed us to avoid the mistakes of other countries and helped protect us from the worst of the recent global recession,” Flaherty said in a press conference on January 17. “The prudent measures announced today build on that advantage by encouraging hard-working Canadian families to save by investing in their homes and future.
The MortgageBrokerNews.ca community was vocally upset in past news tips that Ottawa may restrict mortgage lending further, and a majority expressed Harper and Flaherty were tackling the wrong debt issues. Many brokers feel looser rules around credit cards and auto financing need to be re-examined.
supports some of the mortgage rule changes announced, it disagrees with the reduction of the amortization period to 30 years.
”Rather than reducing the amortization period to 30 years from 35, as the Minister has announced, we would have preferred that the government had required those people seeking 35 year amortizations to meet the same qualifying standards as those with a shorter amortization. We hope the government will revisit this one feature as the economy strengthens,” said President and CEO Jim Murphy in a statement released by CAAMP
, owner of a mortgage brokerage in British Columbia, said he expects the measures to put a rush on the real estate market as buyers seek to get in before the deadline. It’s similar to last year’s changes by Flaherty to the borrowing rules, he said. Whether or not they have an effect, on borrowing, many Canadians are likely to push real estate activities up to avoid the changes. ”It’s not really what these changes will do, but what the perception will be,” he added.
Kinch said he was surprised that Flaherty acted so quickly this winter, but suspects there’s a hidden message in the mortgage rule changes—rate hikes are coming. According to Kinch, this is a way for Flaherty to prepare Canadians to be more responsible with their borrowing ahead of the rise in borrowing rates. “He’s clearly trying to cut back on Canadians using their houses as ATM machines.”
Look for complete coverage of the mortgage industry’s reaction to these changes in the February issue of CMP.