Diversification has been a topic of interest in the broker space.   Yesterday Mortgage Broker News was in my office to record, on video, my thoughts on this matter.  If CMP (Canadian Mortgage Professionals) is covering this story, there must be a lot of chatter on this issue. Here’s my two cents. 

It’s prudent for every business to consider diversification.  The reasons are obvious, increased revenues, new market opportunities, risk mitigation etc.  What has to be carefully thought out is that potential new revenue streams may take your focus away from your core competency.  In our world it’s mortgages.  We do not have the luxury of treating mortgages as a loss leader.  This is what we do, this is who we are.  Therefore, ancillary revenues are secondary, and the amount of resources allocated to such endeavors should not come at the expense of your core business.

As I thought about this issue two questions came to mind…

Firstly, why is there interest in diversification of broker space today?

Secondly, how successful have mortgage brokers been to date relative to offering ancillary products?

With the respect to the why, beyond the reasons I stated above, I believe uncertainty in the market is driving some of the interest.  The competition has become fierce, and the broker market is realizing this is the new norm.  Furthermore, mortgage brokers are learning (from the banks) that selling a customer multiple products increases customer retention.  When the market was buoyant very little planning or commitment is accorded to this issue.  Over the last ten years there were plenty of philosophical discussions about this issue but there was little will.  Today, the market is different, and brokers are looking for ways to cannibalize the customer’s application.  Brokers know that some entity is going to sell their customer other financial products, and they’re contributing to someone else’s success by handing over the data/mortgage application.

As to how successful brokers have been to date offering ancillary products, we need to look no further than creditor life insurance.  This product has been available in the broker space for well over a decade.  To date the success rate or penetration ratio is somewhat underwhelming.  Most recent statistics suggest that brokers have a penetration rate of approximately 22%.  Yet the banks have penetration rate in the high 60’s to low 70’s in terms of percentages.  Why is that?  Is it because brokers view the selling of creditor life as a nuisance? Does the broker not believe the compensation is worth it?  Is there no structure or discipline around selling creditor life insurance?  Do brokers have a moral issue around selling this product?  It appears that bank employees have figured out the answers, and I believe the answer is simple.  Bank employees are mandated to sell creditor life.  It’s not voluntary, and that’s why they’re successful at selling creditor life and other ancillary products.  What gets measured gets done.

The idea of being able to offer multiple products to your customer is very appealing.  However, we need to ask ourselves the following; “is being able to offer multiple products a must have or a nice to have?”.  Creditor life penetration ratios suggests that ancillary products may reside in the “nice to have” bucket.

Until next time

Cheers

As per my previous blog, I will now address the second question I answered as a panelist at the VERICO Business Forum . “What is one thing that a lender can do today to ensure long term sustainability, and what can mortgage brokers do in kind”.

Simply stated there is no one thing that a lender can do today to ensure long term stability. Usually when we’re asked these questions, in a public forum, the answers are sprinkled with ambiguity, and a pinch of fluff. The reality is, if a business is going to be relevant tomorrow it requires careful planning, and a wee bit of luck.

Careful planning requires a full understanding of your customer’s needs.  Sales today is far different than it was years ago.  The customer is far more sophisticated today, as is the sales person.  At Merix we serve two customers, the borrower and the mortgage broker.  For too long in this industry the mortgage broker has been viewed simply as a conduit between the borrower and the lender.  This has to change.  The evolution of this industry requires that we change how we treat our customers, the mortgage broker.

I believe greater transparency is required between the mortgage broker and the lender.  Our dialogue and operating practice has to change.  We will not be able to thrive and grow our business if we continue to work in an environment where one entities profit is another entities loss.  Long term sustainability of our industry requires the broker owner, the mortgage broker and the lender to profit.  If one of these three is left out of the profit equation the industry is doomed for failure or at the very least stagnation.  Therefore, I believe lenders have to become more transparent about their own business.  If every conversation is about more VB (Volume Bonus) or higher finder’s fee, it’s a race to the end.  The challenge we face today is in understanding one another’s business. We’ll never get there unless we present the facts.  The only way we’ll all be able to grow is by giving each other a look behind the curtain.

In terms of what a mortgage broker can do to ensure long-term sustainability?
Be prepared to face two significant challenges, customer retention and increased competition from the bank’s mortgage sale’s force.

Customer retention is the nasty little issue that no one wants to discuss in an open and honest way.  So I’ll give it a shot. There’s isn’t a lender out there who doesn‘t believe that once a broker accepts the finder’s fee and VB, the customer belongs to the financial institution.  Mortgage brokers believe the lender is renting the customer for five years. I can assure you that every lender you deal with, including MERIX, is allocating more resources to customer retention.  Every lender will fight tooth and nail to retain the customer, and so far lenders have been very successful. For illustration please note the most recent CMHC survey relative to customer retention. The banks are winning the customer retention game, and they plan on keeping it that way.

The second significant issue mortgage brokers will have to confront is increased competition from bank’s mortgage sales force.  You’re probably familiar with the two banks that dominate the space today, but I can assure you that all the banks are either investing in that channel today or they’re about to do so.  I mean all of them.  The banks learned from the broker channel.  Subject matter expertise, and a focus on service, is a formula that works.  Imitation is the highest form of flattery, so mortgage brokers be flattered.  That being said, the banks are coming, and they have deep pockets.

Until next time,

Cheers

“…it’s all fun and games until someone loses an eye…”
-Mom

I recently had an opportunity to participate in a lender panel discussion. I would like to thank Colin Dreyer and John Kelly of VERICO for graciously inviting me to participate, (VERICO Business Forum in Las Vegas) and for providing and open forum to discuss industry issues. I was struck by the candor of all the panelist’s but I guess I shouldn’t be surprised because leadership requires facing difficult questions, and having an answer. The panel was made up of industry leaders and kudos go out to Moe Forget, Tim Mezik, Jim Smith, Paul Grewal, Hali Standlund, Ron Swift and Mark Squire. Ducking difficult questions and preparing sanitized responses is the easy way out, and no one on the panel took the safe route.

I enjoyed listening to the responses of the other panelist’s. For example, Tim Mezik, Ron Swift and Jim Smith were asked if there respective institutions would ever consider offering trailer fees as a form of compensation. Tim Mezik, and Ron Swift responded respectively by saying maybe and possibly. Jim Smith, in no uncertain terms, said “no”. His position is understandable when you consider that banks are in the customer acquisition business. Therefore, they do not see the need to perpetually pay for a customer that they have already purchased. On the other hand, we at MERIX have a different philosophical viewpoint. We try to balance the need of our enterprise, combined with the needs of our suppliers, the mortgage broker. I believe there is room for both models, and choice in the market place is critical.

I was asked two specific questions about our industry. Firstly, do I believe there’s a level playing field today. Secondly, what is one thing that a lender can do today to ensure long term sustainability, and what can mortgage brokers do in kind.

With respect to a level playing field, do I believe that it actually exists?  Today I can state unequivocally the answer is “no”. Anyone who would suggest otherwise would at the very least be disingenuous. At the very worst they would be insulting everyone’s intelligence. Here are some examples of why a level playing field does not exist today:

• IFRS accounting rules are being implemented this year. Without getting into the specifics, the amount of capital which has to be set aside relative to the funding of mortgages is increasing. Let me ask you this simple question, which entity do you believe is in a better position to deal with capital issues, a bank or a mono-line? Answer, big advantage for the oligopoly.

• Resource allocation, including marketing budgets, is another huge advantage that banks have over mono-lines. These expenses are factored into the entire bank’s expense line. Therefore, their marketing budgets, and their cost to schmooze brokers, is pocket change for them.

• The CMB allocation is another huge factor in the bank’s favour. Why? Because the banks have access to a balance sheet as well as the CMB. The mono-line’s today are faced with a finite number relative to volumes. The banks on the other hand can fund as much as they have an appetite for. They may be satisfied to fund a finite dollar amount due to margins and market share, but that’s their choice, and they can make that choice based on their business needs. Today, the mono-lines do not have that luxury.

All this being I said, I say the following: boohoo…

I don’t expect anyone to shed any crocodile tears for the mono-lines. That’s life, that’s business. As matter of fact many of the challenges we face today are no different than what we at MERIX faced when we launched our business close to seven years ago. We are the guppies swimming amongst the whales, and that hasn’t changed since day one. Frankly, I don’t mind that one bit. All it means is that we have to work harder, be smarter and fight tooth and nail for every market share percentage point. This is the classic story of David and Goliath. It’s not easy going to a gun fight with slingshot and a rock, but it’s the terms of battle we embrace. As my mother would want to say, “it’s all fun and games until someone loses an eye”. We at MERIX plan on having 20/20 vision for a long time to come.

I’ll address the second question in Thursday’s blog.

Until next time.

Cheers

This was a term we were all too familiar with back in August and September of 2008. It is also the name of a new HBO movie which chronicles what transpired at the beginning of the sub-prime mortgage meltdown. HBO assembled an outstanding cast, and given the subject matter the movie was rather entertaining. I would highly recommend watching the movie. It is a good reminder to all of us that the term boom and bust is as applicable today as it always has been.

In typical Hollywood fashion, a liberal bias amounting to revisionist history, the movie tried to blame George W. Bush and Ronald Reagan for the meltdown, and all other evil things. The truth is you can go back to the Jimmy Carter administration, and the passing of the Community and Reinvestment Act. That work of art stated that home ownership was a right, and not a privilege. This is where the slippery slope began. Then old Slick Willie, aka “which way are the political winds blowing today because that’s what I’ll stand for”, Bill Clinton, put that program on steroids. Suffice to say the responsibility for the meltdown, and the nuclear fueling of the problem, is equal parts Republican and Democratic.

The movie is a great reminder of how perilously close we came to an economic meltdown. How our standard of living was at the precipice. If you think this is hyperbole, because this was really a US issue, the reality is that this carcinogen (sub-prime mortgages) infected world markets. I can’t help but to think about the auto worker in Windsor and Detroit, the welder in Germany, the machinist in France, all, asking the same question: “Tell me again why my pension has taken a hit because of some mortgage problem?” No one from Wall Street could explain what happened in laymen terms. The average person cares little about default swaps, derivatives and mortgage-backed securities. All the layman cares about is finding out who the hell let this happen. That question has still gone unanswered.

The movie doesn’t deal with the who. The movie played up of the part about the moral dilemma the government faced. Who did the government decide to bail out, AIG, and who did they allow to fail, Bear Stearns and Lehman Brothers. All very fascinating and dramatic. But after watching the movie I couldn’t help but ask myself the following question: “How the hell has no one gone to prison over this?” I’m all for a free market system, and the pursuit of wealth, but reckless endangerment of our economy and standard of living should not go unpunished. There were individuals and institutions who knew full well they were passing on toxic assets. They were passing on the risk so they didn’t care. They could care less about the consequences. Yet none of the perpetrators of this ingenious fraud has ever been charged or convicted. You would think at least a couple of them should be experiencing the joys of being passed around in prison for a carton of smokes.

Until next time

Cheers

I suspect by now that you have heard the news that the Macquarie Financial brand will no longer be available in the broker market. To be clear, because there seems to be some confusion in the broker market, Macquarie Financial is not exiting the Canadian market place. They will continue to operate other lines of business in Canada, as well as support multiple brands in the broker space. But the big “O” (Macquarie Logo) will in time disappear from the broker landscape. However, their legacy, and the enormous amount of talent they assembled, will carry on. Macquarie’s success in the broker space will reverberate for years to come.

I remember it like it was yesterday. I was sitting in my office at Merix, and across my computer screen came the official press release that Macquarie had purchased a lender, and that they were committed to a trailer fee model for mortgage brokers. Even though Merix was the pioneer and present day champion of trailer fees, Macquarie’s entrance into the market gave me a sense of relief. I was relieved because another entity would preaching the same story as ours. More importantly a recognizable brand such as Macquarie’s legitimized what Merix was attempting to accomplish, change the way an industry does business. We still have a ways to go before we reach our final goal, but I think it’s safe to say that trailer fee’s today are no longer viewed as that great unknown. Everyone knows today the value of trailer fee’s. Everyone knows today that they should have some portion of their book of business with a trailer fee lender. That in it self is a significant accomplishment relative to where the market was six years ago. The psychology of something new is critical relative to acceptance, and Macquarie contributed to the acceptance of trailer fee’s. For that I would like to publicly thank all the staff and management at Macquarie Financial.

As for Merix, we will always be the torch bearer of trailer fee’s. We believe to our core that it’s the right model for mortgage brokers. As for other lenders who may decide to offer compensation models which reflects what Merix has to offer, I will be the first to congratulate these lenders when they finally do so. I look forward to the day when other lenders join our cause, i.e. creating future wealth for mortgage brokers. Now’s a good time as any.

Until next time.

Cheers