The original article (posted on January 31st, 2014) was in response to the MoneySense article 5 things your mortgage broker isn’t telling you and this tweet sent by Sandi Martin.
All in all, I found Money Sense’s article to be pretty accurate but there is certainly a lot of detail behind the simple points the author highlighted, so I’ve flushed out the author’s points in more detail here.
1. Commission is my friend.
As the article states: "As a borrower, you don't typically compensate your broker. It's the lender who shells out commissions and finder's fee. A conflict of interest? Could be, especially if one lender pays more than another, and the monetary temptation results in a worse deal for you".
The truth is, while much does come down to the broker's experience and ethics, there really isn’t such a big range in your mortgage broker’s compensation structure to warrant concern. If we're talking about a typical, “straight A” borrower (which is a borrower with good credit, a job, and a downpayment) there are really only two ways mortgage brokers can get compensated for this type of deal. The first is called front-end commission which is typically the broker's commission, and the second is back-end commission which is the brokerage commission. The numbers can be split, however, the commissions normally don't impact the rate that we get our clients. It's not like if we get you "X" we're going to get paid "X", and if we get you "Y" we're going to get paid "Y".
Our compensation is going to be pretty standard across the board regardless of the rate we get you.
Now, where it can vary is if we've done more volume with a certain lender. Obviously the lenders with whom we do more volume with pay us more. At First Foundation, however, we just roll those marginal profits back into discounts for our clients. We'd rather get more business. In fact, we use those extra profits to advertise lower, better rates, so that we can get more business, increase our volume and keep the circle of savings going. So although there may be a perceived conflict of interest here, it really comes down to knowing your broker (and his or her ethical standards) and trusting him or her.
One of the unique aspects of dealing with a First Foundation Mortgage Broker is that we are all salaried employees who also earn commission and bonuses when we successfully arrange financing for our clients. The salary ensures that very specific service standards are being met, while the commission aligns my interests with yours. It’s a win / win!
2. I don’t actually negotiate with 40 lenders.
The second point is: I actually don't negotiate with 40 lenders. This has been my anthem forever. A good mortgage broker will have 5 or 6 lenders that he or she works with on a regular basis. The problem is, yes, we would have access to 40 lenders if we wanted to, but the way the rate discounting works for us is that you build up a certain amount of volume with a certain lender and then you get better rates with them. So, if I'm a broker and I'm just doing one deal with a lender, that lender's going to say, "Well, his business isn't important to me. But if he sends me $10M in business in a year, I will give him preferential underwriting treatment and better rates".
Lenders aren't stupid, they're going to try to incentivise us to give them more business which makes perfect sense. So no, the typical broker doesn't negotiate with 40 lenders. They may have access to 40 lenders, but even that's a real stretch.
One of the biggest reasons why people deal with brokers is because of our experience, expertise, and the relationships that we have with the lenders. If you wanted to just walk into a bank yourself and get a mortgage, you could do that. But people choose to come to us because we have already established a relationship with the decision-makers, the underwriters, and the people who actually work through the file; the volume of business we've sent them helps us position your mortgage so that you get a better deal. That's the way that works.
3. I’m a newbie. In the brokerage business, experience matters.
The number three item on Money Sense’s list of the things your mortgage broker isn’t telling you is: I'm a newbie. In the broker business, experience matters.
Yup, there you go, it's tough to start in any business and our industry is no exception. The resulting reality is, though, that sometimes that inexperienced “newbie broker” will work even harder for you because they need your business.
Now, if you're making one of the biggest financial decisions of your life (like buying your first house!) my guess is you want to deal with somebody with a lot of experience. That isn’t saying the person without experience wouldn’t do a good job, however, based on how intricate the mortgage process is, you typically want to be dealing with someone who's experienced.
At First Foundation we do things a little bit differently. We separate the client acquisition—the marketing—with the underwriting. That allows our mortgage brokers to do what they do best which is get great rates and underwrite mortgages for their clients. Since First Foundation takes care of the marketing for them, they typically see ten times the amount of business that the average broker would see, because their whole job is looking at mortgage applications. That's it!
So, if you're looking to find a broker who has the experience, a good question to ask them is, "How much volume do you do annually?" A good benchmark would be a minimum of $10M a year. So, if he or she says they're pushing through $10M in mortgages a year then you’re probably dealing with an experienced broker; $20M is pretty stellar. At First Foundation, our brokers, because they're full-time brokers and don't have to run all over town and pick up their own leads, will write between $30-$40M a year - each. This elevated level of business allows our brokers to see more deals and develop experience faster.
4. The fine print matters.
In addition to experience, the fine print also matters. According to Money Sense, "Most borrowers focus on getting the best rate, but brokers know it pays to delve deep into mortgages terms and conditions". And while I don't argue with that statement, I'm not sure that that's something your mortgage broker isn't going to tell you… Being able to analyze and interpret “legal-ese” is another one of the top reasons people employ mortgage brokers.
What’s the point of securing the lowest of low discount rates if the actual mortgage product isn’t right for you? People trust mortgage brokers to advise and counsel them on the best mortgage product and part of this is involves understanding the fine print.
You’ll want to know if you can make lump sum payments, accelerate your payments, and whether your mortgage is portable. What happens if you decide to move in the next three years? Is your mortgage going to be able to go with you? What happens when your mortgage renews?
There are so many questions you need to answer which is why it’s important to go through the fine print with your broker.
5. I’m not a miracle worker.
This is true, even if we don't like saying it. We like to pretend we can do everything for everyone, but, if we’re being honest, "There's only so much a mortgage broker can do for you if you walk in with a credit score of 500 and a trail of unpaid bills. Lenders see you as a high-risk proposition, and no broker will convince them to give you a rock-bottom mortgage rate reserved for triple-A clients. Be realistic".
It happens, from time to time, that we’ll get an applicant who has some significant gaps in their employment and very little money saved up. For these people, borrowing a large quantity of money just isn’t an option. However, some mortgage brokers—I would say typically a newbie mortgage broker who wants to please everybody—might say, "Oh, we can do that! No problem!" The problem is they can't get it done.
At First Foundation, we believe in helping people achieve their goals in a financially sustainable manner, so we’ll never mislead people into thinking we can help them if we see that it is not in our (or their) best interest.
So, there you are! We’ve just summed up Money Sense’s 5 Things Your Mortgage Broker Isn't Telling You, so you’ll be extra prepared next time you sit down with a mortgage broker.