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Broker channel mortgage volumes continue to grow, but somewhat slower than the industry average. Overall broker-originated mortgages rose 4.4% in Q2 versus the same quarter in 2015.

Bank share of the broker market fell another 4.1% y/y. That’s on top of the 3.4% y/y decline in Q1. Banks now hold just 30.8% of the broker segment, the least since we began covering this survey (and down from almost 60% in 2010).


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Rising house prices FBMany an armchair analyst has speculated on the factors behind Toronto and Vancouver’s runaway home values. And now, a recent study by RBC Capital Markets brings more data to the table.

According to its report, home prices increased at a compound rate of 5.6% annually from 1999 to 2015 in Toronto and 6.2% in Vancouver, outperforming the S&P/TSX Composite total return of 5.3%.

RBC’s analysis found that four factors accounted for between 85% and 90% of those price increases since 1999:

  1. Lower interest rates
  2. Higher incomes
  3. An increase in the percentage of incomes used to make mortgage payments
  4. Larger down payment gifts from family members.

The remaining 10-15% can be explained by influences that are more “difficult to quantify,” RBC says, such as geographic constraints and foreign buying. Notable is the fact that the first two variables account for almost three quarters of price appreciation, its authors claim.

Interestingly, this data doesn’t cleanly mesh with earlier studies from the likes of the Bank of Canada. A 2012 BoC research paper found that the jump in real house prices between the fourth quarter of 2001 and the third quarter of 2010 were driven by:

  • Increasing population: 33%
  • Rising real household disposable income: 24%
  • Declining real effective mortgage rates: 13%
  • Other factors, including “recovery from the sluggish price growth of the 1990s”:  29%.

Whatever the actual numbers, if the floor falls out in the housing market, RBC says that changes in home prices are not good predictors of mortgage loan losses in Canada. “…Job losses (not price declines) are the better leading indicator of potential future losses for lenders/insurers,” it notes. That’s some consolation for Toronto and Vancouver, which have “amongst the best economic and employment growth rates within Canada.”

Other specifics from the report:

Over the period from 1999 to 2015, RBC says:

  • Interest rates are estimated to account for 39% of the increase in home prices in Toronto and 34% in Vancouver;
  • Higher after-tax incomes are estimated to account for 29% of the increase in home prices in Toronto and 40% in Vancouver;
  • The tendency of borrowers to set aside a slightly higher percentage of after-tax income to make mortgage payments is estimated to account for 17% of the increase in home prices in Toronto and only 4% in Vancouver;
  • Larger down payment gifts from family members are thought to account for 5% of the increase in home prices in Toronto and Vancouver;
  • Geographic constraints, such as scarcity of buildable land, have limited residential development and densification. That too has contributed to rising home prices—as have higher municipal charges, labour and materials costs;
  • “Foreigners are likely small in number, but arguably significant in impact,” says RBC. “Although it is likely that ‘foreigners’ do not comprise a significant percentage of home sales, they are arguably the marginal buyer…for those buying in the high end of the market.” Contrary to some other economists, RBC says, “…They likely drag up home prices in the mid- and low-end of the market” and impact everyone (although, the report doesn’t speculate on how much, and cautions that its data on this is anecdotal and unclear);
  • Immigration is yet another home appreciation catalyst, “particularly the investor immigrant program for wealthy applicants.” International buyers also love our weaker loonie, which makes Canadian homes appear “on sale.”

The report makes one other interesting point about Chinese buyers. RBC states that, “If launched, China’s Qualified Domestic Individual Investor program (QDII2) has the potential to be a material driver of further home price appreciation in Toronto and Vancouver.” This is a factor that hasn’t made a lot of headlines. Although, RBC notes that the program’s launch date is still unclear.

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Report Review FBMortgage Professionals Canada released its spring report on mortgages and housing this week. More so than in previous reports, this one was opinion-heavy on the overall affordability and sustainability of housing.

MPC’s Chief Economist Will Dunning has long held that mortgage rule tightening could trip up the economy, noting that “…the greatest risk to the housing market (and consequently to the broader economy) is not reckless consumers or lenders – it is needless policy changes.”

That position has been well covered by the media so we won’t belabour it here. Instead, here are four other quotes that deserve attention — this author’s feedback is in italics.

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  • “Our review of housing market data convinces us that changes in housing prices are fully respective of interest rates.”
    • Affordability is a forceful lever and falling mortgage rates have been the fulcrum for that lever. Nonetheless, home prices also hinge on things like shortages of detached homes (in certain major metros), urbanization, income/jobs gains, natural population growth and immigration. Prices will continue reacting to these factors regardless of modest rate changes and policy tweaks.
  • “…a few senior executives in the financial services sector claim to see increased risk and are calling for tighter lending criteria. We would be interested in seeing the supporting data.”
    • Everyone should join in agreement on this one. Using a public podium to advocate housing changes (with potentially significant economic impacts) should obligate one to support that advocacy with hard data. 
    • Dunning goes on to say: “Mortgage lenders who are concerned about current risk-taking could very easily and very usefully add to the discussions by publishing data from their own businesses, especially with regard to Gross Debt Service Ratios and Total Debt Service (TDS) Ratios.”
    • Plotting debt service ratios over time is vital for housing risk analysis because it tracks how capable people are of making their payments. It’s especially telling if you know how many people have high debt ratios. Industry resources like CMHC and OSFI have had aggregate TDS data like this for ages but refuse to make it publicly available.
  • Will Dunning“The gap between posted versus actual rates has gotten increasingly large over time, and that change has implications for the reliability of any analysis that uses posted rates.”
    • Dunning is correct here as well. Few useful conclusions can be derived from posted mortgage rates, since almost nobody pays them. The Bank of Canada has ample discounted mortgage rate data but declines to make it publicly available. That’s a disservice to housing analysts across the country. Hopefully Mr. Dunning makes his discounted rate data available as well.
  • “At today’s typical mortgage interest rate (2.5%), and assuming an amortization period of 25 years: for the first payment, more than half (53%) is repayment of principal or forced savings.”
    • This “guaranteed savings plan” is one reason why, each and every day, more people view home ownership as their retirement saviour. Over one-third of Canadians expected to rely on home equity to fund their old age, according to Scotiabank in 2012. With inadequate savings and meagre investment returns, that number has likely grown, and will continue to grow. Ottawa best take care to balance its desire to slow and de-risk housing with preserving this critical retirement safety net for millions of Canadians.
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Broker Share

Source: CMHC

CMHC pinpointed some encouraging trends for brokers in its recently released 2016 Mortgage Consumer Survey (MCS).

Among other gains, brokers boosted their market share noticeably among renewers and refinancers. Part of those gains are thanks to increasingly informed consumers. In other words, folks are becoming less likely to merely accept lender renewal offers at face value.

But CMHC’s report wasn’t all rosy for brokers. For one thing, they lost four points of share among their core first-time buyer segment. That’s a number we’ll be keeping very close tabs on in upcoming Mortgage Professionals Canada and CMHC data.

Below are 10 other MCS stats that matter, in no particular order…

 

  1. Lender loyalty is dropping — 81% of those renewing remained loyal to their lender, down from 86% in 2015; 73% of repeat buyers stayed with their lender, down from 77% in 2015. The main reason people switched mortgage providers, says CMHC, was to get a better interest rate.
  2. Brokers seized more renewal business — 26% of those renewing used the services of a mortgage broker, versus 21% in 2015.
  3. Brokers won more refinance business — 38% of those refinancing used the services of a mortgage broker, versus 33% in 2015.
  4. Renewals spell opportunity — In the past year mortgages were split three ways as follows: 62% renewals, 18% refinances and 20% purchases. Brokers and bankers alike are working harder than ever to woo renewers. Expect lenders to make earlier renewal offers at better rates to counter this trend.
  5. First-time buyers still vital — Of the 20% of mortgages that were for purchases, the majority (11%) were first-time buyers and 9% were repeat buyers. Young buyers are most concerned by unforeseen closing costs and overpaying for a home, says CMHC. These are two areas where sound professional guidance creates loyalty.
  6. 2016 CMHC Mortgage Consumer SurveyRate site traffic surges — 44% of those researching mortgages online used a mortgage comparison website. That compares to just 16% of all mortgage consumers a few years ago, according to Mortgage Professionals Canada.
  7. Social media gains — 29% of consumers used social media to gather mortgage information (vs. 20% in 2015).
  8. Online ads work — Almost one-third (32%) of consumers said they found their broker website through online advertising. That’s about half as many as the number who are referred, but it’s growing.
  9. Satisfaction levels diverge — 83% of recent buyers were satisfied with their lender versus 77% who were satisfied with their broker. This is the first time in a while that we remember these numbers deviating materially.
  10. Quality advice pays — Providing advice on long-term mortgage strategies can lead to an 85% increase in the likelihood of new business (from consumers who recommend their mortgage professional to family and friends). Why not provide clients a personalized written mortgage plan with every mortgage? Some of the country’s most successful mortgage brokers do just that.

Survey background: CMHC’s survey was conducted online and polled 3,006 recent mortgage consumers who had undertaken a mortgage transaction in the preceding 12 months. CMHC has conducted this survey since 1999.

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Old way-new way FB A recent Scotiabank survey reinforced what most of us already know: the Internet is radically changing banking.

The bank found that:

  • 96% of Canadians rely on the Internet for information.
  • 89% of Canadians say it’s easier to get info online than through other sources.

In turn, by 2020 less than 1 in 10 financial transactions will occur in branches, predicts Scotiabank CEO Brian Porter. “At the same time, we expect sales through digital channels to increase materially – likely in excess of 50% of total products sold,” he told the Financial Post.

That’s exactly why the company has invested billions in fintech, including a new technology “factory” in Toronto, which will house 350 new online engineers and designers. There, it hopes to spit out brand new web tech that will do things like simplify the mortgage application process (which its “Rapid Lab” team is already piloting at certain Scotiabank branches).

“We’re moving from a paper-based approach to a more technology-enabled, digitized approach,” a spokesperson told Reuters.  (We can only hope that includes e-Signing, something customers love for its convenience.)

All of this is shifting employment at the bank. While Scotiabank is ramping up mortgage tech jobs, it announced job cuts to its adjudication centres and mortgage operations last fall. There’s no better glimpse of human resource efficiency than at its Tangerine subsidiary. Tangerine serves two million customers with just 1,000 employees (compared to 23 million with more than 89,000 employees at Scotiabank).

Tailored Pricing

Half of those who use the net for research feel overwhelmed by the amount of data it presents. So it’s no surprise that 70% of Canadians still rely on advisors for mortgage advice. Seventy per cent is a lot but it used to be closer to 100%, so times are changing and Scotiabank knows it.

With consumers comparing rates online, pricing is more of a factor than ever. That’s partly why Scotiabank has quietly joined the low-frills mortgage movement. Its new “Value Mortgage” follows the lead of BMO, which has had a stripped-down mortgage since 2010.

Compared to Scotiabank’s regular mortgage, the Value Mortgage has:

  • A rate that’s roughly 10-15 basis points lower
  • 10% lump-sum prepayments instead of 15%+
  • Once-a-year lump-sum prepayments or payment increase instead of the ability to make them anytime
  • An annual 10% payment increase option instead of 15% plus double-up
  • 90-day rate holds instead of 120 days
  • STEP product not available
  • No porting

The Value Mortgage has no refinance restrictions, which is a big plus compared with BMO’s “Smart Rate” mortgage, but the lack of portability could be a major turn-off. It requires borrowers to potentially pay a penalty in order to move their mortgage to a new property. Albeit Janet Boyle, Vice President, Real Estate Secured Lending assures, “We will work with customers up front to ensure they are selecting the term that is right for them and fits with their future plans.”

Scotiabank’s low-frills pricing is currently only available in branches. When asked if the product will be available to brokers, who account for roughly 40% of Scotiabank’s volume, Boyle said there are no such plans “in the immediate future.” That’s largely because brokers already have access to deeper rate buydowns than branch reps.

Scotiabank-Logo-PNG-03791-1Encouraging Conversations

Scotiabank now offers three brands of mortgages:

  1. The “Value Mortgage”
  2. The “Flexible Mortgage” (Scotiabank’s regular mortgage)
  3. The “Rewards Mortgage” (which comes with an annual cash reward and Scotia Rewards® Points)

This isn’t by accident. The bank intentionally wanted to create more customized mortgage options.

“We did a lot of behavioural research on what customers want to pay for,” says Boyle, who acknowledges that the Value Mortgage “appeals to a very small segment of borrowers.”

“The approach of having three mortgage solutions has really worked well for us on a national basis,” she says. “Customers like to research on the Internet but they prefer to sit in front of a person,” and having different options lets Scotiabank bankers strike up a dialog about what needs and goals are important to clients.

As for pricing, the bank is constantly investing more in data analytics to better understand its customers. Ultimately, says Boyle, “The customer profile and their relationship with the bank determines the rate.”

 

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Last December, the credit union trade group released a paper on credit unions’ role in the mortgage industry. While somewhat belated, it contains statistics worth mentioning and statements worth debating, not the least of which is their take on mortgage brokers.

Here, in no particular order, are some of its key points. The source is the Credit Union Central of Canada (now called “Canadian Credit Union Association” or CCUA):

CUs in the Mortgage Market

  • 58%: The percentage of credit union loans that are residential mortgages
    • In 1961 it was just 12.7%.
    • “…residential mortgage lending is now at the centre of credit union business,” notes Rob Martin, author of the report.
  • 8.9%: The average annual increase in mortgage balances at credit unions, from 2009 to 2014
    • Compared to 5.5% at banks over the same period.
  • Mortgage market share (outside of Quebec):
    • Highest penetration: 35.9% in Manitoba
    • Lowest penetration: 4.5% in Newfoundland
    • Ontario: 5%
  • 380: The number of communities in Canada in which a credit union is the only financial institution physically present.
    • It’s truly hard to overstate the importance of credit unions to small and rural communities.

Default Statistics

  • 0.29%: Mortgage arrears rate among federally regulated institutions (e.g., banks)
  • 0.13%: Mortgage arrears rate among provincially regulated institutions (e.g., credit unions)

“Credit union mortgages have very low arrears when compared to other institutions…below that of all other institutions with mortgages in [mortgage-backed securities] pools,” according to the report.

Sound Underwriting

Credit Unions FB

In the past, competitors have knocked certain credit unions for their higher loan-to-values, lower qualifying rates, stated income programs, cash-back mortgages and/or longer amortizations. But these criticisms don’t reflect the underwriting prowess of credit unions.

In actuality, the report notes that when compared to other lenders’ CMHC-insured mortgage performance, credit unions:

  • Make fewer default insurance claims 
  • Have lower early delinquency rates (EDRs)
  • Have a higher Misrepresentation Susceptibility Index (MSI) score, meaning they’re better able to detect mortgage fraud and other misrepresentation by borrowers, and
  • Arguably have better knowledge of their local markets, since they lend in their own communities.

Potential Effects of an Insurance Deductible

CMHC has publicly disclosed that it’s evaluating ways for lenders to share more default risk on insured mortgages. Speculation is that CMHC may impose a deductible on lenders when they make an insurance claim.

To that, CCUA says, “If a deductible is significant, the likely impact will be increases in mortgage credit costs for consumers and a reduction in mortgage credit availability for…home buyers. The impact of these changes will be most significant for lower income Canadians, Canadians living in rural/remote regions, or in areas with a fragile economic base.”

It adds: “These outcomes would…be at odds with CMHC’s role to serve underserved areas and fill gaps in the market.”

Effects of Low-Ratio Insurance Tightening

CMHC has cut back insurance for mortgages with a loan-to-value of 80% or less. It has also increased the costs to lenders for insuring and securitizing those low-ratio mortgages.

CCUA states: “…the elimination of low-ratio transactional mortgage insurance may have [a] similar negative impact on…homeowners in small urban centers and rural areas.”

Low-ratio insurance is vital to certain credit unions that operate in illiquid local housing markets. That’s because insurance mitigates property risk—important with rural properties that have less certain valuations than active urban properties. Low-ratio insurance is also key for securitizing mortgages on smaller market properties.

Credit Unions and Mortgage Brokers

Here’s where the paper gets a bit questionable.

CCUA commented on the rising use of mortgage brokers, which it says increased their share of mortgage originations from 22% in 2005 to 31% recently.

CCUA positions credit unions’ “limited reliance on mortgage brokers” as an advantage, stating:

“This development points to an increased commoditization of mortgage products and a general decline in consumer loyalty to a single financial institution when seeking a mortgage…Consumers are increasingly willing to look beyond their primary financial institution for a mortgage and they are making a choice of institution largely on price.”

That begs the question, what is the implication? Do they mean that if you’re a consumer who doesn’t prioritize loyalty and wants an outstanding rate, CUs aren’t for you?

The report says the big six chartered banks source 27% of total mortgage customers through mortgage brokers, whereas CUs obtain 18% of members through the mortgage broker channel.

“The lower reliance of credit unions on mortgage brokers should not be surprising given the stronger customer satisfaction and loyalty displayed by credit union customer/members,” Martin notes, citing “FIRM survey” data to back his argument.

That’s one heck of a claim, and a somewhat specious one at that.

Perhaps if more CUs acknowledged consumers’ growing broker preference, and perhaps if more CUs chose broker distribution, the credit union industry wouldn’t be stuck at just 8% market share, a number that hasn’t grown materially for years.

Credit unions offer exceptional service and support their communities admirably, but they don’t get enough exposure. That exposure is exactly what brokers deliver. This fact is evidenced by:

  • Established lenders like Scotiabank—the top lender in the broker channel, and one that relies more on brokers to bring in mortgages than its own retail channel
  • New lenders like Manulife—which strongly endorsed brokers with its recent entrance into the market
  • Credit unions themselves—witness the robust mortgage growth of broker-channel CUs like Meridian, DUCA Financial, Coast Capital Savings and many others.

CU executives who buy into the proprietary distribution argument better have a foolproof online marketing plan or an inspired local marketing strategy. Otherwise, they’re missing out on a tremendous funnel of new business through the broker channel. Brokers deliver highly qualified borrowers for a one-time fee. CUs then keep all the renewal and cross-sale revenue for their members—not too shabby a deal.

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Back in December when the finance department hiked minimum down payments, it said the change would “dampen somewhat the pace of housing activity over the next year.”

If “somewhat” means “barely noticeable,” then the regulation has achieved its goal, at least in Toronto and Vancouver.

Effective February 15, the minimum down payment rose — up to 2.5 percentage points — on homes between $500,000 and $1 million. Since then, there’s been no perceptible slowdown in Toronto and Vancouver home sales. Those two cities, which are among the fastest-appreciating markets in Canada, were the primary targets of the Department of Finance’s new policy.

 

Vancouver Avg home price

In the first full month following the rule change, the Canadian Real Estate Association (CREA) says that sales of single-family homes over $500,000 were the highest ever in March, in both Toronto and Vancouver.

“While it is still premature to reach a verdict on the efficacy of this measure to cool Canada’s two hottest markets, the early evidence suggests that it had little effect to date,” RBC economist Robert Hague said in a research note. 

A breakdown of home sales by property value, courtesy of the Toronto Real Estate Board and the Real Estate Board of Greater Vancouver, further illustrates the runaway sales of higher-priced homes.

 

March data reveals that homes valued between $500,000 and $1 million rose 28% in Toronto and 27% in Vancouver compared to last year. There’s no telling what sales would have been without higher down payments, but take a $750,000 home, for example. An additional 1.67% down payment isn’t exactly an insurmountable obstacle for most buying at that price point.

First-time buyers will take the brunt of these changes. “The affordability of homes in these mar­kets has taken a further hit…,” points out National Bank Financial in a report this week. Following the rule implementation, “…The time required to accumulate a minimum down payment for the representative home increased in Q1 by 11 months in Toronto and by 34 months in Vancouver.” 

Moreover, while regulators have not materially slowed higher-risk housing markets, larger down payments have nonetheless had two positive outcomes. For one, new buyers in the $500,000 to $1 million range now have more to lose if they don’t pay their mortgage. In addition, as Hague notes “…We believe that the measure has enhanced the degree of prudence in the mortgage adjudication process.” And there’s nothing wrong with that.


Sidebar: Sales of homes valued at more than $1 million also exploded in March, up more than 60% in Toronto and Vancouver.


By Steve Huebl & Rob McLister

 

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Gender inequality FBOne in four British Columbia parents have bankrolled part of their child’s home purchase, and they’ve done it through down payment assistance.

In fact, down payment gifts and loans are the second-most common way that parents financially support their adult children. That’s according to a recent Vancity poll. (“Resolving debts” for their kids is the #1 way parents help out with money.)

But parental support has an interesting bias. Depending on your gender, you can expect significantly more down payment support from the folks.

Specifically, males were twice as likely as females to have received down payment money from mom and dad. The survey found that 39% of males aged 18-34 acknowledged receiving down payment money from their parents—compared to just 19% of females.

“We cannot explain the reason for this difference in numbers,” said Vancity spokesperson Lorraine Wilson. “…It requires further research on why there is a difference in inheritance expectations and realities for females.”

We’re no social scientists, so we can only speculate here:

  • Is there a cultural gender bias? In some parts of the world, men commonly receive double the inheritance of women. It’s baked into their religion.
  • Is it like the wage gap? When it comes to pay, men make more than women on average. But that gender gap doesn’t carry over to inheritances, at least not in North America (according to this research).
  • Do men more often “take care” of their damsels by coughing up most or all of the down payment?
  • Do men buy homes earlier than women?
  • Are women better savers than men?

In truth, we can only guess at why women don’t (or can’t) tap their parental ATM as often for down payment funds. It might make a good university thesis for those so inclined.


Poll Methodology from Vancity: “Insights West conducted [this] online survey for Vancity from January 22 to January 27, 2016. The survey polled 403 adult British Columbians who are “older than 65 and parents of at least one child” and 401 adult British Columbians who are “aged 18-34 and have at least one parent aged 65 and over.”

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CondominiumsIf you want to know how condo investors operate, CMHC has a new report for that.

It just released its 2015 Condominium Owners Survey (COS), and it’s stuffed with facts and insights on income property activity.

One key stat, for example, is the number of condo flippers (buyers who “anticipate holding their unit for less than 2 years”). CMHC estimates the number at just 8% of all condo investors. That’s markedly less than some housing bears would have us believe (which is exactly why hard data is so important; thank you, CMHC).

Below are some of the other mortgage-related highlights.

Propensity to Finance

  • 53% of condo investors put a mortgage on their last purchased unit
    • That compares to 59% of all homeowners, per StatsCan
  • About 20% paid cash
    • Versus 11% for all homebuyers, says Mortgage Professionals Canada

 

Down Payments

  • 20% of investors put down less than 20%
    • Since most lenders only lend up to 80% loan-to-value on rentals, most of these investors likely chose non-prime lenders, bought in a partnership and/or just flat-out lied (i.e., told the lender they’re buying an owner-occupied or second home property, which is fraud)
  • 45% had a down payment of 20%+

 

Term Selection

  • Most condo investors (53%) took the faithful 5-year term
  • Interestingly, 18% took a term over five years
    • That’s almost 4 times the ratio of all homebuyers combined
    • Given how high 7- and 10-year fixed rates are, this goes to show how some investors value consistent cash flow over upfront interest savings
    • This stat is also partly explained by the fact that 60% plan to hold their investment condo more than five years
  • Just 5% took a 1-year term or less

 

Amortization

  • 12% of investors who mortgaged their last condo chose an amortization period more than 25 years
  • 42% took a 25-year amortization
  • 31% went with less than 25 years

 

Rate Choice

  • 37% took a variable rate mortgage
  • 45% picked a fixed rate
    • Compare that to the general population of recent homebuyers, where 3 out of 4 chose a fixed rate
    • Investors overall are clearly more comfortable with rate risk
  • 12% chose a fixed and variable rate (i.e., a hybrid mortgage. This 12% is double the average for all Canadian homeowners.)

 

If you want all the details on this study, read more on CMHC’s website.

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Market share 3

The titans of the broker business stayed on top in 2015.

Scotiabank and First National have been the #1 and #2 lenders in our space for 18 straight quarters. In fact, the last time they weren’t first and second, FirstLine was in business.

The only way their dominance in the broker market could possibly be challenged near-term is if they unexpectedly pulled back from the channel, and don’t bet on that.


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