Big banks have the ability to arrange funds easily and they can absorb bit of a downturn. For a lender who only sells mortgage that too in a limited quantity will see some turbulent time in near future.
The Housing Effect:
As the housing slows and stock market shows some hope we shall face few serious issues.
Raising Bond Yield:
Investors love yield and safety. After a long period of drought, a faint sight of a stronger yield will drive them away from bonds. It is believed that when financial are improving – that brings the first good news of market recovery.
Thus far despite of fetching record breaking profit our bank stocks were not doing well but the scene is changing now.
Expectation of lower house price:
In stock market what kills a share price is the expectation of lower price. Many traders short stocks so heavily that often the regulator will step in to stop shorting.
In housing, buyers may go into the same emotion – somewhat indirectly. When consumers keep learning about the reports of falling home prices – they may decide to wait. In fact they are doing so already. The only positive thing is that in Canada we do not really have much surplus in housing sector except condos.
Issue in hand – Debt:
Debt to income ratio of Canadians has been in a chronic sickness for a while. Repeated reminders and warnings are working their way into our head and the signs are showing already.
Lower mortgage business = higher competition = lower profit:
So far CIBC and BMO are competing vigorously for new deals. Depending on their size a bank they will be able to offer bigger discounts. Smaller lenders will find it difficult to recover their costs as the margin keeps bleeding.
Banks are already trying to get some grip on the brokers market share. With a nice backing from their business volume they will easily be able to put some dent into it.
The attempt a move into the brokers territory is mainly due to fact that the products sold at branches are more profitable than a mortgage sold through a mortgage broker. The easiest way to fight a broker is to offer similar rate – banks are trying just that.
The mono-line lenders who are famous for their rock bottom rates will be forced to make adjustments like lowering broker’s commission or raising rates. One positive side of this business is that they can make fast moves to adjust with the market as they run their operations lean and smart. No doubt that it is one of the biggest weapon a broker can get.
The resulting pandemonium:
Some banks have given up on the broker channel already. They are trying to adapt to a confused model of using road-rep, in branch and call center sales channel. It is creating confusing within the same organization and there are reports that they are under-cutting each other on rates.
We are just waiting for the banks to lunch mortgage sales representatives on the social media. (we shall be covering that soon)
Conclusion: Try not to grow too fast:
Growth is necessary but unplanned approach to a philosophy will only invite disaster. Having access to funds does not mean that it has to be invested in any way possible. A cautious approach to a new path should be taken and results, effects should be monitored and analysed frequently to avoid conflicts and troubles.
Brokers should try to focus on the quality of service and improving their presence. Good times or bad times are nothing but just times, they mean no good or bad. Difficult days will be long gone even before we realise that they were here.