Are Big Banks Killing the Independent Mortgage Broker?

October 31st, 2011

In short, no.

A common question I receive from clients is: how can a broker obtain a better rate from a big bank, than the client can by walking into their own branch?  I tell them it is due to efficiency. The truth – though the banks would never admit it publicly – is that they actually enjoy receiving applications from independent mortgage brokers because we are typically more competent, better trained and more efficient than the bank’s staff. Additionally, we only receive payment on the actual deals we close, as opposed to the direct bank employee, who is paid regardless of what they actually produce. For virtual banks, independent brokers are the preferred sales channels as well. There is a need and place for the independent mortgage broker.

Recent news on this subject has caught my attention. The first concerning an article in Mortgage Broker News, that a major bank is paying realtors a direct fee for referring mortgage clients. This is not new; it has been happening for years. I don’t see that practice as offensive, all is fair in love and war, but I would question the realtor that advises clients to deal directly with a major bank as opposed to an independent mortgage broker. A bank’s advice is obviously biased towards the bank and their products, while the independent broker has no such biases and works in the best interest of the client.

The second article dealt with lenders squeezing out the independent brokers who cannot bring a significant number of yearly deals to the lender, or who have poor closing ratios. Again this has been a trend in our industry for many years and has basically eliminated the “mom & pop” brokerage because they simply can’t compete. I have no problem with closing ratios, but Mortgage Brokers should not be taking the “shotgun approach” to finding a lender (sending a deal out to 30 lenders to see who accepts) out of desperation to close a deal. That approach is a waste of time and resources of the 29 lenders who don’t ultimately fund the deal. If we want to supply the best rates and service then there needs to be built-in efficiencies.

I do take exception the minimum deal requirements as this practice is very short sited on behalf of lenders. When I am talking to lender representatives on this subject I ask them: “Is your top producer today the same person it was 5 years ago?” The answer is always “no.” My follow up question is,”So if you had cut off your top producer when they were just getting started, you would not have that business today, correct?” At that point, they recognize the flaw in minimum deal requirements. I get a chuckle on these lenders who try to buy my business through volume bonuses and other perks. If you “buy me”, then I become biased in my advice. If I let that happen, I should go work for a bank.

Are the big banks killing the independent mortgage broker? Why bite the hand that feeds you?

We welcome your comments.

 

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Re-licensing education for mortgage brokers- Elevating the level of professionalism in the industry or simply a way to purge the ranks and eliminate competition?

October 16th, 2011

The Financial Services Commission of Ontario (FSCO) has set March 12, 2012 as the deadline for completing new licensing requirements for mortgage brokers within the province of Ontario, with the stated purpose is to improve the level of professionalism in the mortgage broker industry.

The move is being applauded by mortgage associations such as IMBA and CAAMP and on the surface would appear to have the support of the mortgage industry. Nor surprising is that both associations will offer the required training for those willing to pay the fee or offer it “free” in exchange for membership in their association.

The speculation has already begun on what effect this new requirement will have on purging the existing ranks of mortgage brokers in Ontario. Is this simply an attempt to eliminate the weakest of the competition or perhaps a cash grab opportunity for the associations?

I fully support all efforts to improve the quality of mortgage agents and level of professionalism in this province but I do question the motives. If we are serious about professionalism then why not impose minimum educational requirements as a prerequisite to obtaining a mortgage license. I would suggest a bachelor of commerce degree or equivalent. That would quickly purge the ranks, but I also suspect many of the decision makers in our industry would be out of work as well. We do need tougher accreditation and training standards that actually promote professionalism and competency.

I am tired of associations like CAAMP promoting the Accredited Mortgage Professional which can effectively be “purchased” via membership and by taking classes whereby the only absolute requirement is that I simply “show up”. Where is the professionalism in that?

We welcome your comments.

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Debunking the Myths of “Rent To Own” Real Estate Transactions

August 22nd, 2011

I  am a big proponent of “Rent To Own” real estate transactions. If properly structured it results in a win/win/win arrangement for the home owner, investor and the realtor. Unfortunately there are a lot of  misconceptions surrounding the process and not many professionals offering unbiased advice. Many lawyers and realtors have never facilitated a rent to own transactionand therefore don’t understand the process. There are different ways tostructure a rent to own deal so this adds to the confusion. We help unlock the mystery.

Benefits of a Rent to Own

For the home owner – Allows homeownership without the immediate need to qualify for a mortgage. A typical rent to own candidate lacks the income, credit or full down payment to qualify for a traditional home purchase. They simply rent the home until such time as they qualify for a mortgage. The investor may assist them in a savings program in order to accumulate the balance of the down payment. The mortgage broker assists with the credit repair.

For the investor – Attracts a better quality tenant during the rental process given the pride of ownership. Allow the property to be pre-sold without the need for additional real estate fees. Provides financial protection in the event the homeowner reneges on their responsibilities.

For the realtor – Allows them to qualify more purchasers. Clients that can’t obtain financing may still represent a potential sale opportunity.

What a Rent to Own is Not

  1. A VTB (vendor take back mortgage). If the investor is transferring ownership to the homeowner on day one and holding a mortgage on the property, then this is not a rent to own transaction.
  2. An arrangement where all rent is applied to the down payment. It seems unlikely that an investor would agree to this when they could simply rent out the property for market rents. Typically someportion of the rent is rebated as a means of assisting in the accumulation of a down payment.
  3. A cash grab for the investor when the homeowner defaults on their responsibilities. Aside from unscrupulous investors, most playing in this investment vehicle want the property to ultimately sell as their profit is predicated on a successful transaction.
  4. For properties priced above market value. Investors need to make money on the resale of the property. Price it to high on the resell and the homeowner will never obtain the required appraised valuation required for financing.
  5. It locks you into specific properties owned by the investor. Many investors let you select the property of your choice as long as it meets their own investment parameters.

We are happy to answer any of your specific rent to own questions.

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It Is Only The Hungry Wolf That Hunts

August 22nd, 2011

People are funny. I have a mortgage colleague who often complains that his business has not taken off as he has expected. His assumption is that he must be missing something like that “magical” marketing piece that is going to have clients beating a path to his door.
A lot of life coach gurus are dedicated to personal improvement, visualization, affirmations, positive thinking and structured goal setting which are all good things towards achieving results. People such as my friend seemingly want to improve the quality of their lives and expect more results from their business yet don’t appear to want to work any harder than they already are. They have the dream but not the drive.
With a good income and asset base it is easy to live off that. 4 hours on the golf course takes priority over 4 hours of client prospecting. A day at the beach is more important than a day of mortgage training. Not that life needs to be about work 24/7 as some personal time is never a bad thing. But when did hard work fall out of fashion as a building block to a better life?
Remember It is only the hungry wolf that hunts
If you are not achieving your business goals it is because you prefer to be right where you are. You are happy, comfortable and have a list of excuses to justify your current reality. You are not the hungry wolf.

We welcome your comments

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Now Is The Best Time To Refinance My Mortgage?

June 17th, 2011

In real estate there is an old adage “When is the best time to purchase real estate?” The answer” It is always the best time to buy real estate” Our question to you is this “When is the best time to refinance my mortgage?” The answer “As soon as you finish reading this article”
The question is why now and what are the benefits to me?
The Bank of Canada has been raising its overnight rates upward over the past year and the prime rate is currently 3.0%. This trend is likely to continue as the economy improves and ultimately fixed rates will again be on the increase. We are still able to fund at 2.15% on a variable rate mortgages and 3.51% on a 5 year fixed for those who qualify
Why would you not take advantage of historic low interest rates if it meant saving you thousands or possibly tens of thousands of dollars over the life of your mortgage? Some are choosing to overlook the low fixed rates because the variable options are still cheaper and they may still be for some time. Most however have not even considered the financial implications of remaining in a higher interest fixed rate mortgage and this is where it becomes interesting.
When examining when is the best time to refinance your should also consider your other financial obligations. If you carry credit card debt from month to month then you should defiantly consider refinancing. Why are you paying credit card rates of 19%, perhaps 30%, when this debt could be consolidated into a mortgage?
It cost you nothing for a mortgage professional to review you situation and the results my shock you. A recent client of mine refinanced their home, took out $35,000 in equity and still reduced their mortgage payments by $3000 per year. $35,000 in essentially “free money” and they can in effect pay their new mortgage off sooner than the old mortgage by applying the $3000 per month against the principal.
She told me I was her “Mortgage God”
Another old adage in real estate that “Real estate is the most important investment decision you will ever make” In reality, “How you finance this real estate investment is your most important decision.
We wlcome youe comments.

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Will The Bank Of Canada Raise Interest Rates May 31, 2011

May 30th, 2011

There has been talk that tomorrow may represent the first day the Bank of Canada chooses to raise the lending rate which as a direct impact on variable interest rates. The election is over so no political fallout will result from this decision. We know the government would like to see rates return to historical norms. The question I have is what has changed in our economy that suggest now would be a good time?
I am fortunate to have on my staff Bob Woodley who I consider my interest rate guru. Bob follows the bond market which has a direct impact on fixed mortgage rates. Bob’s predictions on where fixed rates are headed are uncanny. It is cool to know” in advance” what is going to happen to long term rates as it gives our clients the ability to react accordingly. Something as simple as” locking in” when rates are about to increase could save the clients thousands of dollars.
We welcome your comments.

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Don’t Take Advice From Broke People

April 16th, 2011

I was reading a Jason Heisler blog on the importance of not taking financial advice from broke people. This would be consistent with the teachings of Robert Kiyosaki of Rich Dad, Poor Dad fame and would seem like good advice. Jason does not appear to be a big fan of the financial services industry and makes some good points, but I don’t believe his scepticism should be directed solely to this sector.

In any financial transaction if the person across from you has a financial gain in your decision then you can’t be naive as to any potential bias behind their advice. As one of my colleagues in auto sales explained it, “At the end of the day, it does not matter to me which car the client purchases or if it is the ”perfect” car for them. What is important is that they purchase a car”. You have to love the honesty.

It is very important to surround yourself with the best financial mentors one can find, especially when they may have a financial stake in your transaction. The wealthier they are, and therefore the less your individual purchase impacts on their lifestyle, the more likely they are to provide you unbiased advice. This is by no means an absolute reality, just a logical assumption. Of course being wealthier, they know what worked for them based on their knowledge and experience. No need to reinvent the wheel. Just duplicate what they have already done if it is applicable to your situation.

See Jason’s blog below:

On my way to a monthly investment meeting I was playing passenger while a good friend of mine was driving and we were discussing real estate. Both of us are keen on investing in real estate and have real estate investments. We are also both looking to grow our portfolios and have both come to a crossroads where we have to find joint venture money. We had been discussing a few ideas and bouncing the ideas off of each other and coming up with even better ideas when I decided to let him in on one of the most important pieces of advice I have ever been given, ‘Don’t take advice from broke people.’ These are neighbours, friends, relatives or acquaintances who are not financially free or wealthy. They are the ones that come to you with a ‘hot tip’ on a ‘great’ investment or always talk about investing, yet never take action. Stay away from their advice, or take it with a grain of salt and do your own research on it. Make sure it is based on facts, not speculation. If it sounds too good to be true, it probably is.
And the sad reality is there are hundreds of ‘financial planners’ giving people advice on how to invest when they don’t necessarily know how to themselves. They take a course, graduate from it and then are somehow experienced and educated enough to give other people financial advice for their retirement. I still don’t understand how this is allowed. These financial planners – now I am not saying all financial planners here, as there are ones out there who deserve to be giving financial advice, just the ones I referenced to above – are glorified sales people. If they do not sell their ‘products’ they don’t get their commissions, which mean they don’t get paid. How is that financially free? Is it because they only ‘work’ when they want to? Is that what makes them qualified to give financial advice?
Anyway, I can go for hours on that topic alone and why I think RRSP’s are not a good investment and are going to keep Canadians broke in retirement.
The advice my mentor gave me (Don’t take advice from broke people) didn’t sink in right at that moment. For some reason, I put it on the back burner and carried on with life taking advice from my ‘financial planner.’ And as I did this, I watched the investments he suggested to me start to lose value, and lose value big. I lost close to 30% on my portfolio value because I failed to listen to my mentor. It was at that point, his advice finally sunk in. I had watched my portfolio lose value because I had taken advice from a broke person, and the worst part about it, I had paid him monthly to lose that money for me, the nasty reality of these types of investments.
Since that day, I have not taken advice from a broke person. I now personally (I can call them up and chat to them anytime) know more wealthy and successful people then I ever have before. These are the people I listen to when it comes to financial advice. And even then, I make sure to do my own diligence on what they suggest, because as the old adage goes, no one cares more about your money than you!
So next time you get some ‘great’ advice, just step back and consider who you are getting it from before you jump in. As the great Warren Buffet once said, “It’s only when the tide goes out that you learn who has been swimming naked.”

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Good Debt vs Bad Debt – What’s the Difference?

March 20th, 2011

Good Debt vs. Bad Debt – What’s the Difference?

If you’ve ever struggled to keep up with all those monthly payments including the credit card and car payments, you’ll want to tune in to this important article…

More and more people are getting swallowed up by debt. I’m sure you’ve read and heard many of the statistics and stories in the news. One of the keys to financial independence is to get rid of your bad debt and acquire good debt.

Bad debt is debt that makes you poor, such as credit card debt, car loans, etc. – this is consumer debt. Good debt is debt you acquire that actually works for you. The best example of good debt is a mortgage loan on a rental property that throws off positive cash flow every month. Good debt is money that you borrow to purchase assets that put money in your pocket.

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      5 Steps to Eliminate Your Bad Debt and Acquire More Good Debt

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Step 1- Stop accumulating bad debt. Whatever you purchase via credit cards must be paid off in full at the end of each month. No exceptions.

Step 2 - Make a list of all your consumer (bad) debts, this includes each credit card, car loans, and any other bad debts you have acquired.

Step 3- Refinance your mortgage to consolidate your high interest debts. Chances are you’ve built up enough equity in your home to pay off your high interest credit cards and consumer loans.

As your mortgage advisor, I can help determine how much equity is available and how much you can save by increasing your mortgage balance to pay off bad debts at lower interest rates.

Step 4- Explore the option of using additional equity in your home to increase cash flow. After you consolidate your bad debts you may still have equity left over to invest in a secure cash flow producing asset.

For example, the equity could be invested in a First Mortgage Fund that earns 9% interest. With a home mortgage interest of 5% the net return on this investment would be 4%. That return can be left to compound or withdrawn every month.

Step 5- Pay yourself first.  Put aside a set percentage from each pay cheque or each payment you receive from other sources. Deposit that money into an investment savings account. Once your money goes into the account, NEVER take it out, until you are ready to invest it. Now – instead of just paying creditors – you’re paying yourself for only one type of purchase: assets that give you positive cash flow each month. By adopting this as a consistent habit you will be out of the Rat Race faster than you ever dreamed!

I look forward to hearing about your success stories as you apply these financial principles to your life.

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Calculating Interest Rate Differential (IRD)

February 13th, 2011

With interest rates at historic lows many home owners are seeking to refinance their current mortgage prior to the scheduled maturity date. It is an excellent idea to review this option as the potential savings is generally in the thousands, if not tens of thousands of dollars.

In the past many lenders were content to dissolve a mortgage with a three month interest penalty, but given the number of early redemptions, and revenue lost, lenders now rely on collecting the greater of three months interest or an amount called the Interest Rate Differential. The IRD is based on:

  • The amount you are pre-paying; and,
  • An interest rate that equals the difference between your original mortgage interest rate and the interest rate that the lender can charge today when re-lending the funds for the remaining term of the mortgage.

Most closed fixed-rate mortgages have a prepayment penalty that is the higher of 3-months interest or the IRD. Variable-rate mortgages do not typically have IRD penalties.

Logic dictates that a simple formula would exist for calculating IRD. We have software for such purposes, but in my experience this is an exercise in futility. The reason is that each lender has their own formula for calculating penalties and even the lenders own employees are sometimes unsure as to what the penalty should be. Some lenders use posted rates for their IRD calculation and some use discounted rates. Some lenders round up to the next longest term when determining comparable IRD interest rates, some round down. A small number of lenders prohibit breaking a mortgage early, regardless of the penalty, except in the case of an approved bona fide sale.

My recommendation is that you contact your lender directly for an exact penalty quote, but in my experience even that amount may change, prior to the closing of the new financing. In one example, CIBC provided a payout statement only to present the client’s lawyer with a different payout amount on the day of closing. As you can expect the client went ballistic with the last minute change, as the reason to proceed in the first place was of course predicated on the amount of the penalty when compared to the savings of the new mortgage terms.  When CIBC was asked why they were not prepared to honour their original commitment, and why they were increasing the penalty on the day of closing their answer was simply this, “Because we can”.

At best your mortgage agent will be able to verify your expected penalty amount and hopefully your current lender is not a $#%&*.

We welcome you comments.

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Top 5 Home Purchasing Mistakes. What Your Realtor Won’t Tell You. Part 5

January 26th, 2011

In my line of work I have the opportunity to observe many real estate transactions and have found what I feel are the top 5 purchasing mistakes made by both novice and experienced home buyers. Please enjoy our final instalment of this series:

5.    Finding the best support team. You deserve the best

When purchasing a home you will require the services of many industry professionals including a realtor, mortgage agent, lawyer and insurance provider. The hard part is finding the best people to help you through the process. So where do you start? Who is the most important member of your team? In my mind it is a tossup between the realtor and mortgage agent as to who is most important. A realtor can find you the perfect home but if you can’t finance the purchase then the realtor’s efforts are for not. I have an obvious bias towards the importance of the financing, but for this purpose I will give the edge to the realtor as your most important team member, followed closely by your mortgage agent.

The Realtor

There are about 1500 realtors in our city alone so finding the best one for you could be an exhaustive search. In a perfect world you would interview all of them but who has time for that? The key thing to remember is that the skill set required of a realtor representing the buyer is completely different than the skill set required if the realtor is representing the seller. An exceptional selling agent may be a lousy buyer’s agent and vice versa. Here are some tips you can use to find the very best.

  1. Are they a good listener? If you present your realtor with a list of the “must haves” for the property you are seeking and a second list of the “would like to haves” then any home they show you should contain all of the “must haves” and some of the “would like to haves”. Your time is important. If your realtor has listened well to your requirements they should be able to show you the “perfect” home quite early in the process.
  2. Do they understand your needs? If one of your must have requirements is a Colonial style home and the realtor says “what’s that”, you are going to have issues.
  3. Are they experienced? Being 20 years in the real estate industry does not necessarily mean 20 years of experience. It could be one year of experience, 20 years in a row. The point is if you have a specific need then look for a realtor with expertise in that area. For example; if you know the part of the city you want to locate in, find a realtor that works predominantly in that neighbourhood. They will have a good understanding of the property values, amenities, and may even know many of the neighbours. Look for the realtor with the most lawn signs or who advertises exclusively in the area.
  4. Are they recommended by their colleagues? Here is a trick you can use. Call up a larger real estate office and talk to the receptionist or the broker of record. Explain your situation and ask them to recommend an agent. They will tell you who is good as it is their reputation on the line. If they can’t/won’t give you an opinion, then move on to someone who will help.
  5. Talk to others who have purchased recently through your social contacts. Who had a great experience? Talk to your mortgage agent, lawyer and insurance provider. Who would they recommend?
  6. Does your realtor work with For Sale by Owner listings? If not you are not being exposed to all of your housing options.
  7. Do they require you to sign an exclusivity commitment? If there is no benefit to you in signing then don’t, but please be fair to the realtor. If you find the right one, you only need to be working with one.
  8. Are they available on your schedule? A full time realtor should be flexible enough in their schedule to meet you 24/7. If they work as part of a team then the fact they take a vacation does not impact the ability to proceed on your timetable.

The Mortgage Agent

As in any industry there are good and bad mortgage agents. Here is what to look for:

  1. Do they have multiple lenders available? How can your bank be unbiased if they can only sell you bank products. Find someone who only works for you and is committed to finding you the best available financing.
  2. Do they do this full time? Financing is too important to be left to the inexperienced.
  3. Do they specialize in a specific area? For example if you are purchasing a commercial property do they have experience with this type of funding?
  4. What is their education? Do they have an education/training in financial matters? Can they find creative solutions on difficult deals?
  5. Do they work with a team? Can they work to your timetable?
  6. Do they charge you an upfront fee? They should be no direct fee to you, or a direct fee which only applies with the arrangement of successful financing.

The Lawyer

Real estate transactions are the bread & butter of many law firms and are relatively simple to complete if all goes as scheduled. Here is what to look for:

  1. Do they work with a team? Can they work to your timetable?
  2. What is their base fee and what are their disbursement fees. Get a quote in advance as the disbursement fees vary greatly from law firm to law firm.
  3. Do they do litigation work? Real estate transactions are simple until a problem occurs? How experienced are they in seeking remedies?
  4. Do they specialize in a specific area of real estate? Purchasing investment properties for example brings a host of other legal considerations from proper licensing, liability issues, revenue and expense verification etc. Do they know what to include in an offer to purchase? 

The Insurance Agent

A real estate transaction requires both property insurance and ideally some form of mortgage insurance. Finding an agent that does both is a bonus. Here are some considerations:

  1. Can your agent provide both a residential policy and either mortgage or a term life insurance policy?
  2. It is a lot easier to apply for insurance on-line in today’s marketplace. Comparisons are being driven strictly on price. What do you give up in terms of claims assistance by not dealing directly with an agent? Cheap insurance is no insurance if it is a hassle when you need to submit a claim.

We trust you have enjoyed our 5 part series and that we have given you some things to think about the next time you purchase a home.

We welcome your comments.

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