As both a founding director and current CEO for VERICO, Colin Dreyer isn’t very good at resting on his laurels. Taking it easy doesn’t jive with his plans for the network and for an industry hemmed in by uncertainty.
Recently, the network head sat down with CMP for a frank and thorough discussion of those challenges – any and everything from a volatile real estate market to the financial realities guiding lender decisions. Believe it or not, there may be light at the end of the tunnel.
CMP: Some have suggested all of the big banks now in the broker channel intend to get out within the next five years. First, do you agree? Second, what does that say about broker commission levels and the channel’s competitiveness?
Dreyer: In today’s changing market it’s very hard to predict what will happen in five years. What we do know is that a significant number of lenders have already left the broker channel due almost entirely to the 2008 financial and credit crises and the subsequent shift in regulations and market conditions that have occurred. More specifically, sourcing of funds for mortgages became much more difficult. MBS and corporate paper avenues are not as readily available as they used to be. Most importantly, new regulations such as the Basel Accord created new and more stringent global standards relative to capital adequacy and market liquidity risk. These regulations change the fundamental economics of the mortgage business for many lenders and managing the transition has taken time.
Lenders didn’t exit the broker channel because of broker commission levels. The broker channel is just as competitive as it ever was. What has changed is the competitiveness of various lenders that serve the broker channel. Again some lenders found the new market risks, regulations and funding sources a challenge.
That being said, this is a shared problem. The changes caused by the financial crises changed the fundamentals for all lenders and consequently these changes will be passed down to mortgage brokers and ultimately consumers in the form of tighter credit and more stringent qualification requirements. All that being said, consumer credit needs are always going to be there, lenders are in the business to lend money, attract new consumers and make a profit, so the channel still has significant opportunity.
The mortgage origination channel continues to mature and provide the expertise and choice that consumers want and need to make informed financial decisions. So, we see a very bright future for the mortgage channel for those that understand the nuances of the business and continue to provide value to the lending community.
Will commissions decrease? It’s possible that a recalibration of compensation will take place in order to right size costs with the new realities that lenders now face. I am confident that if there are changes then they will be incremental and reasonable adjustments over time such as what we have seen with First National recently. Expertise and value are always fairly compensated. The broker channel will continue to provide those components to consumers and lenders.
CMP: Broker network consolidation is on the minds of many. Is this really the direction the industry is headed in. Why? And what are the pros and cons for brokers?
Dreyer: Broker network consolidation has been happening for years. VERICO has consistently grown to become Canada’s largest mortgage organization. We don’t see that trend reversing. It’s possible that if the Canadian housing and mortgage market were to significantly adjust there would be casualties to that process. The consequence may be direct amalgamation of smaller and less successful brands – but what is most likely to occur is a natural coalescence of brokers around the larger and more successful brands such as VERICO and a few others. In our view, the pros for the broker industry include the obvious benefit of having strong national mortgage networks and franchises that support the growth of the industry.
The economies of scale work in all industries. The mortgage-origination industry is, for the most part, a low-margin business; but with size and scale, companies like VERICO can offer all the tools, services, products, education and technology that owners and mortgage originators need to be competitive.
CMP: Volume pooling has been increasingly criticized by some lenders as an impediment to efficiency. Do you support volume pooling?
Dreyer: VERICO has never been in support of mass volume pooling among agents. The issue has not been as acute within our network. Our position is simple. Submitting a mortgage vicariously through another agent, who may or may not be registered with another broker firm, result in anonymous agents – anonymous to the customer and to the lender. This can potentially lead to higher risks to the lender, mortgage agents, the broker of record, and for the customer.
Quantified pooling with strict controls eliminates the challenges I just highlighted and ensures the lender continues to compensate originators competitively. The abuse of pooling was recently highlighted as one of the reason that First National changed their compensation. We need to be proactive with our lender-suppliers to ensure that we can be competitive with quantified pooling so it does not adversely affect the profitability of the lender and bring our channel under scrutiny.
CMP: Looking at the banks and the new tighter lending guidelines, where is the broker channel headed? Back to alternative lending?
Dreyer: Alt-A and subprime lending certainly are a growing opportunity for brokers as many banks exit this niche. However, that in no way means that brokers will be less competitive or less active in prime mortgages. The bottom line is that mortgage brokers provide expert service and convenience to Canadian homebuyers and borrowers. There will always be lenders who want to participate in an efficient and expert industry.
CMP: Are you optimistic about the broker channel and the growth of VERICO?
Dreyer: Definitely yes, and on both counts.
I do not want to minimize the seriousness of world economic events that surround us today and be rhetorical with positive comments framed by rose-coloured glasses, but I have seen considerable market shifts during my career and each time it has always resulted in a higher level of efficiency and opportunity. The fundamentals of our market are not going away: consumers will continue to purchase housing; consumers will need credit; lenders require consumers. We have the best opportunity to reach not only entry-level consumers, but the full spectrum of consumers by the service and multi-choice of the mortgage and financial products that we can offer. Our model will continue to evolve, but the opportunity to reach consumers in today’s market and make them raving fans of independent brokers is unlimited. This is our time to efficiently grow broker market share.
As for VERICO, I am more optimistic than when we started the “mortgage network” phenomena over eight years ago. Our model attracts the most respected companies and originators in the industry. We are the most cost-efficient in the industry. We provide all the resources companies and originators need to succeed and their success is our sole focus. Diversification of opportunity with consumers for VERICO members is our next plateau.
Challenge inspires innovation; innovation creates opportunity; opportunity can be worked into success. That is what VERICO members are all about.
CMP: Brokers were again weighing in on MortgageBrokerNews.ca about how high commission splits for agents are unsustainable and don’t allow brokerages to really train and bring value. What are your thoughts on that key issue?
Dreyer: VERICO is a network of 195 independent broker firms across Canada with over 2,200 mortgage originators. As such, I enjoy the opportunity to observe many different broker business models. There are existing broker business models that focus on recruiting for a large sales force with a range of commission splits to smaller boutique-type companies that may offer a flat fee.
I think this gets back to the consolidation question. We recognized over eight years ago this shift in agent compensation and the value of scalability. Our model offers small and large companies all the tools, education and competitive advantages of a national company, but with the autonomy and authority over their own brand and business strategy to grow into the business they aspire to be locally or regionally.
CMP: Recently some high-level brokers packed up and moved to different broker network. Will we see more migration and why?
Dreyer: Yes, we are in a changing mortgage and real estate environment. Companies and individuals will look closely at who they are with and why. If the organization they are with provides them with the vision and the resources they need to be successful then they should continue to support that company, if not, they need to examine the options that are available to them sooner rather than later. Over and over again, brokers and business owners who talk to us and explore the opportunities with VERICO come away surprised and impressed by what our network offers. Mortgage brokers will ultimately identify with companies that will provide them new and sustainable opportunities and will make the shifts that are in line with their business.