Getting while the getting is good. An increasing number of brokers are deserting the rate wars, deciding to move over to the B side, as a way of building a book less susceptible to the bullets of the banks and, indeed, other brokers.
“It was just not competitive anymore because the banks were undercutting the rates I could access by so much that it didn’t make sense to stay solely in the A sphere,” Shawn Allen, owner of the independent Matrix Mortgage Global in Toronto, told MortgageBrokerNews.ca. “About a year ago, I decided to deliberately switch my emphasis to growing the number of B private lending deals. They’re now about 65 per cent of my business and growing.”
He’s not alone, with more and more independent brokers now changing gears and moving toward subprime mortgages, specifically financed through private money. What they’re leaving behind, according to Allen, is a battlefield where the opposing side – the banks – are wielding unsustainable, loss-leader rates as a weapon in order to retain and attract clients. Some are even eating their own interest rate differentials if existing clients are threatening to break mortgages and accept a broker-arranged deal.
“It really is getting highly competitive on the a side,” Michael Marini, a mortgage agent with Dominion Lending Centres Funds in Toronto, told MortgageBrokerNews.ca, “and it’s for that very reason that I’ve grown the B portion of my portfolio substantially over the last while, as well as commercial. I have a referral relationship with banks where they send me their turn-down business and I’m taking those clients to the B side for a short term-loan, one or two years, and then placing them back, usually with the same lender later.”
He’s also actively growing what is already an extensive database of individual private lenders, who he can take a deal to, another way of meeting the demand from subprime clients. He remains very active in the prime space as well.
Allen’s strategy is similar, and is already starting to yield the kind of gains he realized when the banks weren’t quite so hungry for A deals.
“What I’m finding is that it took about six months to get back up to the level of business I had before I made the switch to alternative,” said Allen, “and about a year before I got back up to where I was at my highest. The client numbers are smaller now, but I’m making more in fees than I did before and I’m also able to make a commission when I can take a client back to an A lender after they’ve successfully finished their alternative mortgage.”
Any current growth in A brokers migrating to the alternative sphere follows historical patterns, said one Toronto MIC manager, Brian Moskowitz, president and founder of
Moskowitz Capital Management. Bouts of intense rate competition with the banks – and among brokers, themselves – have traditionally led to greater portfolio diversification.
Still private lending guidelines, as well as those of institutional alternative lenders, are generally different from the application requirements of their A-market counterparts. Brokers making the switch need to do their homework, he said.
“If you’re a mortgage agent relying on A business as a core, diversifying your income and targeting alternative borrowers and those looking for construction financing or commercial is a good idea,” said Moskowitz. “But the mortgage agent really needs to study the alternative marketplace and build credibility with the lender in order to increase the chance of getting the mortgage funded. You have to study what the lender funds – ask an underwriter for examples of deals they have funded, and forget about what’s in the brochure.”