Tuesday, July 15, 2008

Canadian Banks Divided Over Mortgage Broker Strategy

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Canadian Banks Divided Over Mortgage Broker Strategy

TORONTO (Dow Jones)--Frank Techar shrugs off news that Bank of Montreal (BMO) has lost significant market share in domestic mortgages.

The head of BMO's Canadian banking unit was well prepared for that to occur when he made the decision last year to stop selling the bank's mortgages through mortgage brokers.

A growing number of Canadians are using brokers to shop around for their mortgages. According to the Canadian Association of Accredited Mortgage Professionals, 34% of first-time homebuyers worked with a broker last year, up from 25% in 2005. Even experienced homebuyers are opting for the broker channel - 27%, according to a recent CAAMP survey.

For homebuyers who may not have individual negotiating power or significant real-estate experience, a broker is a valued middle-man, observers say. And Canada's buoyant real estate market, a surge of buyers who are either young, self-employed or new to Canada, and intense competition in mortgages have all spurred their popularity.

But Canadian banks are deeply divided about the use of brokers. Some, like Bank of Nova Scotia (BNS) and Canadian Imperial Bank of Commerce (CM), wholeheartedly embrace the channel, developing specialized products such as home equity lines of credit, to lure new clients.

Others - like BMO - say brokers bring in low-margin mortgages, which can increase market share at the expense of profitability. And they say brokers can impede the bank's goal of fostering a deeper banking relationship in which a homebuyer becomes a valued customer.

"We didn't like the return profile of those assets," Techar said in a recent interview. As well, he noted, "we had a more difficult time building relationships with those customers."

Royal Bank of Canada (RY) also eschews the use of brokers, and Dave McKay, group head of Canadian banking, says that hasn't hurt its mortgage business in the least, noting Royal Bank holds more than C$140 billion worth of mortgages, and its book is growing at 17% annually.

The broker model "just doesn't work for us," McKay said at a recent investor conference. McKay argued that using brokers makes the bank "lose control" of the customer, a consideration that BMO cites as its principal motive for taking its mortgage business back in house.

BMO found it difficult to "cross-sell" other banking products to those customers who had opted for a BMO mortgage because of the broker-negotiated rate, says Lynne Kilpatrick, senior vice-president of personal banking. That's because those customers built a relationship with the broker, not the bank, she notes.

Customers whose connection to the bank is based on a good interest rate tend to be "a bit promiscuous," she says. "When the mortgage comes up, they tend to chase the next best rate."

For a bank struggling to improve its relationship with customers and to build its sagging "share of wallet," that temporary connection was counterproductive. Following its decision to abandon the mortgage channel, BMO increased the number of "mortgage specialists" on staff to 300 from 170 previously. These specialists work with real estate agents and others to bring the homebuyer in to the bank.

Kilpatrick says the specialist is the customer's initial contact with BMO "with a warm handoff to the banker, where they can then have a conversation about other banking needs."

In fact, Kilpatrick says BMO has been successful in replacing the mortgages lost by abandoning the broker channel and has now moved to step two: increasing its share of the growing mortgage market. BMO officials believe they can achieve that goal by the end of next year.

And BMO executives say they're happy with their decision: "We do find our ability to cross-sell products that come through the mortgage specialist is exceptional," Kilpatrick says. "That's the bread and butter of the retail banking business."

Although BMO believes the broker channel has hindered its client relationships, other banks find it gives them access to a whole new group of clients.

"We see a tremendous advantage in attracting customers through brokers," says Rick Lunny, executive vice-president of lending at Canadian Imperial. The broker-sourced mortgage gets the client in the door, and "allows us to build on the relationship."

Since many of the homebuyers who do use brokers are making their first major purchase, they typically haven't done much financial planning, he says. Once they have a CIBC mortgage, the bank can then begin discussing their other financial needs.

CIBC also employs about 500 mortgage specialists, and sells mortgages through the brank branch as well. "The key is that CIBC is committed to a multi-channel approach," he says.

Bank of Nova Scotia is so keen on the broker channel that in 2006 it purchased Maple Trust Co., one of the country's largest alternative lenders. The transaction immediately increased the bank's market share.

In fact, last year 53% of all of the mortgages funded by the bank were originated by brokers associated with either Maple Trust or Scotia Express - the bank's Web site for mortgage brokers.

Maple Trust Chief Executive John Webster believes brokers have a competitive advantage because of the nature of real estate sales in Canada - which typically take place on weekends or after tradition banking hours.

"The person who gets there first gets the business," he says. Moreover, brokers are able to tell a potential homebuyer that they have offers from three or four lenders.

In a recent research note, Desjardins Securities analyst Michael Goldberg said Scotia is able to cross-sell products on broker-originated mortgages at the same level as branch-originated mortgages.

"The key point is that brokered mortgages must be closed in person at a branch, providing the opportunity to get to know the client," Goldberg noted.

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