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John and Carla Davidson are the kind of customers
banks drool over. They both have long-standing, full-time jobs,
and they're in the habit of borrowing money to buy income
properties. But when the Timmins, Ont., couple went to their local
bank branch a year and a half ago to seek financing for a triplex,
they got a royal run-around. That's when they decided to try out a
mortgage broker. "Everything went so smoothly with our
mortgage broker, we started wondering why we were putting up with
all this baloney from our personal banking whatever-they-call-them
at CIBC," says John Davidson. "It was mind-boggling. We
wanted to borrow another $100,000 from the bank, and they wouldn't
even return our phone calls for two or three days."
The Davidsons did end up borrowing money from a bank -- $95,000
from the National Bank--but it was arranged at arm's length by
their mortgage broker. And while it's a truism in business that
eliminating the middleman brings the best bargain, that was not at
all the case for the Davidson's. Their broker beat the preferred
rate offered by their CIBC branch by almost 1 per cent, which will
save them a couple thousands of dollars over the five-year term of
the loan. How much did they pay for that service? Nothing.
Consumers like the Davidsons, who swear they will never go
directly to a bank for a mortgage loan again, have quickly turned
Canada's mortgage brokerage industry into one of the
fastest-growing segments of the financial services sector. In 1997
alone, mortgage brokers processed more than $15 billion in
residential mortgages. But there is still plenty of room for
expansion. In the US, mortgage brokers originate more than
two-thirds of all residential mortgages. In Canada, that number
stands at only 20 per cent, but it could double in the next two or
three years.
Converts like the Davidsons say that a big attraction is that a
mortgage broker acts as an advocate -- holding a borrower's hand
through the application and approval process, advising on how to
raise a downpayment, and pitting several banks, trust companies
and other lenders against each other to get the best deal. While
mortgage brokers are entitled to charge a fee, most do not. They
generate revenue through finder's fees paid by the lender, which
average 65 basis points. Even better, they can discount the posted
rates at chartered banks across Canada by one-half to a full
percentage point on any given day.
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The reason
mortgage brokers can undercut the banks' rates has a lot to do
with the volume of deals they negotiate. "If I give a single
lender more than $100 million worth of business a year, which I
do, I have more leverage than the average consumer to negotiate a
lower rate," says Pierre Fournier, CEO of Quebec's largest
mortgage broker, Multi Prêts hypotheques.
In the mortgage brokerage industry, there's a definite advantage
to being big. In the past few years, many of the smaller players
have been devoured by half a dozen so-called "Super
Brokers." These firms have scores of agents working under the
licence of a master broker, and they account for close to half of
Canada's mortgage-brokered deals.
Super brokers have brought consolidation and modernization to a
business plagued by image problems in the past. Says Norlite
Financial Services' Art Trojan, head of Canada's largest super
brokerage: "The stereotypical image of the mortgage broker
was that of a guy who's sitting in a back room, saying, 'Hey
buddy, do you need some money? We're going to charge half a point
extra and, if you miss a payment, we're going to break your
legs.'"
A sign of the changing times is that many of Canada's leading
banks and trust companies now look to super brokers to bolster
their mortgage portfolios. Their agents work on straight
commission, specialize in selling nothing but mortgages day after
day, and can bring in business at a far lower cost than a bank's
coast-to-coast staff of sales reps. Trojan predicts that those
members of the financial services sector will become an endangered
species. "The banks are going to look at the cost of
generating mortgage business through their branch network, and
they're going to be outsourcing on a major scale," he
declares.
Trojan's firm, which has its headquarters in Mississauga, Ont.,
emphasizes speed and service. Armed with state-of-the-art software
and computer networks, Norlite has collapsed the traditional
application and approval process -- a days-long affair with lots
of faxes and 30-page credit histories -- into an electronic
transaction which can be concluded online in hours. "With the
way banks are treating people, I think mortgage brokers are really
going to catch on," says John Davidson, who dealt with a
Norlite agent. Many Canadians, it seems, feel the same way. |
