One former CAAMP
chair and head of one of the largest independent brokerages is warning brokers to “recalibrate” their business model or risk being left behind as the market changes.
“Brokers need to consider increasing the percentage of business they close under the traditional up-front model vs the perpetual trailer/renewal option, one that most lenders do not favour due to the long-term cost associated with the model,” John Bargis of Mortgage Edge told MortgageBrokerNews.ca. “If the expectations are that the market is going to remain flat or even start to curve downward as interest rates begin to increase as per expectations in the next two years, brokers would be far better off choosing the best up front/renewal compensation package available, to ensure residual income as refinancing continues to thin out.”
According to Bargis, refinances will continue to decline as values decrease, rates move up, and more changes are introduced by the federal government, which would make renewal/trailer models far more attractive. Bargis’ view is supported by the recent stats on refi business which show volumes are down significantly.
“Purchase volumes increased approximately 11 per cent while refinance volumes were approximately 81 per cent lower compared to the same period in 2012,” according to the Crown corporation’s latest quarterly report. “The latest mortgage insurance parameter changes that took effect in July 2012 effectively eliminated refinancing at loan-to-value over 80 per cent.”
Still, brokers can get ahead of the curve by concentrating on doing business with those lenders who embrace the trailer fee model.
“Refinancing under the current (OSFI) regulatory changes are going to obviously affect our ability to refinance going forward; so my question to a broker would be: Wouldn’t it be more prudent to actually pursue a renewal model whereby the client can’t go anywhere anyway because they simply can’t refinance as easily … as opposed to choosing the upfront eat what you kill option, which potentially has no future revenue attached to it one - five years down the road with the diminished ability to refi an existing client?” Bargis said. “There are lenders who offer anywhere from 100-110 bps upfront, with 50 bps on the back end at renewal time.”
“This type of model adds value to broker business, much like the financial planning, and insurance models,” he continued. “Embrace it, you’ll likely find it to be a smart choice for the future of your business.”