mortgagescanada-blog

[mortgagescanada-blog]

Let’s talk about churning

Here is a good topic for consumers to understand... churning. Not butter, but instead brokers who churn their book of business to make more money.

It is a common practice in the mortgage brokerage community in Canada and is one of the ways that brokers negatively impact consumers... and lenders.

In the mortgage industry churning is what happens when a mortgage broker moves a customer from one lender to another. This most often happens when the client is looking to advance new funds against their homes. There may be several reasons why a customer would wish to advance new funds: (1) money for renovations (2) funds for school (3) to purchase a second property (4) debt consolidation, and the list goes on.

The mortgage broker, in their infinite wisdom, will convince the borrower that they need to move from lender A to lender B. The usual excuse is that lender A will not approve them (the broker rarely submits the application to the original lender) or because the interest rate from Lender B is slightly lower than offered by lender A.  Well, here is the real reason why a broker does this. Money.

If the mortgage broker leaves the client at Lender A they are only paid for the new money advanced. Here are some example numbers to consider. The client has a $250,000 mortgage with lender A. They wish to advance $50,000 to complete renovations on their home. If the mortgage broker does what is called a “top up” with lender A they will only be paid on the $50,000 new money (roughly $500). However, if the broker moves the client to Lender B they will be paid on the full amount of the new mortgage ($300,000) with that lender (Roughly $3000). 

Here is the real problem with that scenario. The client is coached to move their mortgage and as a result, they pay a penalty sometimes for as much as $9000 on a 250,000 mortgage - but let’s use three months interest of $3000. In order to pay the penalty, the broker rolls that amount into the new mortgage amount. So instead of borrowing $300,000, the client ends up with a mortgage of $303,000. The broker will also most likely set the new amortization on the mortgage back to the original 25years. So the client is in truth paying far more for that $50,000 then they would if they had simply stayed with the same lender. They broker, however, is happy because they earn considerably more commission.

When interest rates were higher and they started to come down brokers used to churn their book on a regular basis. They often told clients that the lowered rates meant that they could save big money, and in some cases, they could. When you factor in the penalties and the longer amortization the savings was usually far less than what the broker would sell the client. To try to shift focus away from themselves the brokers have started a campaign against lenders trying to say that they are not properly calculating penalties. This shift in focus caused all of the major media to paint lenders with a broad brush and accused them of being underhanded with how they do business. What brokers will not tell you is that the way those penalties are calculated was outlined in the mortgage contract.

The penalty would never have been an issue if the broker had simply left the client with the original lender. Most lenders will do what is known as a “blend” where they will waive the penalty, increase the mortgage amount, and blend the new interest rate with the old. If the client does want to lengthen the amortization (say back to the original 25 years) on the mortgage that is known as an “extend and blend”

This practice is very common (even though brokers will deny it) and is the reason why the average term that a broker originated mortgage remains with a lender is so much shorter than one which is originated by a branch. Broker mortgages only have an average life term with a lender of 28 months, versus a bank branch originated mortgage of 39 months.

The biggest issue here is that we have an industry which only earns if they can convince the customer to borrow as much money as possible. They shift their client books from lender to lender and that means it is harder and harder for consumers to pay off their mortgages.

There are mortgage brokers across Canada that work with syndicated mortgage providers, financial planners, and investment advisors. They are all working with the same goal... get consumers to borrow more and more money so that they can make commissions. They use lines like “get your equity to work for you” and convince people that they should not worry about retiring debt free, it is better to borrow and invest. Earn an income from your home. In some cases that may be OK, but it also means that we will have generations of people in Canada that will never be debt free.

Brokers are at the front of the line to blame the banks and unsecured debt. They call for the government to regulate credit cards and other unsecured debt vehicles. They are not doing this to protect consumers, they are doing it to shift focus away from the ever escalating debt that is secured by property in this country.

Consider this. Our federal government provides lenders with mortgage insurance through three different vehicles: The CMHC, Genworth, and Canada Guarantee. They back 100% of The CMHC portfolio and 90% for Genworth and Canada Guarantee. With the many mono-line lenders bulk insuring their portfolio, and the banks also doing the same, it means that the Canadian government (the tax payer) is guaranteeing over a trillion dollars of mortgage debt.

So our government is essentially protecting (on the backs of the taxpayer) the profits of multi-billion dollar companies, and the incomes of mortgage brokers. That’s a serious problem. If our property industry was to fail in a big way the taxpayer would be on the hook for billions of dollars of mortgage debt. Enough to financially cripple the federal government.

Next blog we will talk about the truth behind the new mortgage rules and the real reason why mortgage brokers don’t want that truth to come out.

[mortgagescanada-blog]

An Industry built on fraud.

There is not a single soul in Canada that is willing to take a hard look at it because of the power of the lobby group behind it. Governments and regulators fear the repercussions from not just mortgage brokers or their associations (such as Mortgage Professionals Canada), but also from their biggest supporters like TD Bank and Scotia Bank.

The truth that no-one wants to talk about is the rampant amount of what the banks call “light” fraud that occurs in mortgages originated by brokers every single day in Canada.  Tweak an application here, make a minor change there. Nobody gets hurt, right? I mean the people are making their mortgage payments, aren't they? Of course, they are! Why? It is simple, people are afraid of losing everything.  You see that is what would happen, with all but one province (Alberta) allowing for both seizure of the property and suing for whatever is left over means that failure to pay could mean total financial ruin for hundreds of thousands of Canadian homeowners.

Mortgage brokers are famous across the country for being able to “finesse” an application or even bully a lender into approving a deal. Lenders make “exceptions” for these top performing brokers because they need the broker to exist. Lenders like Home Trust, Street Capital, and even the big boys TD Bank and Scotia Bank rely on the business that brokers bring in.

The provincial regulators that govern mortgage brokers are hamstrung by having too few staff to effectively monitor brokers. When the regulators do try to bring in new rules (Like BC did with insisting that brokers disclose exactly how much money they earn in commission to the consumer) brokers embark on massive lobbying campaigns to oppose any regulatory oversight. They claim that they are working for the best interest of the consumer, but the truth is simple. They are only concerned by how much money they make. Period.

Big Companies like Dominion Lending have strong ties to the government at all levels. In BC the head of marketing for Dominion is good friends with the premier having worked on her campaign. The president of the company has been chummy with at least one prime minister. They donate big bucks to political campaigns and that gives them big leverage over those politicians.

Brokers have long insisted that they work in the best interest of their customers, one brand, Centum even using the tagline: “Looking out for your best interest”. The facts could not be further from the truth.

With practices like churning their book they are keeping Canadians locked into their mortgage longer than ever, and it is all done in an effort to make more and more money.

We will take a look at some of the more nefarious activities that brokers participate in during future blogs. Suffice to say that if our over-heated markets crash, it will be on the backs of mortgage brokers who skirt the laws, and flog mortgages to consumers. All to make a buck.

[mortgagescanada-blog]

Home Trust is a symptom

If you have been following the news about the mortgage industry in Canada lately you will most likely know about the recent crisis in the industry surrounding Home Capital Group. Most people will know them as Home Trust.

They are or were, the largest non-bank lender in the country for years. The vast majority of their growth is attributed to mortgage brokers. The very same people that have brought this multi-billion dollar company to its knees.

Not through a direct attack... but rather through the day-to-day nefarious activities of people with little or no scruples about how they do business. Mortgage Brokers.

Brokers submitted false documentation, lied on applications, and generally committed fraud when submitting deals to this lender. Now, the lender is not innocent in all of this, but it all starts with mortgage brokers. An industry that was built on fraud.

What exactly is a mortgage broker? Well, not too many people know the truth of what they do, or the role that they play in Canada. Time to pull them out of the shadows and take a look at what they really do compared to what they claim to do. We will be doing that in future blogs, but suffice to say that mortgage brokers today are in truth only high paid fax machines that offer little to no service to Canadians. Even the so-called ‘good’ ones.

The truth behind the collapse of this venerable lender is not so much the deeds that they did or the people at the top that are being blamed for their actions.  It is rather laid squarely at the feet of an industry that for decades has perpetrated fraud in order to make money. An industry of highly paid commissioned sales people that falsely make the claim that they work for you and not the lender (the truth is that they work for the lenders... it is who pays them). An industry of people who figured out a way to work the system to make money, and at the same time screw a financial system and claim that they are only looking out for the best interests of the consumer.

There are many brokers in Canada, and not all of them are shady greasy manipulators... but most of them are.  The biggest out there... Dominion Lending Centres, Mortgage Centre Canada, Mortgage Alliance, The Mortgage Group, Centum, Mortgage Architects, Invis and Verico. 

Stay tuned as we pull back the curtains and show these people for what they really are. Money hungry liars.

[mortgagescanada-blog]

Mortgages In Canada

What most people won’t talk about in Canada is the truth behind the mortgage industry and mortgage brokers. Well, it is time to pull back the curtains on the industry and show not just consumers, but politicians the truth about what is really going on! That is what we are hoping to achieve with this blog. Stay tuned as we shed some light on the deepest and darkest corners of an industry that has long fooled us all.