Rate buydown debate heats up

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A controversial profile in CMP stoked the fire of indignation for one broker who argues buydowns cheapen the industry.

“(When) selling low rates, the advice isn’t there and the only thing the client gets is a low rate? What is a lower rate if, say the client bought it two years ago at 2.79% and we can now do 2.49%?” Nick Bachusky, an Ottawa-based broker, told MortgageBrokerNews.ca. “He gave the lower rates then but it won’t benefit the client now because they aren’t getting any advice.”

Ron Butler, one of the industry’s most successful brokers, was recently featured as an Industry Icon in the latest issue of CMP. And in the article, he claimed the future of the industry was a higher prevalence of bought-down rates.

“Wouldn’t it be nicer if the client just got the best possible deal and didn’t have to meet anybody to do it? Someone online or on the phone could meet with them – something that is efficient and easy to do,” Butler told CMP. “Nine out of 10 brokers are so wedded to their model of earning 125 basis points on every file.

“If you want to give better rates than (another) broker is offering, you can’t cling to legacy models.”
It’s a future Bachusky and, indeed, thousands of brokers across the country want to avoid.

“When I picked up the issue and I read that, I just shake my head. That is backwards; that’s where quality suffers and that’s when we lose our jobs and that’s when robots take over,” Bachusky said. “That’s not why we became mortgage brokers; buydowns are not why we became mortgage brokers.

“We love our clients, we want to be in communities, we’re viewed as people who can do the best job and we care about clients’ debt ratios.

Which side of the debate do you fall on? Have your say in the comments section.
  • David Larock on 2016-03-17 9:18:08 AM

    “Nine out of 10 brokers are so wedded to their model of earning 125 basis points on every file."

    That is a ridiculous statement.

  • Morgan on 2016-03-17 9:34:07 AM

    Rate buy downs actually present an ethical issue. As a broker we have the ability to get the client a lower rate but in turn we receive a lower commission. As long as lenders present us with the ability to buy rates down, ethnically speaking we should be doing this or at least disclosing to our clients that we didn't for what ever reason we use to justify it. service, guidance, etc.

    Bottom line is a better rate is available and they didn't get it for one reason or another. Lenders either need to stop allowing buy downs or brokers need to disclose that they essentially did not get their client he best available rate.

  • Jeff on 2016-03-17 9:50:03 AM

    It seems, over the past few years that FSCO has been emphasizing "knowing your client" and require brokers/agents to take extra efforts in determining the most suitable product for our clients. How well do brokers with models such as Bulter and his team "know their clients"? Eventually FSCO may look into this low rate, stripped down advice model, and demand some changes which may create more work than is worth it for them.
    Also, when you run a model such as this, eventually the bad reviews start to pile up and can eventually destroy your reputation.

  • James Robinson on 2016-03-17 9:57:01 AM

    I don't believe this is an ethical issue in any form. We are providing a service and our price has to be in line with what we provide. You can take your BMW to the dealership and pay $150 for an oil change or you can go to a quick lube oil change place and pay $30. Both offers attract customers and those customers each see different value in what they are receiving. We live in a free market society, so there is not one right answer to this question as price and value are very different things.

  • Rob Campbell, Broker Financial Group on 2016-03-17 10:46:57 AM

    I know and respect both Nick and Ron very much, but this debate is old.

    The advantage of technology in 2016 has definitely helped the likes of the online/over the phone broker to maximize volume and limit time. Putting the work on the client to gather and email docs is not a bad thing. And I'm sure that Mr. Butler's business has been refined a million times to ensure that all checks and balances are in place to avoid fraud as much as possible. The Butler's are smart dudes, don't fool yourself. You don't get to that type of volume by being an asshat and crossing your fingers on every file.

    Nick's opinion on small town and communities is one that I echo. I live and work in a city where I will likely bump in to many of my past and current clients and community events and socials.That demographic are still very much a face to face client, and feel security in meeting in an office to chat.

    But quiet frankly, this debate is getting tired. I can spend 3 hours on a file, meeting with the clients, developing a strategy, etc...and then they go home and see another rate on line and they're gone. That's not their fault, that's the open market. I always say that the client will do what THEY feel is right at that exact time, sorry hard work and a pretty location mean nothing if the client doesn't value that. If they value speed and efficiency online, that's what they deserve.

    It's the type of client you should focus on, and ignore the other model.
    I'm not saying ignore technology, because there is immense value in having a large social reach and stirring up your Google juice to float to the top.
    What you do with the client after they call or inquire online is your choice for that next step.
    Brokers and Agents need to stop focusing on the other guy/gals model, and start perfecting yours.

    Now, off to order something online for .99 and pay $15 for shipping :)

  • Stephan Smith on 2016-03-17 11:23:14 AM

    I didn't realize that buying down a rate equated to less service. If you are earning 80 bps or 110 bps, it's still GREAT money we earn.

  • Jeff on 2016-03-17 11:40:24 AM

    Stephen, I normally buy down rates by 10 bps and still run a full service model. If I recall correctly, the article states that Butler earns 35 bps, not 80 to 110. Unless you are originating large Toronto/Vancouver size mortgages, 35 bps is not enough to provide a high level of service.

  • Tony Piattelli on 2016-03-17 11:45:27 AM

    My only question is, Since when is buying down the rate the lowest rate being offered? The lowest rate being offered is that presented by the banks for the broker to work with. Arguing that buying down the rate is the lowest rate being offered out there is a misnomer and misleading, and only creates confusion amongst the buyers as to what's consider fair.

  • Josh on 2016-03-17 12:08:21 PM

    This whole discounted rate model is in leu of offering full service and is utter garbage.

    The cheapening of the service and our industry is something that should not be celebrated.

    The role of a mortgage brokers should be to provide financial advice and planning that clients would not receive at the branches etc. Rate comes 2nd.

    Anyone can advertise the lowest rate and a point and click option... Thats not what this profession was created or what is should become.

    It's almost offensive that they print that he is "one of the industry most successful brokers", it should be he is one of the most successful discounted no service brokers.

    Would he be so successful if he offered face to face advice and actually spent time working on the clients behalf and didn't attempt to undercut the competition that offers a service based model?

    What will surely happen in the future is that the lobby groups for the big FI's will push the regulators to ensure face to face KYC is done...

    The cheapening of the service and our industry is something that should not be celebrated.

    I believe that our associations should be leaning on these service models to remove them from the industry. Not because of the competition aspect, but the cheapening of our industry as a whole.

  • Paul Therien - CENTUM on 2016-03-17 12:19:40 PM

    It is interesting that so many people are quick to attack Ron the way that they do. I do not necessarily agree with his business model, but on the other hand we have no idea exactly what that model is. The old adage: "walk a mile in his shoes" applies here.

    Ron has built a successful mortgage brokerage, and he has worked hard to do so. He competes on rate, and from what I have heard his customers do get good service from his brokerage. Maybe they do, maybe they don’t. If they do not however, I can’t see anyone going back to him for future business – only time will tell and that is for Ron to manage and deal with.

    Is his deep discounting reasonable? For him it is. Is him taking a hit to his bottom line to do the deep discounting good? Who am I, or anyone for that matter, to criticize it… it’s his money – he can do what he wants with it. If he wants to pass it on to his clients, that is his choice.

    At the end of the day - like so many other service industries, there are differing opinions about how business should be conducted. Discounted business is popular with some consumers, and not so much with others - but what we do know is that there is room for all. When Superstore opened people said it would never work because the service was so bad, decades later they are still here. The self-serve check outs at stores were said to be terrible, yet today they are often the busiest in the stores. It does not mean that personalize service still is not valued – holt Renfrew is going strong, as with the recent opening of a Prada Store, and a Versace store blocks from my office, the expensive places are surviving just as well. There is room for all.

    Ron and I may not always see eye to eye on things, but I respect his right to have his opinion. I also respect his right to build a business that works for him.

  • Amy kinvig on 2016-03-17 12:38:20 PM

    My clients are more than happy with my service and have actually told me they wouldn't want me to buy down the rate with my paycheck. They don't even want a dinner gift card for indtrosucing friends and family. (I still do because I like I spoil my clients) :)
    If I'm competing with a big bank for example I will consider this option, but I always get the best rate for my clients. I choose to not buy it down, essentially that is what is happening. Not an ethical issue whatsoever. My on going Mortgage planning and advising continues each year through the full term and the life of their mortgage, this is worth my pay. Many lenders don't pay 125bps in the first place and there is so much more that goes into finding the right fit for you client, in my experience. Rate is just one factor and if that's all your focusing on you then this is a disservice to your clients.

  • Jason Henneberry with DocAssist on 2016-03-17 12:40:55 PM

    Organizations like Ron's are learning to do more with less. But that doesn't necessarily mean they are sacrificing advice for price. In my experience, high volume brokerages are often managed by industry veterans with years of experience. They are are organized, highly efficient and typically sell more than one product line, offsetting the discounted revenue on mortgages through affiliate partnerships, insurance cross sells, etc...

    As James pointed out with his oil change metaphor, there is room for all models in our industry. The aggregated annual volume of the top 5 online discounters is somewhere in the range of 1.5% of all originated mortgages in Canada. That leaves plenty of room for more traditional "relational" brokerages. There's a "Quick Lube" in every city, but I don't see BMW attacking their model... they win on the merits of their service and the quality of their product.

    Ron didn't invent the internet and as much as I'm sure he would like to, he can't force Canadians to go online and compare mortgage options. Homeowners are doing that all on their own, and it's a trend that is likely to continue rather than abate.

  • Jivan Sanghera on 2016-03-17 12:46:43 PM

    For my clients it is a matter of understanding the key differences in the products. A lend wise mortgage is not the same as a value flex mortgage which is not the same as a fully featured product. People aren't dumb, given the menu of options they will likely choose what they believe meets their current and 5 year goals. I also make sure that we highlight the penalty structure to them. Once this is done they usually gravitate to the value flex or fully featured product. We can't be everything to everyone. The market is changing. People will start to abuse the full service brokers time and then get themselves a better rate on line. It's difficult for me at least to sell on service or rate alone. It's all trust. If and when they do trust you and do believe you know what you're talking about they will likely go with your recommendation.

  • Industry Issue on 2016-03-18 1:21:01 PM

    Buy downs are allowed. Period. No one is breaking the rules. The industry should regulate the max buy down amount. What other respected industry uses commission to buy down the value/cost of a product? You cant be upset when someone is playing within the rules granted. Maybe its time to change the rules?

  • Kevin Corcoran on 2016-03-18 4:23:30 PM

    To buy down rates constantly by reducing commission is the same thought process you would never see in corporate boardrooms , to lower commodity prices carte blanche, reduce profits lower returns to investors & oops you get removed as CEO

  • nick on 2016-03-20 2:46:03 PM

    Those that can afford to operate based on lower commissions will continue to do so. However it is debatable that they will be able to run a profitable business in the long term based on that model. 35 bps will not pay the bills in most markets. Buydowns are therefore a business decision. All the power to ron and those who use the buydown model. However my model has carried me to 26 years operating my business and i still have the same happy clients and maybe a buck or two more in my pocket.

  • Jeff on 2016-03-22 1:40:56 PM

    If the government is concerned that low fixed rates add to the risk over-borrowing and housing bubbles, they may demand that lenders reduce, or take away our ability to buy down rates. A few years ago, when the 5 year fixed rate fell below 3%, it became public known that the Federal Government was asking banks to increase their rates above 3% to reduce the chance of a bubble. If I recall correctly; Manulife actually raised their 5 year fixed rate in compliance with the Government. If the government is still concerned about housing bubbles and over-borrowing, taking away rate buydowns would be a logical first step. This would also increase our finders fees, provide us with more time to spend on each individual client, spread clients out over more brokers and agents, rather than just a handful of discount brokerages, thus benefiting the industry as a whole.

  • Ron Butler on 2016-03-22 7:17:13 PM

    Same as always: some very thoughtful, sensible comments, some very odd. There is room for every business model today, full service mortgage brokers will be here for a long time but as the years go on, far fewer of them. I stand by my statement: paying someone 115 to 125 basis points of a loan amount to locate a client, process an application and convey documents to a lender is not a long term business model.

    To paraphrase Bruce Croxon formerly of the Dragon's Den: "in 50 years when you google the word "broker" there will not be anything to find" that applies to all types of brokers not just us. Tech flattens commissioned intermediary relationships and that is just a fact.

  • The Wealthy Homeowner™ on 2016-03-23 4:37:38 PM

    Our members pay a flat fee for the Mortgage Services they receive and our research shows this is best way to secure the best advice on Mortgages.
    Anyone looking to build a mortgage service business on "buy downs" at at time of Canadian Banks tailoring their new online platforms to mirror the rocket-mortgage model, will lose.
    Mortgage Brokers value is in their Advice not their rates. Although their Advice generates better rates, good Mortgage Brokers are a key component of a successful homeownership strategy.
    Asking a Mortgage service provider to cut their earnings $200 bucks but to ignore that phone call on the 2nd month of the 3rd year on your 5 yr term as rates are forecast to increase, will cost thousands in exchange.
    Nuts!!

  • Matt Leggett on 2016-03-31 3:24:33 PM

    Why can't you offer good service, with good advice and a good rate? Now that anyone can look online and see what other brokers are offering, giving a client an unbought down rate is a bad rate with bad service. Someone else will just give that rate to them and you won't get paid anything. You are selling the exact same product as every other broker so you can't say you are providing better service by costing your clients thousands of extra dollars with higher rates. Obviously I would love to paid full on every deal but those days are gone and you have to adapt. It is up to the broker to decide how much they want to get paid on each deal. Capping buy downs just levels the playing field for brokers who aren't good at their jobs to begin with.

  • Jeff on 2016-03-23 11:25:06 AM

    Ron, it sounds like supporting the death of our profession. Most people still want a professional who is willing to take as much time as needed to develop a long term plan, explain the types of products available to them in depth, and be there for them to provide advice after even the mortgage closes. What is interesting is that it is the 20-somethings that seem to want the face to face interaction the most.

    The rate sites that you advertise on choose "select reviews" to make you look better, but have you seen your reviews on google reviews? With reviews like that, it is your business model that is jeopardy.

Broker news forum is the place for positive industry interaction and welcomes your professional and informed opinion.

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