Overheated markets push brokers to trailer fees

Overheated markets push brokers to trailer fees

Overheated markets push brokers to trailer fees

As a hedge against a “very probable” correction in B.C. home prices, a leading broker is actively moving to trailer fees, a way of protecting income at renewal for high-ratio clients, who may ultimately find themselves under water.

“Last year I did zero trailer fees and am now using them for 80 percent of my high-ratio deals,” Greg Martel, owner of Dominion Lending Centres Harbour View Mortgages, told MortgageBrokerNews.ca. “I would strongly advise other brokers in overinflated markets –  not only B.C., but Alberta and Saskatchewan – to do the same thing because when prices drop, they won’t be able to move those clients at renewal.”

Martel’s move to batten down the hatches comes amid growing speculation that Vancouver, Victoria and other markets grappling with double-digit price gains will, in fact, suffer a price correction. The high-volume broker, who funded $89 million in deals last year, is predicting that storm of sorts will come within the next five years.

“I don’t think it will be a huge drop, but at least a 10 per cent correction sometime within the next five years,” said Martel, ranked 13th on this year's CMP Top 50.

The decline would be more than enough to force most recent high-ratio borrowers “upside down” on their home value-to-mortgage ratio. It means they would have no equity in the home, effectively stymieing attempts to transfer them to a new lender at renewal, said Martel.

This summer, he assiduously began placing clients with lenders offering trailer fees if, in fact, the mortgage terms met client objectives on rate and other key variables. It’s an about-face from the broker’s established preference for the traditional upfront compensation model, but protects renewal income when clients don’t have the equity needed to switch lenders.

Other brokers have likely taken the same precautionary steps to protect their future revenue in markets where house prices far exceed household incomes. Vancouver is on the top of that list, with a median home price 9.5 times that of the median household income, according to the latest RBC affordability index.

Purchasing the average detached bungalow will claim 92.5 per cent of the average Vancouver family’s income, compared to the 37.1 per cent of the average Calgary family’s earnings.

Still, brokers even in that key Alberta market may be tempted to take a closer look at Martel’s strategy, with prices largely considered to be overinflated despite 2008’s devastating correction.

“I think that's prudent,” he told MortgageBrokerNews.ca.

  • John Bargis, Mortgage Edge 2011-09-09 3:54:07 AM
    The benefit of trailer fees should not be a surprise to anyone, especially since they've been available in our market for several years, although sparingly. It's good to see that there are some who appear to be waking up and smelling the coffee. The industry as a whole has unfortunately been slow in embracing this wonderful concept....My personal opinion is that more needs to be done by the industry players to encourage lenders to develop a residual model...Trailer fees are somewhat like dividends to the mortgage agent for the fruits of their labour.....One need not look any further than the financial planning community to get a solid grasp of the basic concept of building for the future....
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  • Eric 2011-09-09 4:50:40 AM
    Who, in Quebec, offers trailers?
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  • Mike 2011-09-09 9:18:55 AM
    Young broker like yourself should know better than to have supported the Scotia's and TD's so heavily from the start. Trailer is where its at! You've left hundreds of thousands of dollars on the table and now are smartening up. Better late the never!
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