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Wednesday, November 10, 2010

Canada Independent Mortgage Brokers to Remain Strong in 2011 Despite the Decline of U.S. Brokerage Market, says Report

Canada Independent Mortgage Brokers to Remain Strong in 2011 Despite the Decline of U.S. Brokerage Market, says Report

Tuesday, 09 November 2010 21:21 Written by David Hatton, Editorial Team

Mortgage brokers were popping Champagne corks this week after news was released Monday that the residential market inched past the $1 trillion dollar mark in late August.
Canadians had $1,008,000,000,000 in mortgages outstanding at the end of August, a gain of 7.6 per cent in one year, according to the Canadian Association of Accredited Mortgage Professionals (CAAMP). Over the past 15 years, the volume of outstanding mortgages has increased a even more whopping 194 per cent.
As the residential housing market emerged from the recession earlier this year, consumers rushed into buying properties before the market recovered, raising average prices to an all-time high of $346,881 in May. The market has since recovered slightly with prices around $331,000.
Canadians also borrowed heavily against their home equity during the economic crisis. The CAAMP report noted about 18 per cent of consumers took equity out of their homes – an average of $46,000 – with half stating it was for “debt consolidation or repayment”. Based on an estimated 5.65 million mortgage holders in Canada, that represents about $41-billion in borrowing.
“It is estimated that 30 per cent of the takeout was for debt reconsolidation and repayment,” the report stated. “Therefore, while the amount of outstanding mortgage debt would have increased by this amount, totals for other types of debt would be correspondingly reduced. About $15-billion was taken out for renovations, $6-billion for education and other spending, $7.5-billion for investments and $4-billion for other purposes.”
But the report also noted a larger proportion of mortgage holders increased their payments in the past year. CAAMP reported about thirty-five per cent of consumers surveyed paid more than they had to, with another 12 per cent making lump sum payments, 16 per cent increasing their monthly payments and another 7 per cent doing both.
That announcement came hot on the heels of a Deloitte Consulting report that the Canadian private mortgage broker channel will remain “strong, stable and established” as it continues to fight with the big six banks across the country for market share in the years ahead.The report, titled “Winning Strategies in the Brokered Mortgage Marketplace”, suggested mortgages issued by non-bank providers will likely provide for one-third of all mortgages in Canada for the foreseeable future.
"The Canadian mortgage industry is undergoing another significant paradigm shift," says Todd Roberts, consulting partner and leader of Deloitte’s Corporate Strategy Practice. "In the face of significant industry developments such as the recent credit crisis, industry consolidation and price competition, many banks and non-bank lenders are starting to seriously evaluate the economics involved in pursuing the mortgage brokerage channel. As more and more of these lenders enter this business, Canadian mortgage consumers will ultimately benefit in the form of increased choice of products, value-added advice, and more convenient services."
Independent mortgage brokers represent 38% of total mortgage originations in 2009, up from 26% in 2003, according to Canada Mortgage and Housing Corp (CMHC) data. And roughly the other half of their 2009 mortgage volume was from three of the big six banks – Scotiabank, FirstLine (CIBC) and TD - active n the mortgage broker channel.
The industry website noted that CAAMP said brokers had 25% of 2009 total market share, according to their calculations. That could be due to two things: banks putting more reps on the street and banks realizing that low rates and market share are correlated.
It added the 2800 bank mobile mortgage reps will increase, putting more pressure on brokers. Brokers represent objectivity and choice, however, because brokers typically know and sell multiple lenders’ products. Hopefully lenders do not get carried away with “preferred broker” lists and destroy this edge, however.
“Lenders who use top 100 lists and the like are so excited by the “efficiencies” they create that they’re completely blinded to the effects these policies could have on the industry long term,” the website noted, adding unless things change, “volume pooling and submission desks could become essential for brokers who want to compete with bank reps for larger clients”.
That becomes a sharp contrast when compared with their U.S. counterparts, who have seen their share of mortgage broker collapses, the Deloitte report noted. Major banks such as JP Morgan Chase & Co. and Bank of America Corp, no longer sell mortgages through independent mortgage brokers after the subprime market imploded due to mortgages with unrealistic rate increases, inaccurate readings from credit rating agencies and lack of proper regulation.
In the U.S., the number of mortgage brokerage firms has contracted to 20,000 in 2010 from 54,000 in 2007, the report said. According to the U.S.-based National Association of Mortgage Brokers (NAMB), in 2006, mortgage brokers originated 65% of U.S. mortgages. They now originate a "previously inconceivable" 15%, the report says.
In Canada, however, the broker model has evolved from "a fragmented lender of last resort" to a legitimate option, the report says.
The Canadian lender distribution model in particular has undergone several changes over the last two decades, and while the landscape of lenders continues to shift, the mortgage broker channel remains a viable alternative to the major banks' branch and mobile mortgage sales forces (MMSF). According to the report, while mortgage market share trends for bank branches have steadily decreased (trends which are expected to continue), by contrast, they have modestly increased for mortgage brokers (they are expected to be flat into the future), and steadily increased for bank mobile sales forces (they are expected to continue).
“Canada could not be more different,” says Rob Galaski, Toronto-based senior manager of Deloitte’s corporate strategy practice. “In Canada, most of our lenders, particularly the major banks, have exhibited considerable restraint during the credit crisis and were much more conservative.”
“Over the last decade, there’s been a lot of speculation as to whether the brokerage channel is here to stay,” he says. “We’re finding that the broker channel in Canada is extremely stable and definitely a viable channel for all types of lenders, including the major banks. And, that’s a large contrast to what you find in the United States.”
Canada was largely shielded from the global credit crisis because of stricter mortgage lending rules and more conservative underwriting standards, according to the report. Meanwhile, the big six banks and monoline lenders like Home Capital Group Inc. continue to tap the mortgage broker channel to expand their business.
The future for the mortgage broker in Canada "remains positive" although the scenario anticipated five years ago that brokers will represent the majority of origination volume is “unlikely”, the report says. "The channel will continue to stabilize, settling at approximately one-third of mortgage origination dollar volume," it says.
"Over the last decade, an increasing number of viable options for borrowers have surfaced," Deloitte’s Galaski explained. "In addition to the traditional options available at bank branches, Canadians seeking a mortgage can now consult the banks' mobile mortgage specialists, independent mortgage brokers, and online sources. In this changing and more customer-friendly environment, the mortgage broker channel has emerged as a legitimate competitor that is helping provide greater choice and convenience to Canadians."
"There are many groups of Canadians who are benefitting from access to the specialized lending services that mortgage brokers can provide. In particular, individuals who would have previously been faced with very few options due to their financial circumstances—such as new immigrants, the self-employed, and individuals with credit challenges—now have options that were not previously available to them even a few years ago," says Galaski.
Mortgage brokers are "so important because they are the primary access point for people who have credit challenges," says Galaski. "The major banks have strong programs now for new Canadians, for example, but the mortgage-broker channel provides for people with credit challenges, people with a short credit history, and people with income challenges access to lenders who exist outside the mainstream."
"Having a strong and established broker channel is an excellent thing because it facilitates consumer choice," he says.
The Deloitte report added imminent changes in legislation may remove penalties and barriers for switching lenders.
In response to consumer group concerns that mortgage prepayment penalties are complicated and lack disclosure, the federal government has stated its intention to standardize their calculation and disclosure. The typical repayment penalty is either three months' interest or the difference between the existing rate and the rate the lender could charge in the current environment — known as the interest rate differential (IRD). In a rapidly falling rate environment, the IRD method provides the lender with greater compensation for the foregone interest revenue—but it is typically more expensive for borrowers who plan to discharge their mortgages.
"If new government regulations remove the IRD penalty as a barrier to switching, more consumers will likely switch mortgages in periods of declining interest rates," explains Roberts. "In the absence of stiff payment penalties, lenders will therefore seek to minimize lost customers by building strong relationships through active cross-selling and retention strategies for at-risk groups."
According to Deloitte, emerging trends that are expected to shape the Canadian mortgage industry and ultimately impact Canadian mortgage holders include:1. The balance of power will shift from financial institutions to mortgage-seeking Canadians: As the mortgage lending landscape continues to shift, Canadians will have access to a wider range of options when selecting a mortgage. This has increased competition among lenders (bank branches, mobile mortgage specialists, independent mortgage brokers, and online sources) which in turn will result in more customer-friendly service, increased product offerings and convenience for Canadians seeking a mortgage.
2. Online and telephone banking will continue emerging as viable channels: Remote self-service options such as online and telephone banking are emerging as popular alternative channels for obtaining mortgages. Given the new level of sophistication telephone banking has recently achieved, Canadians no longer need to leave home to obtain a mortgage as some lenders are allowing borrowers to complete their mortgage applications using a voice signature. In addition, online features such as calculators, planning tools, and live chat options with lenders are giving Canadians access to more information than ever. Although these channels are not new, they are in the early stages of adoption and signify an important trend for Canadians interested in the self-service option.
3. Mortgage brokers will evolve from "rate shoppers"' to "advisors" in order to survive: Given Canadians now have increased access to mortgage rate information, mortgage brokers as "rate shoppers" are quickly becoming irrelevant. As such, the "mortgage broker as advisor" value proposition will be the most successful approach for this channel. To succeed in today's hypercompetitive marketplace, mortgage brokers will start to offer value-added advice to Canadian mortgage holders similar to the way investment brokers have evolved from transactional to advice-based roles.
4. Major banks will continue to compete for broker business: Major banks will continue to invest heavily in proprietary distribution to compete directly with the mortgage broker channel, and to a growing extent, each other. In particular, the emergence of bank mobile mortgage sales forces (MMSF) is challenging the perception of brokers as the low-rate/better customer service alternative (particularly among non-branch/ monoline lenders). As a result, bank MMSF are making major inroads due to convenience and customer service. Armed with differentiated products, more than 2,800 mobile mortgage sales agents are operating in Canada today. The evolution of MMSF and the role major banks choose to play in the broker channel will have significant implications for the future of broker originated lending in Canada. If banks choose to stay in the broker channel, Canadians will have more choice and competitive pricing. Brokers will also need to raise their game and increase their level of client service sophistication. However, if banks withdraw from the channel, it will dramatically restrict the supply of mortgages in the broker channel.
5. Investments in technology will benefit consumers in terms of speed and convenience in obtaining a mortgage: As more lenders make technological advances, quick turnaround and visibility on deal status will improve, ultimately benefiting consumers. Improvements to workflow management tools streamline back-office operations, facilitate accurate and timely front-end communication with consumers, and allow lenders to proactively handle exceptions and reduce turnaround times. For example, if a borrower wants to know whether they can increase their mortgage to win a bidding war, the lender can now evaluate the risk and provide them with an answer within four to six hours―compared to the several days it used to take using a manual process.
6. The super-broker networks will continue to consolidate: In recent years, increased competition, heightened compliance requirements and rising technology costs have pushed the broker market to consolidate, with smaller shops merging into super-broker networks. In 2005, almost 70 per cent of Canadian brokers were employed by one of five broker houses. Today, this figure tops 85 per cent as new mid-tier networks have emerged. As a result, the quality of the remaining firms is much higher (for example, more consistent training for brokers, better technological enablement, greater negotiating power with large lenders on behalf of consumers for better products and rates).
7. Niche lenders with specialized product offerings will emerge via the broker channel: As the participation of new lending institutions in the mortgage broker channel continues to evolve, niche lenders with specialized products will emerge via the broker channel. In doing so, they will provide new options to groups of Canadians who previously had few mortgage options available to them due to their financial circumstances (for example, new immigrants, the self-employed, and individuals with credit challenges).

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