New dawn for non-banks

Few believe the commission cuts that subsequently swept through the mortgage industry in mid 2008 were purely a coincidence, as the non-bank sector’s fortunes started to crumble.

Originators and mortgage managers (originators) stood by helplessly and watched their previously healthy 20 per cent plus share of the mortgage market dwindle to next to nothing in a matter of months. The reality is that at the time, brokers didn’t have much choice. Many originators were simply unable to compete with the big banks’ rates.

But times have changed.

Recognising the threat to consumers of a lack of healthy competition, the federal government has since thrown its weight behind the non-bank sector. In late 2008 it announced that it would pump up to $8 billion into their coffers via a residential mortgage backed securities (RMBS) buy-back scheme designed to inject liquidity back into the system.

The result is a resurgent origination sector with money to lend and prices that are competitive to the mainstream banks. The question now is whether brokers are ready to abandon the big banks in favour of mortgage originators

The view from the top

The need for brokers to support the mortgage origination sector is an obvious one, according to PLAN Australia’s CEO Ray Hair.

Competition in the market, he says, is essential to ensuring a vibrant and viable industry. It simply comes down to brokers having a sufficient choice of products to offer borrowers.

“With the recent consolidation of banks and decreased competitiveness of non-banks as a result of funding issues, some borrowers are missing out. It’s critical that we see a return of this sector [mortgage originators] if competition and choice are to remain an option,” he says.

John Kolenda, the director of sales at Loan Market Group, agrees. He says now, more than ever, consumers need brokers.

“A consumer will need to use a broker to find alternative sources [to bank products, which have become restrictive] – and of course that is how the broker channel started in the first place,” says Kolenda.

In his view the very presence of brokers drives competition in the market and, to a degree, “keeps lenders honest”.

Although there are now fewer lenders in the market – thanks to the credit crunch – negotiating with them is getting tougher. For many borrowers, understanding the difference between the various products available is bewildering to say the least.

Mortgage Choice’s senior corporate affairs manager Kristy Sheppard says the non-bank sector is “absolutely vital” to maintaining a competitive mortgage market for consumers and ensuring the future of the broker channel.

“This sector has encouraged strong competition in the mortgage market, keeping all lenders on their toes. This has, in turn, provided consumers with greater selection and higher quality of loan products – with the greater selection resulting in lower prices of the products,” she says.

Ms Sheppard says although brokers can deliver their core service offering – “hand-holding customers through what can be a very confusing process in choosing a suitable loan for a range of lenders and products” – without the non-bank sector, it’s the choice that non-banks offer consumers that matters.

“We will be able to produce a much broader range of products if the non-bank sector flourishes,” she says.

Back to the future

Mortgage originators will doubtless hope that over the coming years their former pre-credit crisis glory days will return.

At the beginning of the decade both mortgage brokers and mortgage originators prospered side by side off the back of a booming housing market and borrower demand for products that were not restricted by the banks’ traditionally tight lending criteria.

The mortgage origination proposition was a good fit with the broker channel – an offering based on service and on price – and appealed to Australians tired of the banks and their excessive profits.

Over time, mortgage originators were able to carve out a significant share of the market, at one point accounting for over a fifth of all loans written in Australia.

Investors’ love of RMBS was a major driver of the ability of mortgage originators to compete with the banks on price, and as the heady days and confidence in RMBS remained, wholesale funders and the mortgage originators they supported could continue to take the fight to the banks.

But the walls came crashing down thanks largely to the excesses of our friends in the US, with the credit crunch putting an end to the flow of cheap funding. The non-banks had lost their key competitive advantage.

The impact of the crisis on the sector was two-fold: a sharp spike in interest rates and mass paranoia as to the stability of the non-bank sector as a whole.

With the resulting flight to the majors, brokers are in a precarious position – one which if they don’t dig themselves out of quickly could seriously undermine their overall value proposition.

Indeed, the third-party industry could be in serious danger if brokers continue to turn their backs on mortgage originators in favour of the mainstream banks. Without a strong non-bank sector, broker commission levels remain vulnerable if controlled by a shrinking pool of banks.

Adding value

The flight of brokers to the perceived safety of the banks has been damaging for the non-bank sector.

From July 2007, the non-bank share of the home loan market fell over 17 consecutive months, according to ABS data.

Mortgage originators have been a casualty of the decline, with many experienced and proven businesses forced to reduce their lending levels or exit the market altogether.

It’s a situation many in the industry view with concern, including ING DIRECT’s head of mortgage management Brett Mansfield.

The broker shift to major banks has created a concentration of risk – in a number of different ways. Mr Mansfield says originators are vital to the industry.

“Their value proposition is that they offer a higher degree of personalised service, and they are more contactable,” he says.

Unlike the major banks that are “like factories” because of their size, Mr Mansfield says mortgage originators are much more in tune with their customers and offer a more personalised service.

Mr Mansfield says mortgage originators are also great supporters of the broker channel because they are completely focused on third-party distribution unlike banks, which have their own proprietary channels.

“Their presence keeps pressure on rates and fees and stimulates product development,” he says. “They’ve been at the forefront of product development and innovation.”

Frank Knez, associate director, product and marketing at wholesale funder RESIMAC, agrees that mortgage originators have a lot to offer.

According to Knez, wholesale lenders provide originators with diversity of product offering, opportunities for white labelling, competitive pricing and commissions, and systems infrastructure to support the broker in loan processing and servicing.

“Non-bank lenders have for many years delivered innovative products with competitive pricing, which is still the case today. Expedient service is another reason to use non-bank lenders together with attractive commission models,” he says.

Steve Weston, general manager of distribution, broker platforms and lending at Challenger Mortgage Management, is another firm supporter of mortgage originators and their value proposition.

“Their main proposition at the moment is service, in particular turnaround times. Mortgage originators live and die by their service; they also offer a personalised, flexible service such as offering brokers flexible commission options,” he says.

MFAA CEO Phil Naylor says a healthy and robust mortgage origination sector is critical to consumer choice – and could help revitalise the non-bank sector.

“They [mortgage originators] provide a great impetus for the third-party channel’s popularity with borrowers. The wider the range of products available to borrowers, the greater the role of mortgage brokers,” he says.

“Borrowers are not necessarily loyal or hesitant about any particular lenders, they have simply tended to gravitate toward banks recently because they have been almost the only option.

Wholesale support

Challenger Mortgage Management’s Steve Weston says non-bank products have a role to play in ensuring the broker value proposition to borrowers remains strong.

“They need to offer variety,” he says. “Brokers should include non-bank products for their service credibility.”

One of the main challenges is responding to negative consumer perception around non-bank products. It’s a battle some brokers are not willing to engage in.

In many cases, brokers are still choosing to channel business to the mainstream banks because they are perceived to be an easier sell to clients.

The fact remains that over the last 18 months consumers have been brainwashed into believing that only non-bank lenders suffered at the hands of the credit crisis. People also have short memories.

“Remember,” says Steve Weston, “the non-banks were the ones who drove down prices and created competition.”

The federal government’s $8 billion injection into Australian RMBS has certainly put some confidence back into the market and also reassured investors, who have piggybacked some of the recent deals by Challenger, RESIMAC and FirstMac.

While 2008 was certainly a tough year for RMBS all indicators are that the government’s stimulus package plus increased investor confidence should see more RMBS deals placed in 2009, priced at levels that keep non-bank funds competitive to bank-based products.

Nonetheless, the sector still has challenges ahead, says Brett Mansfield.

“I’d like to think we are at a point now where the channel will start to re-emerge and 2009 should be better than 2008. The reality today is that banks are writing more than 90 per cent of business – but smart brokers will start to recognise the value of mortgage [originators],” says Mr Mansfield.

Mortgage originators should now maintain market position, if not grow, as a result.

“If you look at the sector, those remaining funders are all very solid businesses and that is something we can take great comfort in. In terms of mortgage [originators] themselves, there are some very strong businesses out there – the sector has contracted a lot in the last 12 to 18 months but those that are still operating are strong,” says Mansfield.

Time will tell whether brokers will embrace the non-bank sector with the same enthusiasm they did earlier this decade. But with the banks maintaining a firm stance on broker commissions, their very future may depend on it.

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QUASH THE CONFUSION

Mortgage managers, non-bank lenders, non-conforming lenders, originators... the swag of different terms from the non-bank sector can be confusing to say the least. The following simple explanation will help clear up some of the confusion:

Non-bank lender: Usually sources funds from the capital markets via securitisation; may lend directly to borrowers, via brokers, or operate as a wholesale funder to originators and mortgage managers. Example: Challenger; RESIMAC; FirstMac

Originator: Distributes funds sourced from a wholesale lender (either bank or non-bank) via brokers or directly to borrowers. Focuses on sales and marketing, broker support, product pricing and so on, but leaves the management, rate adjustments and administration of the mortgage to the wholesale lender. Example: Opportune; Wizard

Mortgage manager: Much the same as an originator however is more hands-on in the loan’s management – from credit assessment to monitoring of loan repayments, rate adjustments and other administration. Example: Australian First Mortgage; Better Mortgage Management

Non-conforming lender: Can be any of the above however focuses on the sub-prime market. Example: Liberty Financial; Pepper Home Loans

For the sake of simplicity, Mortgage Business will in future refer to originators and mortgage managers as originators

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STAND AND DELIVER

Correctly time your introduction of a non-bank mortgage and you’ll increase your success rate

Introducing a lender who your client has not heard of – or they’ve heard bad things about – can be a challenge for even the most experienced broker.

Considering the negative reception non-bank lenders have received over the past 12 months it’s easy to see why many brokers have opted for the easy path of directing customers to banks – tried and tested Australian institutions that have stood the test of time.

But the non-bank sector has a lot to offer and brokers will need to start thinking again about how – and when – they introduce non-bank products into the mix.

Australian First Mortgage’s Michael Maiorano says one of the best times is when the question of turnaround times comes up.

“If your client needs the loan quickly, we could have it approved within 10 to 12 days while it might take two to three weeks with one of the banks,” he says.

Martin Rodgers of NSW Mortgage Brokers says it’s very straightforward:

“I don’t think that there is any real secret. If a broker understands the complexities and is versed in the differences between bank and non-bank lenders, and then able to communicate that effectively with clients, there shouldn’t be any difference.”

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BEST FOOT FORWARD

What is the non-bank sector’s value proposition? In the face of borrower uncertainty and confusion, brokers need to know how to handle the tricky questions

Why choose a non-bank over a bank product?

“Quick turnaround and personalised service, particularly now as bank turnaround times are suffering.” Michael Maiorano, Australian First Mortgage

“One application provides clients access to multiple funding lines, allowing them to be migrated to the product that best suits their circumstances.” Mick Conyngham, Mortgage Ezy

“With a mortgage manager or mortgage originator, you’re more than just a number. You receive a more personalised after sales service as the lender can act on the client’s questions, queries and issues in a timelier manner.” Paul Ryan, Opportune Home Loans

What are the common objections brokers face from clients when recommending a non-bank product and how are these objections best overcome?

“Brand recognition has to be a major issue – some people may not recognise a non-bank’s [mortgage originator’s] name. This is usually dealt with by outlining who the provider of the wholesale funds actually is. For example, Mortgage Ezy is a conduit to some of the largest banks in the world such as ING, which does not have a retail presence.” Mick Conyngham, Mortgage Ezy

“Whether non-banks are safe is always an issue that’s raised. The point to reiterate here is that we are the middlemen, it won’t matter if we go bust... the funder would simply appoint someone else to manage the loan.” Michael Maiorano, Australian First Mortgage

“An issue we’ve identified as quite common is whether a mortgage manager or originator will pass on rate reductions or increases consistent with everyone else. This [issue] has created tension. Many believe that non-banks’ rates have moved higher than the banks when rates were moving upwards or not as much as the banks when rates were in decline – in many cases this is not necessarily correct.” Paul Ryan, Opportune Home Loans

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SOLID GROUND

Mortgage originators continue to offer a viable alternative to bank products

While there has been a wholesale shift towards the perceived security of bank products, the result of which has been a significant drop in non-bank market share, many brokers still see the benefits in directing business to mortgage originators.

Indeed, as liquidity improves, the mortgage origination sector offers an appealing prospect for brokers.

Martin Rodgers of NSW Mortgage Brokers says the non-bank sector is fundamental to his ability to do his job well.

“My job is to do what is best for my clients, which means quality products, competitive rates and equally as important, quality customer service – without all three I may as well give the game up,” he says.

“Given the adversity within mainstream banking at the moment I can comfortably say that non-bank lenders don’t just have quality products and competitive rates, but they far exceed my expectations when it comes to customer service.”

Rob Diodata, a broker with Mortgage and Finance Professionals, says he does not hesitate to recommend a non-bank product if it suits his client’s needs.

Mr Diodato says he’s yet to encounter a borrower who objects to non-bank products and non-bank mortgages account for around 30 per cent of all business he writes.

“I think they’ve really become part of the landscape over the past few years and everyone’s very accepting of them now. If you don’t have any non-bank lenders on your panel then you’re not offering your clients a full range of products.”

Martin Rodgers has written non-bank products for over 10 years, and as long as they remain competitive, will continue to do so.

“Educating people and giving them as much information as they need so they can make educated decisions will see people continue to go towards those offering cost effective alternatives with superior service – and that means the non-bank lenders as much as the majors,” he says.

Mr Rodgers believes that the financial crisis has “affected in no way whatsoever” his ability to offer non-bank loans and has some sound advice for brokers who aren’t convinced of their benefits: get educated.

“As much as holistically understanding the policy and product side of things in comparison to the majors, it is up to the brokers to take advice from those with experience. I would be opposed to risking any of my clients with someone I know very little about – homework is a must.”