Builder: Do not use mortgage brokers

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An Ottawa broker has come up against what he calls the most overt attempt to shut mortgage professionals out of the condo development market -- a builder’s email specifically demanding a commitment letter from a big bank and “NOT from a mortgage broker.”

“I fully believe this is an example of tied selling,” said Stephane Prevost, an agent with Dominion Lending Centres Alliance. “Here, my client, the buyer, is being told, in writing, first, that they must produce a commitment letter with an 18-month rate hold – something brokers can’t really furnish – and, second, that the letter has to come from one of the Schedule 1 banks and not from a broker.”

Prevost has now taken that complaint to the competition bureau, which has suggested the builder’s demand is within the law, based on past precedence.

The conflict stems from an email sent to Prevost’s client late last month, with the developer laying out requirements to cement a purchase agreement.

“For the mortgage pre-approval letter, as mentioned during the contract signing, it must contain the following four pieces of information in order to be accepted,” writes the real estate agent for the developer. “1. The approval must be from a Canadian Schedule 1 Bank (NOT from a mortgage broker). 2. The approval must be valid until closing – November 2013 to be determined.”

Brokers rarely encounter that first demand in writing, said Prevost, concerned it represents a new level of aggressive competition between banks and brokers for clients buying “off the plan.”

While banks routinely enter into formal relationships with developers granting them access to prospective buyers looking for rate holds, brokers have traditionally been shut out of the market at that point. They instead seek to convert the client closer to construction completion. It’s a way of getting around their limited access to extended rate holds.

That might be the status quo, but it’s largely been one relegated to back room and not put to paper.

“These people are basically not allowing mortgage broker s access to the client until after the agreement to purchase has been signed and accepted,” a frustrated Prevost told “ It’s what goes on all the time verbally, but on not in writing. And If you look at the document, it is almost as though they are telling the buyer that this is a legal requirement – not to use a mortgage broker and to have a 18-month rate hold. It’s not.”

  • KARIM LALJI on 2012-02-09 5:54:06 AM

    If you were a builder you would ask for the same. Brokers are well known for backing out of deals that close 18 months from now and frankly for your own sake you need to stay away from this market. By providing your client a commitment, you are steering them away from a long term rate guaranty and you are placing them in harms way if the rate goes up.

  • Nicole on 2012-02-09 5:55:47 AM

    I have lost many half million dollar deals to this process. Reality is, until one of our lenders open up a 12-18 month rate hold, we just cant compete on the day the client signs the purchase contract. I find it extremely frusterating as I know past clients who have paid an extra $5k to $10k to a bank because of this policy.

  • Ex-banker Broker on 2012-02-09 6:07:06 AM

    Brokers CAN get 18 month rate hold. NOT all brokers have access to this though. Coming from the bank myself, brokers have much more flexibility. Totally understandable from builder's point of view - but really not good for PR/marketing.

  • Paul in Toronto on 2012-02-09 6:08:08 AM

    I really see nothing wrong with this at all. We are unable to hold a rate for that long, period. If the rate goes up in the meantime, our commitment letter becomes worthless. I don't blame the builder for requiring this. I actually refer my clients back to the bank in these cases, because it is best for them to have a rate guarantee. If I can beat the rate within 120 days of the actual closing, then great. New construction condos is not a market for brokers.

  • Al Franken on 2012-02-09 6:08:35 AM

    Karim, you couldn't be more incorrect. When a bank provides an "approval," it's just a letter based on what the clients tell the bank - nothing more. It's simply a rate hold, yes, but it's being sold as an "approval" by the builder. It is just another case of clients being misled. What happens if something bruises the client's credit in 12 months? How are they to complete the transaction if the Builder will not "let them." If a Broker ever worked with a builder or realtor, and they issued a letter stating, "Your approval must be from a Mortgage Broker, NOT a Schedule 1 Bank," don't you think the banks would cry foul?

    Until the Banks have to play by the same rules Brokers do, it's an unlevel playing field - and I don't see our National Association doing anything at all to change that. OK, it's a fact of life - but should we all just roll over and accept it, or stand up for what we believe in?

  • DJP on 2012-02-09 6:10:50 AM

    Unless mono lenders have the gumption to play the same game, and play by the same “real-world” rules with chartered banks, this kind of business will indeed be lost to the broker channel. Although mortgage originators are on the receiving end of this fight, it is the mono lenders battle to wage. After all, it’s their money and they will need to compete head-to-head and toe-to-toe for every dollar out there.

  • Toni Patterson on 2012-02-09 6:13:26 AM

    This is a very common practice in the Edmonton area and not restricted to condominiums. You can however insist that the buyer is entitled to have choices and not allow the builder to dictate the options for the buyer.

  • Ravi on 2012-02-09 6:16:13 AM

    The builder knows that a broker cannot get an approval outside of 6 months. As the completion date is outside your 4 months that are typical for rate holds the builder will only use approvals from the banks. These are firm approvals and not rate holds. That being said my company can provide this service a FIRM approval within 24 months of completion. With a tier 1 bank to boot.

  • Ad Lakhanpal, Mortgage Broker, Mortgage Alliance on 2012-02-09 7:11:28 AM

    Why would a broker want to put together a deal 18 months in the future and give the client 18 months to shop around? I tell the condo buyers to get a long term commitment from the bank, which is usually from the incumbent bank, and call me 120 days before closing. I have better chance of locking in the deal at that time.

  • Len Lane on 2012-02-09 7:55:22 AM

    This must be a condo project as we do deals with builders here in edmonton and have 18 month rate holds with several sched 1 banks. Trouble is for builder/developers they are so far ino the banks back pocket that they are threatened by the banks when they stray and I should know I worked in the builder industry for 15 yrs so I'm well aware of the back room deals going on with banks. in fact it was a complaint from RBC that I had my license that I chose the mortgage industry over the builder move ever.

  • GTA Broker on 2012-02-09 7:58:18 AM

    Nobody has even mentioned the builder getting a rate kickback from the bank that provided the construction financing for the condo development. It is common banking practice to charge the builder Prime + Y%, for the construction financing & then agree to rebate X% of the interest, to the builder if certain buyer mortgage dollar thresholds are met.
    The rebate is based on the dollar volume of mortgages & term, taken by the condo unit buyers, with the same bank that did the construction financing. We could be talking hundreds of thousands of dollars, if not low millions, in a large development in the GTA. So a builder would be an idiot to support mortgage brokers & not push the bank road rep. for his construction financing bank. The builder would rather have your money in his pocket.
    So here is another learning moment. Educate your clients. Tell them this is how “the system” works. Let them see the actions of the banks, & the builders are not transparent. Show them you know what you are doing & you are using your knowledge in their best interest.

  • Welbanks on 2012-02-09 8:17:57 AM

    Being a broker, this is a tough one. I can appreciate the builder's requirement as most brokers offer this approval WITHOUT an actual approval from a lender. From the builder's perspective, this represents risk to them that they may not want to take. I would assume they have had a bad experience in the past with this type of "commitment letter" and they don't want to be burned again. Realit of the situation is that the bank commitment is really no different than that of a broker. Most schedule I banks would need to requalify the client as registration approaches, and if the client's situation has deteriorated, then the bank commitment is no better than that of a broker.
    Those calling this "tied selling" are probably seeing this from the wrong perspective. I expect it comes from experience, not their banking partners. Although there are flaws to their reasoning, it probably gives them a better sense of security.

  • HFX Broker on 2012-02-09 8:21:38 AM

    The Builder sounds like he is trying to firm up his PreSolds in order to get his Construction Financing as his capital is light. Truth be told, the Builder's Lender is probably anti-broker and wants the Builder to convince his Purchasers to use them instead of a Broker Supportive Lender. It is Tied Selling; something big banks have been doing for years and will continue to the grey area...because they can!

    My associates are correct though on the next part-Don't focus on an 18 month close where the client will be exposed to too many Rate Ads etc, focus on Client Files you can Close in 90 days or Less.

    And, yes, there are Lenders that will offer 18 month Rate Holds, especially if they are the Project Lender for the Construction Financing.

  • Angela Wong-Liao, Invis Inc on 2012-02-09 8:56:47 AM

    In my opinion, mortgage brokers/agents should not involved in new construction approval process as we cannot guarantee the interest rates till completion and in the condo market, till the condo is registered. As a former banker who looks after new construction sites for the bank, the project financing bank has the first right of refusal for getting the ends mortgage from the sites. In view that we cannot guarantee the interest rates till closing on new construction, we can potentially exposing our clients to higher pricing if we insisted on looking after our clients at this stage. As a prudent mortgage professional, I always advise my clients to take the financing from the project financing bank, have the interest rates guaranteed, so that my clients are protected. I will contact my clients closer to the closing date, ususally 120 days prior to closing to assist my clients should I be able to get him/her a better mortgage pricing.

  • Anoyed client to hear this whining on 2012-02-09 9:46:58 AM

    @ Ad Lakhanpal, Mortgage Broker, Mortgage Alliance

    Sounds like great customer service the big problem I have with you brokers. So you tell the client to go waste someone elses time then I'll beat anyones rate later when it's closer to closing but don't ask me for any advice and if rates are higher later screw you.

  • Mike on 2012-02-09 10:12:59 AM

    I would agree with the Builder that a letter directly from a mortgage broker would not be valid approval. I'm sure the Builder would accept an approval directly from the Lender on the Lender letterhead arranged through the Mortgage Broker. Although all mortgages usually come with conditions the the Buyer has to adhere to and that may be defaulted on later, the Buyer would be wise to at least rely on an approval directly from a lender. Let's all remember that is what would be best for the buyer. Once the Buyer gets closer to the closing date, they are still free to shop around to get the best deal.

  • Adil A.Rahman on 2012-02-09 12:19:58 PM

    Banks are taking full advantage of this. Lenders should def. look into offering long terms rate hold for agents/brokers. We are already sending live deals to some of the big banks, I don't see why we cannot offer 18/24/36 months holds with the same bank. We have the possibility to do 12 to 18 months right now with a lender or two. Everyone should look at the bigger picture, WE CARE ABOUT OUR CLIENTS AND WE WANT TO SECURE THEM A GOOD RATE!!! I'm saying that brokers should be able to provide the same service thru the same bank if we already are sending them hefty volume. I think this is only going to be a matter of time until all major banks/lenders start offering brokers full service.

  • J McN on 2012-02-09 3:19:56 PM

    Al Franken, what you said is incorrect. When the bank mortgage specialist provides the 18 month rate hold, the deal is completely underwritten and finalized including income credit downpayment etc. The file does not have to be reopened at closing. I know this because I am with a bank and have many of them on the go.

  • Mobile Mortgage Specialist on 2012-02-09 3:35:14 PM

    Al Franken, your comment is completely incorrect. As a bank Mobile Mortgage Specialist, I provide many 18 month "rate holds" to buyers and they are full mortgage approvals, completely underwritten with credit, income, downpayment etc approved by underwriting. The file doesn't have to be reopened at closing.
    In order to have this program in place, there is an application process that must be completed that generally takes a few weeks to a couple of months to put in place.
    The reason that builders want this program is because the mortgage is fully approved up to 18 months in advance and DOESN'T have to be revisited every 120 days, so they know the sale is FINAL.

  • John Dearin RPA,. AMP. on 2012-02-10 6:49:47 AM

    So Mobile Mortgage Specialist, in 18 months when the deal is to close, and I have shot my debt up a few 100 thousand, and forgot to pay a dozen or so bills, you would still advance the funds because you would not have revisited the file? What a crock. Then again, maybe you believe this to be true yourself.

  • No Name on 2012-02-10 7:42:25 AM

    If the mortgage specialist at the bank do in fact qualify the client and then do not revisit this file closer to closing then if there is a default because the client lost their job or runs their credit to the hilt then let them take the hit. They deserve it and can apparently afford it.

  • Stephane Prevost on 2012-02-10 12:42:22 AM

    Wake up people. Don't fall into the trap where you can't make your own decisions. Why are non-banking institutions and their agents and brokers giving mortgage advice when they are not licensed or even authorized to speak about mortgage advice?

  • Stephane Prevost on 2012-02-10 2:01:14 AM

    Spoke to a local broker who read this article last night. He had the same issue and was able to service his client by doing the same thing I did. Turns out a Lawyer letter is acceptable.
    The letter must confirm suite address and province, and that the client has the financial capability to close on the property at the closing date

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