Lender: Commission cut won’t protect broker channel

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A lender is now weighing in on the debate about brokers lowering upfront commissions in order to protect lenders squeezed by tight margins, suggesting it would do little to protect the broker channel and keep other lenders from following Macquarie and Concentra.
 
“As an alternative lender, I’m more removed from this situation,” Nick Kyprianou, CEO for Equity Financial Trust, told MortgageBrokerNews.ca, “but I don’t think it would accomplish anything – brokers and lenders should get paid what they need to for what they do, and lowering commissions isn’t the solution. What’s called for is a more permanent change in how brokers sell their services, a shift away from an emphasis on rate and toward the value-add they and non-bank lenders present clients.”
 
The remarks follow those of a leading B.C. mortgage broker, one of the first to suggest that a significant percentage of brokers are now willing to accept as little as 60 basis points upfront on a standard five-year mortgage in exchange for a guaranteed renewal fee of 20- to 25-basis points.
 
Ryan Cooper, a senior mortgage consultant with VERICO Paragon Mortgage Group, views it as a way of stemming the loss of broker-channel lenders squeezed by commissions and thinning margins, suggesting brokers might be receptive to lower upfront payments in exchange for those guaranteed renewal fees.
 
His suggestion has riled some brokers, although most are concerned that the current market forces will eventually encourage other broker channel lenders to follow the lead of the sixth biggest lender, Macquarie Financial, which last week announced it would cease selling through brokers because profitability – constrained by commissions and interest rate spreads – failed to live up to expectations.
 
As an alternative lender, Equity Financial sets its rates independent of those variables, but Kyprianou maintains that brokers working both A and B spheres must shoulder some of the blame for the challenges now facing their industry and its lenders.
 
“In focusing on rate, they’ve set it up for the non-bank lenders and for themselves to lose,” he said. “The only winners in this are the banks. Taking deals to the banks based on rate doesn’t work to the benefit of brokers. And it’s not selling based on the expertise that brokers have to offer.”
 
It’s the kind of sea-change in marketing that many brokers themselves are calling for, asking colleagues to move beyond selling rate. Ostensibly, it would take pressure off non-bank lenders in some cases challenged to bring interest rates in line with heavily discounted bank rates, used as a loss leader to win clients whom can they be sold other financial services.
 
“Sacrificing rate in order to compete only on rate is essentially a race to the bottom,” said broker and industry trainer Greg Williamson, who is planning a 1,000-broker webinar discussion on July 13 focused on “winning the Rate War.” “That’s because today your rate may be the lowest, but tomorrow it may be someone else and pretty soon you’re working more for less money.”
 
A growing number of brokers are, in fact, scratching their heads over the increasing willingness of banks to eat premature-closing penalties in order keep clients from accepting broker-arranged deals. That tool is being applied at the branch level, and outside of any corporate-wide policy directive, say mortgage professionals. The consequences for brokers – even if they're bringing business to those banks – are, negative, argues Kyprianou.
 
“It can’t be all about rate,” he told MortgageBrokerNews.ca. “But I don’t think cutting commissions is the answer.”
  • Robert Stanfield on 2011-07-01 1:55:46 AM

    In regards to Macquarie's comments about finder fee's being to high, maybe they shouldn't have negotiated such a ridiculous pay structure with Verico offices. That pay plan was way to high. Kudo's to Verico for negoitiating a great pay plan for their offices. Their main focus, as told to me by a Macquarie BDM, was Verico offices due to the relationship they had and the pay plan, it was an easy sell. Macquarie made their bed, now they are blaming the spreads for leaving the market. You make your bed, you haveto sleep in it. Close minded lenders like that, good ridance, don't need you in our industry. I agree, as a broker you should be more than just about the best rate, you should be offering knowledge and service, which we all know the banks lack. FYI: I am a former Verico agent now with Invis.

  • AB Mortgage Broker on 2011-07-01 2:23:15 AM

    Macquarie left the industry years ago when they decided they only wanted the top 1% (cream of the crop, if you will) of consumers. I will miss Concentra has there were easy and a pleasure to deal with. As for Canadiana, beware of the wolf in sheeps clothing.

    Lenders are giving away the farm to attract more business and that's not the fault of the industry. They got caught up in there own game and lost. That said, I do believe mortgage associates need to pull their head out of the sand and quite competing on rate. It's time to add value!! Or get out of our industry and go sell cars.

    And to Invis, Mortgage Alliance, Centum, TMG, The mortgage Center, and all the other big brokerage houses, it should be about quality not quantity. Time to clean up your backyard and do your part for the longevity of our industry!

  • John on 2011-07-01 2:31:07 AM

    Plus look at who was running Macquarie and where they were before that. It was a system destined to fail. This article is making news of nothing. Just like 50% of the rest of their articles. As for Concentra, I'm surprised they lasted so long.

  • Mark on 2011-07-01 3:09:46 AM

    I don't understand the thought of cutting our up front commisiions, instead of 80bps for a 5 year deal, let's get 60bps. Instead of catering to the Big 12 broker houses, which don't represent the majority of us at this time, cut their volume bonus - give it to the deserving producing individual agents directly! 26 years in this business, the issue of fees has never been an issue and never should. We offer a service the is cost efficient and if a lender was losing money on us, we wouldn't exist. Stop cutting big volume bonuses to feed suits who golf and count on other peoples work to feed their habits.

  • ON broker on 2011-07-01 3:43:49 AM

    AB Broker should have included the biggest culprit of highering non experienced brokers and taking numbers over quality, and that is DLC. They are tarnishing our industry the worst. volume over quality.

  • ON Broker on 2011-07-03 9:55:17 AM

    To AB broker, I find it hard to believe that you feel an independent broker house that has no one to answer to but themselves, and their bottom line, does a better job of policing themselves. Independent brokers are always blaming the big houses for lack of professionalism, when we follow a much more stringent guideline of compliance, at least at Invis we do. Don't meet compliance, don't get paid. Plus, as most independents are a part of Verico, there is no such thing as a true independent anymore. Get YOUR head out of the sand and do some research before you make negative comments about the industry and the business the big houses do. ANy independent that is a part of an organization like Verico is no different than an Invis office or any other big broker house office. I feel it is the independents that need to clean their act up as they are still acting like it is the wild west of 20 years ago.

  • Michael Roach AMP on 2011-07-05 8:30:32 AM

    Both the ab broker and and the on broker of June 30th are correct.. Unfortunately the bigger the firm the lack of control is only natural. This is not to say it can not be done.. I have been in the industry over 40 years so have some insight in this regard.

  • AB Broker on 2011-07-05 10:15:21 AM

    We can sit here and take turns pointing the blame all we want. The fact of the matter is the only way we can accomplish what's being discussed is to create a policing organization with some teeth, that will actually use them. You get caught being unethical = license revoked, you don't supervise your agents = license revoked, your not competent = license revoked. Plain and simple, if we want to restore and maintain a reputation of quality and professionalism, we need to get rid of the bad brokers regardless of who they work for, and what province they are in.

  • Here Here to AB broker (Faye Drope on 2011-07-08 4:45:57 AM

    I agree totally with AB Broker. Our industry has been running amuck for quite some time now. I feel that the top producers keep their heads in the sand and dont want to notice the pinheads out there. Little do they realize that they too will be painted with the same brush if something big goes down. you just have to look north to see that. When I entered the industry in 99 the US Brokers held 70% +/- of market share now they are under 20%. I know the declining numbers are for a different story but in the end the same. We need to get tougher on the idiots. We need continutity across the country. I also agree with Mark and the VB

  • Another Broker on 2011-07-08 4:56:46 AM

    The positive outcome from this may be to lose many unqualified agents and hopefully shut down some large brokerage houses that have helped bring our situation to this point. Then maybe we will see professionalism return to the business and hopefully more willingness on the lenders' side to retain broker business.

  • 5 BPS is all would take on 2011-07-08 5:01:32 AM

    In reading the article and comments I can't help but think we have missed the mark somewhat. I have been in the industry for many years and have only recently been involved in any such talk of reduced commissions. Up until very recently the banks have not been competitive with the broker channel when it comes to rate but that has changed. It was only a matter of time before they realized that they were missing out on business because Brokers sold on significantly reduced rates, often from the same bank, through their broker channel. Those that felt this would last forever clearly had their blinders on. The big banks were going to get rate hungry and now all of us Brokers don't like it. You know what I say.......can't have your cake and eat it too.

    There has also been much talk about lenders leaving the industry recently which I can easily sum up as a normal part of any evolving economy or market place. For those of you who were brokering 10 years ago you will surely agree that the number of lenders in our game has increased 10 fold in that time frame. The loss of a couple of lenders is a normal process, as is the loss of a few brokers (still to come) and a few realtors (happening now and more to come) and a few financial planners (happening all over the place as well). This is clearly part of the normal process. Remember it isnt 2006 where money grew on trees.

    The part I have a hard time with is the fact that the lenders do not realize the easy solution, and the easy solution may not be so easy for some because of the difficultly in attracting new business and maintaining current. Maybe these lenders will be part of the normal culling of the herd. And yes It does all comes down to rate. Decisions were made many years ago that rate was the biggest factor in influencing brokers to use their company so they waged war against each other. Hey I am all for better rates, clearly it equates to increased wealth for my client and I look brilliant in being able to help them. But here is the real issue. If the lenders would stop doing the Quick Close deals......one lender offers a rate for 30 days, another matches that rate and offers it at 45 days and a third comes in at that rate and extends it to 60 days. The 60 day rate hold is now the norm and the rate has moved 10-30 BPS lower than a standard rate. This is where their spreads are, yes they will tell you the get this quick money from other sources, but really the reason they are able to offer the quick close is because they convert more of these deals and people move quickly. Moving quickly and efficiently in our industry is the number one reason for proffit. Keep in mind many of these quick close deals are now full service mortgages with full prepay options, they are not gimmicks any more.

    If the lender that offers a rate paying 80 BPS, a higher rate at 100 BPS and a higher rate yet at 130 BPS would also recognized they are not likely winning any new business and are screwing up the market, they would likely stop it. But clearly they make way more money on the higher rate even though they pay the higher commission along with it. This example brings me to my point. If each lender was concerned about having to reduce commissions because of reduced spreads realized they control the spread there would be no problem. If they all increased their rates by 5 BPS and maintained that spread we would not be having this conversation.
    Brokers would not care because they are earning their commission as they should be. The only time a Broker beats a lender about rate is because a competitor lender has some better rate out there. If that race to the bottom did not exist the broker would not have the lower rate to compare to and would not beat their preferred lender up (that preferred lender surely feels the pressure and eventually reduces their rates as well)

    Over the years many lenders entered the game and can in large part be thanked for the contribution to the plummeting rate game. Get your rates in line, stop forcing other lenders to follow suit, and this problem goes away. That being said there is only so much business to go around regardless of rate so if another lender like MacQuarie, who had a small product line up, little flexibility, little incentive and often times not competitive rates comes along and then disappears, that is normal.

    To prove this to yourself, ask you lender what their biggest expense is and they will tell you the initial set up with internal staff and broker commissions. Then ask them how much commission it would take to buy their rate down by 5 bps, most will charge you 20-30 bps commission. So take this calculation the other way. 5 bps increased rate, means 5 bps increased spread for them. Leave your commission alone and everyone wins.

    I agree the broker world is full of bad ones, but so is the banking world (in-fact more-so in my mind) but the topic of cutting commissions will not be solved by having regulatory bodies to get rid of the bad guys. That would take years to implement, always have major problems and never get away from the good guys still wanting better rates because a lender offered something lower.

  • Calum Ross on 2011-07-08 5:28:05 AM

    The pooling of mortgage volume and the ability of low producing and part-time mortgage agents to access preferred pricing and greater compensation plans has to stop if we want to once again function in partnership with our lenders. Every time someone who does not have the efficiency or volume required to get the extra consideration gets to participate in perks they have not yet earned there is money being taken off the table from those people who have built their mortgage practice around realizing those gains.
    I fundamentally believe that paying for performance that has not be achieved and awarding status that hasn’t been earned is a threat to the integrity of the pay for performance model that we all subscribed to when we entered a professional commission sales role. Since when did capitalism or ‘the free market system’ function effectively by rewarding for mediocrity?
    Broker incentives and/or discounts were designed to reward performance and the mutual operational gains driven by true broker/lender partnerships. If we returned to a world where status was earned (the way it was intended to be) then lender profitability and the need for brokers to achieve individual excellence would once again return to the market. There is no way that I should be given access to top discounts or top status with a lender I do little or no business with just because some person at my brokerage firm has top status. The fact that this is exactly what happens is ridiculous and it completely undermines the core fabric of the entire broker-lender relationship. It was short sighted that this type of option every made it to market, but it would nothing short of idiotic if we as an industry allowed this to continue.

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