Collateral Charge – A competitive advantage?
A slightly edited version of the piece running in CMP magazine this month.
- Collateral Charges are her to stay
- Be balanced in your explanation of CC’s.
- Understand that the advantage the existence of CC’s creates as a clearly logical way to demonstrate why a client should not have all their debts with a single Financial Institution.
- Be the informative, educational, and unbiased Expert!
Much has been made of the presumed ‘evils’ of the Collateral Charge style mortgages more and more lenders seem to favour, largely based upon issues around a clients inability to move to a new lender at renewal time without triggering renewal fees. (Credit unions use the term ‘Credit Master’, and lenders register these sort of mortgage in slightly varying ways, for this articles purposes we will use the term ‘Collateral Charge’ as a general description of these sorts of registrations)
Often at the heart of negative spin pieces are concerns around a Brokers inability to ‘move’ a client at renewal time. Brokers incentives to ‘churn their book’ may change should trailers fees enter the picture with all lenders. Arguably the lack of trailer fees in our industry a limiting factor in raising the standards of professionalism as up front only compensation tends to create shorter term focus and service. Although many Brokers, certainly the top producers, see the long term value in treating their books of business as a farm, nurturing and tending to the existing crop of clients with great care. This same structural compensation issue applies to many bank representatives with very similar commission structures resulting in zero fiscal motivation for subsequent personal client follow up. The opportunity within this dichotomy is another topic altogether, lets focus on how the collateral charge style registration can in fact give you, the independent Broker, a competitive advantage.
Priorities to live by;
- The Clients best interests are Priority #1.
- The Lenders interests are second in line.
- Those of the Broker are a distant third place.
After all without the first two parties, a Brokers existence is moot.
Lets consider the topic of collateral charges from these three perspectives;
1. The client – being placed in a collateral charge product
The (potential) win for the client is that there are no new legal fees for securing a line of credit or increasing the mortgage balance in the future. (assuming, generally speaking, that they choose either the 125% of the value option or a max amount agbove the actual mortgage amount). If the client chooses to register their mortgage with a collateral charge lender for ONLY the specific mortgage amount then the upside for them is quite limited moving forward.
Some negatives for the client;
- They are effectively entering into an ‘all indebtedness’ mortgage which brings any other debts to that specific lender under the umbrella of the registered security against the Real Estate. In other words co-signing a credit card or car loan for somebody that stops making payments with the same lender holding the mortgage can ultimately result in a foreclosure notice against the original clients property. Not something clearly spelled out on a mortgage commitment.
This alone (my Visa can trigger a foreclosure?!?!) is enough to stop most clients in their tracks and creates a few more questions.
It is also costly to move the mortgage to a new lender at renewal time, in particular if the mortgage is a smaller one. This is now somewhat secondary as clients are still wrapping their head around a $5,000.00 credit card balance potentially triggering a foreclosure – which it very well can. In one of my own clients cases it was a 29K Visa balance of an ex-spouse still on title, although said ex-spouse was neither residing in nor contributing to the property itself.
This brings us to a key point;
The Collateral charge is Neither Good nor Evil. It simply ‘is’.
It is here to stay, it is the future of the majority of mortgage registrations. Thus we need to learn how to present it in a neutral fashion. Considering many of our clients lender options are limited to Chartered Banks or Credit Unions it would seem illogical to throw the entire concept away as ‘sinister’.
Educated and enlightened clients are the key!
Once aware of this far reaching method of registration and its serious ramifications how best to proceed? Considering that nearly all institutions (most likely including the clients current bank) now register in this fashion it is perhaps worth suggesting the client not have all their banking, credit cards, and small loans with the same institution with which they place their mortgage. Instead they will benefit from two, or more, institutions in their lives. In fact placing their mortgage with a third institution altogether is more prudent still. i.e. personal banking with Lender A, business accounts with Lender B, and mortgage(s) with Lender C. (Clearly this opens the door for a discussion on the virtues of Monoline lenders as well)
If all banking as done at ABC bank, and the mortgage alone is all that is held at DEF bank, we then eliminate the sinister side of a collateral charge mortgage; a foreclosure triggered by a small consumer debt.
This is the simple solution for protecting your client from the downside of a collateral charge product.
Yes this is you, the expert Broker, using the collateral charge against the clients own bank. You are educating the client as to the pitfalls of having all their eggs in one basket. Again this is not an ‘evil bank’ scenario, nor is it an ‘evil policy’, it is simply a policy that exists with nearly all chartered institutions. It is good business practice for them, shareholders appreciate good business practices, shareholders being the ones that bankers ultimately answer to. If the client still prefers to be placed with a big bank or Credit Union fair enough – you have not painted a picture of the collateral charge as a negative with another institution, instead the exposure is greatly decreased with the multiple institution solution.
A solution that you the Expert Advisor brought to your client. Clarity as to the potentially devastating ramifications of a collateral charge with their primary bank, as opposed to negating the risk via use of an institution independent of the balance of the clients banking.
All that remains is potential upside for the client. Again aside, to some extent, from the issue of moving the clients mortgage at renewal.
Moving at renewal as a topic can strike a client as an odd conversation to be having at inception time mind you. i.e. What? You will want all of this paperwork, my time and this stress all over again 2, 3, or 5 years from now? Can’t you place me with a lender you have some influence over my renewal with, you were supposed to make this process simpler?
Yes. you can, and you will – because this is the right thing to do. Place the client with the lender that makes the most sense for them in the long run, do not let your own issues cloud things. Do the right thing for the client every time, the money will follow.
Ultimately ‘porting’ at renewal is becoming less of an issue as we already have at least two lenders stepping in to offer a no-fee switch program for collateral charge mortgages. No doubt 3-5 years from now there will be more doing the same.
2. The Lender registering a collateral charge.
I think that we have made the case for why lenders love this format and are unlikely to change it anytime soon. i.e. ‘All indebtedness’ and the increased security over the entire client relationship.
Although Lenders are increasingly under pressure to disclose all of the details more clearly, current mortgage commitments are lacking in any sort of detailed explanation. This is left up to the Mortgage Broker to provide. Master your script and ensure that the language is unbiased, matter of fact, and when clients ask for more information from the lender themselves you can forward this excerpt from the DoF site;
While many consumers continue to choose a traditional mortgage to secure their home loans, many are increasingly choosing collateral charge mortgages. The impacts of having a collateral charge mortgage may differ from traditional mortgages. For instance, switching between lenders may be more difficult. To make an informed choice, consumers need sufficient information to clearly understand the costs and consequences of collateral charge mortgages relative to traditional mortgages. The Government will require enhanced disclosure, better equipping borrowers to understand these impacts.
3. The Broker
Lets address the main points
1. Focusing on what makes the most sense for the client both product and lender-wise during mortgage inception should be priority #1.
2. A Brokers concerns about switching a client out to another lender 3-5 years later should be far lower than ensuring the client is placed with the appropriate lender up front.
3. Strong communication throughout the mortgage term will see that the client refers and returns to their original Broker for any increases or a port.
4. When the client does return looking for more funds, say $7,000.00 for a special assessment, if you originally spent time talking them out of a collateral product up front, ask yourself this; Are you now going to cover the cost of their legal fees which otherwise would have been nil?
5. As more lenders go the way of the collateral charge style product, there will be in turn more lenders that will accept a transfer in of an existing collateral charge.
6. Most Importantly; Understand all the ins and out and ups and downs of a collateral charge and do not paint yourself into a corner one way or the other. Simply be informative and neutral.
A sad example of a Broker failing to understand and clearly explain this topic was a recent client which came into my office convinced that they could in fact borrow 125% of the value of the property, and that they did not need to re-qualify. This client was less than impressed to discover this in fact was not the case, as had apparently been suggested by their previous Broker. Ultimately we were still successful with their refinance, but the misunderstanding eliminated the original brokers chances of doing any further business with the client.
I have also had a recent experience where the Branch rep at the branch signing made this same mistake, as they were unaware of exactly how the product worked.
Be the Expert; Know your stuff!
i.e. Yes, legal fees are waived, but there is still an update appraisal required, and of course updated credit and income confirmation. It is essentially the same as underwriting any other refinance transaction – minus the trip to the lawyers office.
Collateral Charge products are here to stay, learn about them and use them for what they are; an excellent competitive opportunity to move a clients mortgage relationship away from their existing Financial Institution. Unless of course you placed the clients mortgage in the first place, in such an instance you should be considerate of both the clients time as well as the current lenders status alike and make use of the increase provisions that a collateral charge provides prior to looking to move the client.