Lots of brokers out there criticize rate buydowns. They argue that buydowns cause a “race to the bottom” in mortgage pricing.
If that’s how you feel as a mortgage broker, take solace. The race isn’t far from the finish line.
Online mortgage rates have already plunged to levels where some brokers now earn just 35 basis points in compensation (or less), even on five-year fixed terms. That’s one-third of what most brokers make.
At these revenue levels, only a minority of exceedingly efficient large-scale brokers will succeed long term in the deep discount market. As more independent mega-brokers sign on directly with funders (à la True North Mortgage) and/or negotiate $50-$100 million volume deals with lenders, that’ll become all the more true.
Adding to this trend is the virtual certainty that more lenders will launch DTC (direct-to-consumer) call-centre models and sidestep originator commissions. And, of course, our major banks won’t be left behind. CIBC has already flashed a glimpse of the future by negotiating rates on borrowers’ smartphones and bypassing traditional mortgage specialists.
Thus far, the rest of the broker industry (those without deep discount models) seems largely unfazed by these developments. Canada’s top mortgage agents— the 20% that do 80% of the volume—have profitable existing books of business and established referral sources. In their view, they can sufficiently sell their value to clients. Moreover, their volume has yet to take a serious hit.
Then we have the lean-minded so-called “order takers.” These are online shops willing to work for 35 bps. These are the guys who have started to move the market for all brokers—regardless of experience, referral sources, salesmanship, advertising, value propositions or what have you.
I increasingly hear from $200- and $300-million producers who are losing deals over 5-basis-point rate differences. This is something that rarely happened to them in the past, but it’s occurring with more regularity today.
As time goes on, brokers will hurry to find solutions to this problem when, in fact, one key solution is the same as it always was: dollarization.
In industry terms, dollarization is the practice of articulating the value (in dollars) that customers receive from your advice and assistance. It’s an effective strategy given the commoditization dilemma, but it’s not easy to execute.
The question you’re trying to answer as a broker is: What is it worth to someone, monetarily, if I find them the optimal mortgage?
“Optimal” refers to the mortgage with the lowest cost of ownership and the best customer experience. Getting a theoretically optimized mortgage is worth something to people because it saves them time and money (interest cost, penalties, refinance rate surcharges, conversion rate surcharges, reinvestment fees, discharge fees, etc.).
But here’s the rub. Identifying the lowest cost of borrowing for a particular client takes serious work and analysis. It entails something like this:
- asking the right interview questions upfront
- understanding a client’s five-year plan
- calculating the probability of certain life events occurring in that timeframe
- objectively comparing features and restrictions for several mortgages
- mathematically ranking which mortgage (or series of mortgage terms) are the best value over five years
- explaining that to consumers in a way they understand (and believe), with hard numbers to back it up, and
- ensuring the customer doesn’t take that knowledge and go elsewhere.
Note: We focus on five-year time horizons because: a) mortgage terms over five years are not cost effective at today’s rates, and b) predicting the future beyond five years approaches futility.
In an era where online rates are often 20+ basis points below median broker rates, failure to optimize people’s financing and dollarize that service may become a death warrant. It boosts the odds that customers evaluate you on price, and price alone. And that’s a bad outcome for the more than 95% of brokers who don’t/won’t have the buying power and side deals to compete on rate.
When the “race to the bottom” is officially over, those who prosper against the Walmarts of the mortgage industry will be the professionals who can persuasively explain why their higher rates are not just padded profits. Many quality full-service brokers believe that their service to prime borrowers is worth an extra 20+ bps. In most cases, it’s not. But it’s not worth just 1-2 bps either, and effective dollarization can get that across to folks.