Brokers threaten action against lender

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With Meridan Credit Union’s refusal to offer its broker partners access to its record-low rate promotion, several players are suggesting a boycott.

“Tip of the hat to Meridian for trying this. Hopefully, it won't bite the client's [when] in 18 months they get a considerably higher rate,” one reader wrote. “So, we stop sending Meridian business until they enable us to provide that rate.”

However, as others have pointed out, the promotion is a good play by Ontario’s largest credit union, which will look to cash in on the renewal business.

“This is a really smart play. Secure new clients now for 18 months at a really low rate and wait on the renewal to make the profit,” Jackson Middleton of Kilted Media wrote on MBN. “What percentage of new clients do you figure they will retain at renewal? 75-85 per cent? Well played.”

Meridian announced last Thursday it is offering an 18-month fixed-rate mortgage at 1.49 per cent, stoking the flames of the rate war. It’s the lowest posted mortgage rate in Canadian history.

Although several brokers quickly applauded the product, Diane Medeiros, manager of media and stakeholder relations told that the rate is only available through the branch network.

“It's too bad a monoline didn't come up with this idea first,” Middelton wrote. “And it's too bad that likely none will follow suit.”
This isn’t the first time Meridian has offered special promotional rates exclusively in-branch.

A year ago the credit union offered a 2.99 per cent five-year fixed through its branch.

"We do have … a pretty competitive rate available for brokers," Bill Whyte, chief of member services at Meridian Credit Union told at the time. "Where we focus for brokers is on niche mortgage products – that’s business-for-self mortgages, construction mortgages."
  • Jake Abramowicz on 2015-04-13 11:45:45 AM

    I don't agree with Jackson that MCU will renew 75-80% of borrowers. If you're a good broker you can come up with a strategy. We know MCU's rates are not the cat's meow on a day-in-day-out basis, so educate your client who goes into this mortgage and be on them like a fly on fruit. At renewal time you can offer to move them and get a much better deal.

    That being said, I don't think MCU will flinch and suddenly feel the effects of brokers not dealing with them. As a CU I don't think they are as broker-focused as others, therefore this may actually end up hurting broker channel since they may just shut it down anyways if this is how brokers react.

    I'm not agains the reaction, I do understand and sympathize with the anger as I am in the same boat. I only use MCU for BFS deals, never for qualified deals, as their underwriting process and decision making has proven to be less than stellar on triple a1 deals (not to mention their rates are always out of line)

  • Hal Tagg on 2015-04-13 11:50:50 AM

    The real danger here for us brokers is that this could be the start of mortgages becoming a loss leader.

    The Credit Union is willing to take a loss to increase market share. Those of us that only sell mortgages (ie. not diversified into any other related business) will certainly suffer if this idea gets traction with other lenders.

  • Ross Taylor on 2015-04-13 11:50:56 AM

    Meridian are perfectly entitled to offer whatever they want at the branch level. They don't owe us anything. It is a privilege to be able to access their products, as they often fill a void other lenders cannot, and we don't complain then.

    It's not like a monoline is holding back a special offer - MCU is a full service FI - to complain or boycott would be very short sighted.

  • M. Robertson on 2015-04-13 12:34:43 PM

    #1) Average basic compensation for a 2 year product is 55 bps (range is 50-65 bps), factor in the average VB paid on these of 25 (range is 20-30 bps) and the lenders are paying anywhere from 70bps to 95 bps for a two year product. The average compensation paid for a 2 year product in Canada is 80 bps.

    #2) At a mortgage rate of 1.49% the lender must cover hedge costs, employee costs, etc. So let’s break it down to dollars and cents. For a $300,000 mortgage product the bank will earn $8627.47 in interest charges for the term of that mortgage. Chances are pretty good that at best this product offering is a break even product when looking at current hedging costs and unit costs for the average credit union in Canada.

    #3) The bank (CU in this case) has to pay their brick and mortar overhead no matter where the mortgage is originated, the broker or direct. It has been proven time and again that broker originated business is not as profitable. Why? Well, because of the upfront commission paid and the fact that broker originated mortgages typically have shorter life spans with the lender, so less opportunity to earn profit.

    Meridian will earn $8627.47 on a 300K mortgage assuming it goes full term. If broker originated they would pay out $2400.00 in commission. That means that they would not earn one cent in positive revenue on the mortgage until the 7th month. When you factor in hedging costs, etc. it means that they lose money on the product, at least twice what they would with strictly branch origination. Add into the likelihood that MOST of the broker originated mortgages will be moved to another lender at renewal (brokers have to earn that full commission after all) and people really and truly questions why the lender will not offer the product through the broker channel?

    Broker are all about brokers. It is always “me me me” when dealing with the lenders. Brokers want to make more money, they want lower rates, they want faster service, they want.. they want… they want. If brokers don’t get what they want they threaten to boycott a lender, they attack them in public forums.

    Change is coming, I can see it on the winds.

  • Jake Abramowicz on 2015-04-13 12:50:31 PM

    Interesting math. So your assumption is the lender looks at just interest earned as sole baseline for profit model and not upsell/cross-sell many other facets of their offering. Although I don't disagree with your math, and that change is coming, I don't think it'll happen overnight (obviously). Good post.

  • M. Robertson on 2015-04-13 1:15:14 PM

    No, not making that assumption. A lender can't build a profit model for a product based on the "possibility" of a cross sell. They have overall targets of profitability for the business as a whole - yes. But each product has to hold its own as well.

    For example, what of the monoline lenders who do not have the opportunity of cross selling and where brokers continue to demand lower rates and higher commission?

  • Steve on 2015-04-13 1:15:43 PM

    Does anyone know if this is a collateral charge? Anyone signing up for this would be the diehard rate shoppers. If they don't have a competitive rate in 18 months , they probably won't retain too many.

  • Miles Kulik on 2015-04-13 1:26:36 PM

    to M. Robertson
    Can u help clear something up for me?
    part 2) $300,000 mortgage at a rate of 1.49% for an 18 month term equates to $8627 in interest earned. And, that this equates to a break even business model. Can u please provide the basis for the $8627 calculation? and how the break even is estimated? Also, please enlighten how fixed vs. variable costs can be treated equally in a business model. Sorry, just re-read the information supplied, also please show the numbers when the assumption that Meridian would not be profitable until after the 7 month if this was broker originated. It seems really far fetched, or skewed, that a broker would earn $2400 on an 18 month term mortgage at this rate. When we are nowhere near earning those kind of bps on a 60 month duration mortgage that has this kind of deep discounting.

  • Jake Abramowicz on 2015-04-13 1:34:57 PM

    the commission would not top 30bps all-in IMO

  • Moose on 2015-04-13 1:37:04 PM

    Hal has a good point. This is a race to the bottom and it's a sprint at this point. At some profitability on mortgages for lenders will near break even or negative at this pace and that's bad news for brokers if/when lending volumes slow down. Rationally the lenders incentive to keep this channel open will reduce dramatically and their focus will be retention vs new business. As for a boycott that will prove ineffective as MCU has almost a monopolistic lockdown on certain niche lending.

  • Omer Quenneville on 2015-04-13 2:04:41 PM

    I'm sure they will have a competitive rate and I would bet this would be a collateral charge to discourage moving and forcing them into a new competitive collateral charge. Good deal short term bad deal long term. CMHC should not insure collateral charges, they are not mortgages.

  • Omer Quenneville on 2015-04-13 2:04:55 PM

    I'm sure they will have a competitive rate and I would bet this would be a collateral charge to discourage moving and forcing them into a new competitive collateral charge. Good deal short term bad deal long term. CMHC should not insure collateral charges, they are not mortgages.

  • Lachman Balani on 2015-04-13 5:09:00 PM

    Considering that when the 5 yr bond rate was 1.6% we were closing deals at 2.89% on an average or 1.8above the 5 yr bond rate. seeing as how the 5 yr rate is .75 and using the same multiplication factor of 1.8% we get 1.35%- why can't all the other lenders jump on board and offer 1.49%(higher than 1.355) for a 5 yr fixed? .I have been saying this time and again ever since 5 yr rates experienced a precipitous drop from 1.6% to even lower than 0.7% at one point.
    In summary alllenders shud be offering at 1.49% for 5 year fixed or lower.Ia m sure they will be making money even though many will dismiss my calculations as too simplistic and that there may be certain fixed costs, but that's what they said when 5 yr rates were above 2% etc.etc.

  • Ron Butler on 2015-04-14 10:50:18 AM

    Mrs. Robertson constantly says the dumbest things: "lenders can't model cross-sell", guess what; the big banks in our channel know their cross sell income from brokers to the penny. His assumptions about how lenders like or dislike our channel results are just silly, Scotia generates about 50% of their mortgage clients from brokers, TDCT just committed to a massive upgrade in mortgage delivery through brokers with their new platform, National Bank is 130% of plan with mortgage brokers this year and a fourth bank has had a working group exploring entry to our market for the last 6 months. 5 out of 6 of the Big Banks Capital Markets divisions supply funding to monolines. Honestly, the idea that the big 6 banks have a conclave and plot the demise of the mortgage brokerage business is just so dumb. I think the wind that Mrs. Robertson is feeling may be fumes from glue.

  • Omer Quenneville on 2015-04-14 10:56:08 AM

    The banks will win out in the end if you keep our clients uninformed, walk them into places like TD and sell our clients down the river with collateral mortgages. An mortgage brokers will line up to drink the kool aid.

  • Don Johnstone on 2015-04-14 1:26:15 PM

    Meridian is a marginal regional player at best. As we go around totally focused on mortgages, know what? Most of the world doesn't know. In my career I have had dozens of clients choose to go with their bank even though the rate was higher. How many prospects who when they tell you the rate they are paying you cringe. Yes, there are some super-sensitive rate shoppers but vast majority of clients are looking for 3 things. Someone they trust, good advice and a competitive rate. As for banks they suffer from a little bit of schizophrenia. They like our business but if truth be told if they could grow their book without us they would.

  • Clayton Carby on 2015-04-15 11:53:58 AM

    Great Post Don Johnstone. I wonder what the comments would have been if RBC had done the same thing. My clients are as you say looking for a person they can trust and rely on to help them understand the mortgage business. And when you provide this service you get paid on both the origination and referral business from a satisfied client.
    How many client do you know that want to go through a renewal in 18 months gambling the rate will be as low as it is now?

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