Brokers may think collateral charges will eventually blow over, but that storm is here to stay, cautions industry veteran Dustan Woodhouse. What do you need to know?
Collateral Charge – A competitive advantage?
Much ado has been made about the presumed ‘evils’ of collateral charge-style mortgages as more and more lenders seem to favour them. These concerns are largely based on issues around a client’s inability to move to a new lender at renewal time without triggering renewal fees.
The broker’s viewpoint might change if all lenders offered trailer fees. However, our industry lacks trailer fees, which, arguably, limits the standards of professionalism.
Although many brokers see the long-term value in treating their books of business as a farm, nurturing and tending to the existing crop of clients with great care, there are still many who employ a ‘hunter/eat-what-you-kill’ style.
This same structural issue applies to many bank representatives with very similar commission structures resulting in zero fiscal motivation for subsequent personal client followup. The opportunity within this dichotomy is another topic altogether, so let’s talk about how the collateral charge-style registration can, in fact, give you, the independent broker, a competitive advantage.
When it comes to mortgage brokering, these are three priorities to live by.
- The client’s best interest is priority No. 1
- The lender’s interests are second in line
- The broker’s interests are a distant third place
After all without the first two parties a broker can’t exist.
Now let’s consider the topic of collateral charges from these three perspectives:
1 THE CLIENT BEING PLACED IN A COLLATERAL CHARGE PRODUCT
The (potential) win for the client is that there are no new legal fees for securing a line of credit or increasing the mortgage balance in the future (assuming, generally speaking, that they choose either the 125 per cent of the value option or a max amount other than the actual mortgage amount). If the client chooses to register their mortgage with a collateral charge lender for only the mortgage amount then the upside for them is quite limited moving forward.
Some negatives for the client:
They are effectively entering into an ‘all indebtedness’ mortgage, which brings any other debts to that specific lender under the umbrella of the registered security against the real estate. In other words co-signing a credit card or car loan for somebody that stops making payments with the same lender holding the mortgage can ultimately result in a foreclosure notice against the original client’s property. This is often not clearly spelled out on a mortgage commitment.
This alone should be enough to stop most clients in their tracks with a few questions.
It is also costly to move to a new lender at renewal time, in particular if the mortgage is a smaller one. This is now secondary if the client is still wrapping his head around a $5,000 credit card balance that is potentially triggering a foreclosure – which it very well can. In one of my own client’s cases, it was a $29,000 Visa balance racked up by an exspouse still on title; even though said ex was neither residing in nor contributing to the property itself.
This brings us to a key point.
The Collateral charge is neither good nor evil. It simply ‘is.’
How to proceed with collateral mortgages
It is here to stay; it is the future of the majority of mortgage registrations. Thus we need to learn how to present it in a neutral fashion.
Considering that nearly all institutions (most likely including the client’s current bank) now register in this fashion, it is perhaps worth advising the client not to have all their banking, credit cards, and small loans with the same institution with which they place their mortgage. Instead they should spread their money and investments among two or more institutions. In fact, placing their mortgage with a third altogether is more prudent still.
So, for example, a client could have his personal banking with Lender A, business accounts with Lender B, and mortgages with Lender C (clearly this opens the door for a discussion on the virtues of monoline lenders as well).
If all banking is done at ABC bank, and the mortgage alone is all that is held at DEF bank, we then eliminate the potential darkest of sides of a collateral charge mortgage to come into play: a foreclosure triggered by a small consumer debt. Yes this is how you, the expert broker, can use the collateral charge against the client’s own bank. You are educating the client about the pitfalls of having all their eggs in one basket.
If the client still prefers to be placed with a big bank or credit union, fair enough – you have not painted a picture of the collateral charge as a negative with another institution and their exposure is still greatly decreased with the multiple-institution solution. As the expert adviser, you have simply enlightened the client about the ramifications of a collateral charge with their current lender as opposed to a lender independent of the balance of their banking.
All that remains is potential upside for the client. This, of course, is aside from the issue of moving the client’s mortgage at renewal.
Clients may not even consider the topic of renewal -- or what should be done at renewal time.
“What? You will want all of this paperwork, my time and this stress all over again two, three, or five years from now? Can’t you place me with a lender you have some influence over my renewal with? You were supposed to make this process simpler,” they may say.
Yes. You can, and you will – because that is the right thing to do. Place the client with the lender that makes the most sense for them in the long run; do not let your own issues cloud things. Do the right thing every time and the money will follow.
Ultimately ‘porting’ at renewal is becoming less of an issue as we already have at least two lenders stepping in to offer a no-fee switch program for collateral charge mortgages. No doubt in three to five years there will be even more doing the same.
2 THE LENDER REGISTERING A COLLATERAL CHARGE.
I think we have made the case for why lenders love this format and are unlikely to change it anytime soon -- ‘All indebtedness’ and the increased security over the entire client relationship gives them complete control.
Although lenders are increasingly under pressure to disclose all of the details more clearly, current mortgage commitments are lacking in any sort of detailed explanation. This is left up to the mortgage broker to provide. Master your script and ensure that the language is unbiased, matter of fact, and when clients ask for more information from the lender themselves you can forward this excerpt from the Department of Finance website:
Collateral Charge Mortgage - Dept of Finance comments
3 THE BROKER
While many consumers continue to choose a traditional mortgage to secure their home loans, many are increasingly choosing collateral charge mortgages. The impacts of having a collateral charge mortgage may differ from traditional mortgages. For instance, switching between lenders may be more difficult. To make an informed choice, consumers need sufficient information to clearly understand the costs and consequences of collateral charge mortgages relative to traditional mortgages. The Government will require enhanced disclosure, better equipping borrowers to understand these impacts.
Let’s address the main points from the broker’s perspective
- A broker’s concerns about switching a client out to another lender three to five years later should be far lower than ensuring the client is placed with the appropriate lender upfront.
- Focusing on what makes the most sense for the client both product- and lender-wise during mortgage inception should be priority No.1.
- Strong communication throughout the mortgage term will see that the client refers and returns to their original broker for any increases or porting.
- If you originally spent time talking a client out of a collateral product upfront and that client returns looking for more funds, ask yourself this: Are you now going to cover the cost of their legal fees, which otherwise would have been nil?
- As more lenders go the way of the collateral charge-style product, there will be more lenders that will accept a transfer of an existing collateral charge.
- Most Importantly, understand all the ins and out and ups and downs of a collateral charge and do not back yourself into a corner one way or the other.
A sad example of a broker failing to understand and clearly explain this topic recently resulted in a client coming into my office convinced they could borrow 125 per cent of the value of the property, and that they did not need to re-qualify. The client was not impressed to discover this was not the case, despite what the previous broker had suggested. Ultimately we were still successful with the refinance, but the misunderstanding eliminated the original broker’s chances of doing any further business with the client.
So know your stuff!
For example, legal fees are waived, but there is still another appraisal required. Which, of course, requires credit and income confirmation. It is like underwriting any other refinance.
Collateral-charge products are here to stay, so learn about them and use them for what they are; an excellent competitive opportunity to move a client’s mortgage relationship away from their existing financial institution. Unless of course you placed the client’s mortgage in the first place, in which case you should be considerate of both the client’s time as well as the current lender’s status alike and make use of the increased provisions that a collateral charge provides prior to looking to move the client.
About the Author
Dustan Woodhouse a B.C.-based mortgage broker with Dominion Lending Centres