Since the early 1990s, the use of mortgage brokers – technically independent mortgage agents/advisors who work for a registered Mortgage Broker, has gained great popularity as most of Canada’s banks began to use this channel to acquire mortgage clients, while at the same time we saw the emergence of several new lenders in the mortgage market introducing innovative distribution methods and a variety of mortgage product offerings previously unavailable.
Many of these new ‘wholesale’ lenders (as commonly referred to) didn’t have the expensive branch networks and large overheads in place with the existing dominant mortgage lenders. Instead they relied solely on third parties and benefited from a business model that allowed them to pay third parties on a production only basis – providing the ultimate cost outsourcing.
While this was happening, the mortgage marketplace in Canada was now increasingly using Mortgage Backed Securities (MBS) for the buying and selling of mortgages which further brought economies of scale (cost savings) to consumers. With less overhead, new lower cost funds, and product specialization, the savings allowed them to pay third parties a commission for the mortgage while providing lower rates, more products, and a greater variety of features to the client.
A commission similar to that a bank mortgage representative gets paid – without the opportunity to make more money by having the client take a higher rate (currently the model used for most bank mortgage specialists).
This expanded in the mid-to-late 1990’s with several companies using the internet to force lenders to “bid for your mortgage business”. This forced the larger lenders to enter the business using the same means in an attempt to expand their own business or recapture lost business.
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In the U.S. over 70% of consumers use a mortgage broker to get their mortgage. The Canadian mortgage market appears to be following in the footsteps of the American market. Why?