Differential Advantage - An Uncomfortable Truth

Mortgage broker market penetration in Canada has risen steadily over the years but we still fall far short of U.S. statistics for origination at 75%.

There are many reasons for the fact that Canadians continue to renew 90% of their home mortgages, refinance 85% and initiate over 50% through banks and lenders directly, as opposed to the U.S. where brokers are responsible for much higher percentages in all three categories.

The reason for this is partly because of the industry’s history which began years earlier in the United States. Also, in Canada the mortgage broker industry was perceived as being the lenders of last resort to whom borrowers went when all other alternatives had failed.

There are a few reasons given for the disparity between the two countries. For starters, Canadian banks offer a higher level of customer service, are more regulated and have a stronger reputation than their American counterparts.

Canadian consumers aren’t usually concerned about losing everything due to bank failure or that their home mortgage will suddenly be owned by a questionable lender. The one area our banks seem to fall short however is in the quality of mortgage service.

Although tied selling is illegal in Canada (and in most of the U.S.) Canadian banks have demonstrated a high competency in attracting their clients to a multitude of products and services ancillary to their original transaction, whether a new mortgage or a savings account. Canadian banks boast that they offer one stop shopping for mortgages, loans and investments to qualified customers. And they do, but does it meet the client’s specific requirements? Much of the time, it’s a one size fits all situation.

The consumer’s dilemma is that they already have a high degree of trust with their bank, and are unaware of alternative choices. This is where “we” as an industry need to provide further education to the marketplace about what it is we actually do.

When a consumer qualifies for a bank mortgage and has an idea of what he/she needs, traditionally the primary service offered by a mortgage broker is to obtain a lower rate through their various lending sources. Definitely an important aspect of the job, however to beat the bank we need to do much more.

For example, there have been times where I have witnessed an individual (who should have qualified) get rejected by their bank because the loans officer was not experienced enough to assess their complex situation. This is a big point of differentiation where an experienced mortgage professional would add significant value.

The following lists a few ways banks operate when it comes to mortgages that will give brokers greater points of advantage:

• The bank generally doesn’t give consumers the best rates available even within their product group unless a consumer is aggressive and prepared to go elsewhere. The banks will however offer brokers their most competitive rate and terms because they know the broker is knowledgeable of what's available, and that they are a major source of business for the bank.

• The banks could choose to be competitive however it is in their own self interest to renew or refinance at higher rates. As long as consumers continue to finance their mortgage blindly and neglect shopping around, this state of affairs will continue.

• Bankers aren’t properly trained to seek out the client’s best interests and are more focused on process administration rather than client care. The bank's priorities and policies eclipse client needs every time. Banking loan officers and in-house brokers are extremely busy and are trained to complete the application process as quickly and efficiently as possible. Time is a luxury they can’t give to a client due to many others also waiting in line for service.

• As mentioned above, banks don’t lend money to people who fall short of their black and white style criteria. The bank employee who rejects an individual’s application may not have been properly trained to understand that person's particular situation.

• Banks don’t really care about consumers' best interests. There is no conflict of interest for an employee working for the bank, or for a mortgage broker working primarily for one bank. Their focus will always be on whoever is providing them with a paycheck. It’s not that the bank employee prefers this but rather that it is the nature of the business.

To change perceptions and increase the use of mortgage brokers by consumers, we as an industry need to:

• Be obsessively client centered. This sounds obvious but is often not the belief held by many consumers. Take the time to know your prospective client thoroughly. Recommend solutions rather than sell products. The right solution to a client's problem is critical to meeting their needs, even the ones they may not know they have until walked through all of the relevant issues.

• Be helpful even to those you don't do business with immediately. There are brokers out there who can be just as jaded as some bankers when it comes to serving people. If a potential client is in deep trouble, perhaps facing bankruptcy or foreclosure then find it in yourself to provide the client alternative resources and support. Mortgage insurance companies such as Genworth and CMHC, as well as bankers are making serious efforts to provide bridges to people with temporary problems.

• Market the industry and our broker brand. Offer support to our national and provincial associations to continue public relations and marketing efforts. Large brokerage companies through their communications should also lend a hand to enhance the public’s perception of broker value.

• Improve training and new broker support. New brokers need a lot more support than they currently get from most brokerage companies and new brokers should be encouraged to work in full service and support organizations. Mentoring of new brokers is critical. If the industry is to have a differential advantage against the banks it will be in the area of professional customer service and support. Quality service is the root of professional development.

• Tell the public the truth. The industry as a whole needs to have greater transparency regarding the nature of the relationship between the banks and the brokerage industry. Don’t obscure financial and mutually beneficial relationships especially if they may impact consumer choice. Clients are not ignorant and will understand that bonus driven relationships with preferred lenders may be contrary to their best interests. Brokers will be surprised how borrowers react to candor.

I hope the information presented in this blog sheds some much needed light on an industry that is rapidly growing and changing. If you have further comments to add, please don’t hesitate to do so.