A supporter of trailer fees is aiming to stem the loss of broker-channel lenders squeezed by commissions and thinning margins, suggesting brokers might be receptive to lower upfront payments in exchange for guaranteed renewal fees.
“If the lenders genuinely have to scale back on upfront commissions in order to justify their use of the broker channel – something, of course, we, as brokers, don’t want to see – then that move would have to be accompanied by mandatory renewal commissions,” Ryan Cooper, a senior mortgage consultant with VERICO Paragon Mortgage Group, in B.C. told MortgageBrokerNews.ca. “That would essentially defer a portion of the upfront fee and reward brokers who are prepared to keep a client at an existing lender if the rate and the terms being offered are competitive instead of moving them just to make a commission.”
Cooper, a big proponent of trailer fees, is suggesting brokers may be willing to accept as little as 60 basis points upfront on a standard five-year mortgage, with the guarantee of 20- to 25-basis points to follow upon renewal. That differs from both the standard, and generally preferred, upfront model as well as the trailer fee option, which divvies up compensation into annual instalments, both before and after renewal.
The suggestion comes as brokers grapple with the loss of Macquarie Financial, and to a much less extent, Concentra Financial. Last week, both announced they’d leave the broker channel by the end of the month, with Macquarie officials suggest its exit is needed to lodge the lender out from between a rock and a hard place.
“The Canadian mortgage landscape has been one of, if not, the most challenging environment,” Matt Rady, head of Macquarie Banking and Financial Services Group, North America, told MortgageBrokerNews.ca. “What we’ve seen is a narrowing of margins that have made it a challenging business to operate on a medium-term basis. While it's profitable for us, it's difficult to see what opportunities there will be. The treatment of broker commissions, coupled with those tighter margins, has put a strain on returns on regulatory capital.”
Cooper did a significant portion of his business with the lender, which will now transfer administration of its $8 billion book to Paradigm Quest. The service provider will also handle broker remuneration on those deals.
“It was sad losing Macquarie,” Cooper told MortgageBrokerNews. “Their trailer-fee model was particularly attractive. "You know, if something is not working for lenders, they need to work with the broker network heads to ensure that mortgage originations are beneficial to both the lender and the broker, rather than leaving the channel."
Cooper’s proposal could alleviate expenditure pressures for broker-channel lenders as they face tight interest rate spreads for the next six months to a year, say analysts. They suggest the Central Bank will hold its key overnight rate steady until early 2012. Dropping bond yields – responsible for setting fixed rates – are also expected to maintain that downward trajectory in the near-term, further squeezing profit margins for lenders.
Still, brokers need to proceed with caution, even as they try to protect their borrowing options for clients, said one industry veteran.
“The model in its current state needs to be revised and there is a sense of urgency here,” John Bargis of Mortgage Edge told MortgageBrokerNews.ca.”Having said that, there needs to be careful study about the way going forward because in many ways what’s being considered is like a tax -- once implemented, it’s hard to reverse.”
He’s lobbying for the same kind of discussion between lenders and brokers that Cooper is suggesting, although would like to see it expanded to broker associations.
“We need to really sit and examine the capital markets and the new capital requirements on a true partnership level,” Bargis said. “It’s about time the associations stepped up and finally demonstrated their value to their members.”