Specialist lending: Say 'yes' more often and reap the benefits

The broker proposition is built around choices, opportunities, market knowledge and solutions – all of which are essential to the specialist lending market. So why aren’t more brokers catering to these borrowers?

Some specialist borrowers may already know they are in strife and be aware that their current financial situation could act as a temporary roadblock to their hope of securing a new mortgage.

Others, however, may be surprised to hear they have fallen outside the traditional lending criteria of mainstream banks. Upon being declined or told to ‘wait until things improve’, these borrowers are likely to feel shocked, disappointed and helpless.

Given how strongly the broker proposition is linked to helping people secure their dream homes, catering to people of various financial backgrounds and finding solutions where the banks can’t – or won’t – it is surprising that more brokers aren’t active in the specialist lending market.

RESIMAC’s chief operating officer, Allan Savins, says brokers need not shy away from these types of loans.

According to Mr Savins, some brokers may be sticking to traditional residential mortgages because they mistakenly believe specialist loans are non-compliant with the National Consumer Credit Protection Act (NCCP), or because they predict the loans will inordinately add to their workload.

Mr Savins says many of these misconceptions are gradually being dispelled, but brokers need to focus on the potential of specialist loans to find solutions.

FINDING A SOLUTION

Brokers are solutions providers, dream fulfillers, problem solvers. Even though they can’t necessarily help everyone, there’s no reason why these job descriptions can’t be applied to specialist borrowers.

“Offering specialist products is important for brokers because it enables them to offer a wider shelf of solutions,” says Mr Savins. “It can also expand a broker’s appeal and help them transition from being a transaction-based practitioner who concentrates on a particular segment to someone who is more solutions based.”

Mr Savins says that brokers are well placed to integrate specialist solutions into their existing offering and don’t necessarily need to focus on the specialist market in order to find success with these borrowers.

“There will be groups that only focus on specialist but by and large, we are an adjunct to the prime process,” he says.

“As you go through the prime process with a client – through the discovery of making your enquiries – you might suddenly realise the borrower can’t fit. Instead of turning that client away, specialist lending is about being aware there are solutions available and that you may still be able to sell a loan to this particular client.”

Indeed, this is how Geoff Abbott, director of Chardon & Abbott Home Loans, became involved in the specialist lending sector.

“I did all the normal loans for a while, but realised there was a space there for specialist lending,” he says. “People’s circumstances change ... You can help people by putting them into these non-conforming, or specialist, lending solutions.”

Mr Abbott says finding a solution for a specialist borrower can actually help other aspects of their lives turn around as well – a rewarding experience for both broker and borrower.

“A lot of marriage breakdowns happen because people get themselves into financial strife,” he says. “If we can guide them through that, reduce their financial difficulties and stress and help them find an appropriate solution, then other aspects of their life might pick up as well.”

SPECIALIST BORROWERS

All of this fits into the notion of brokers being solutions providers. But who exactly should brokers be providing solutions for? Who do brokers need to start saying ‘yes’ to in order to successfully tap into this market?

Mr Savins says that it’s difficult to generalise the specialist market, but some of the people who fall into this category may surprise brokers.

According to Mr Savins, specialist lending isn’t just about credit defaults and borrowers with an adverse financial history.

“There is no defined characteristic that pigeonholes every specialist borrower together,” he says.

“Between 30 and 35 per cent of the business that RESIMAC writes is full doc PAYG – which surprises people.

Also, 70 per cent of our business is classified what we term as ‘clear credit’. So people say ‘Why would those borrowers come to you? Why would a full doc, PAYG, clear credit borrower come to specialist lending?’

“The answer is quite simple. We are more flexible than the mainstream lenders when it comes to our employment requirements. We’re more flexible with our parameters in terms of length of employment, whether you’re full time, contract and so on.

“I think we’re potentially more flexible in terms of the income we will recognise to service a loan. So, we actually write a fair quantum of business as full docs. It’s about providing a solution.”

Mr Savins says some borrowers who fall into the specialist category may have an impeccable credit history, a generous amount of savings and a stable job history. Individual circumstances, however, can force them, at least temporarily, into the specialist category.

“We see a number of borrowers who have not been in the country long, so they are new immigrants who don’t have a track record in Australia,” Mr Savins continues. “They’re looking to acquire property but they might have no track record and no savings, or their savings might be coming from overseas.”

Other borrowers who need specialist solutions may have an adverse credit history. However, Mr Savins says, in many cases, these events simply form a part of life and can’t be avoided.

“We have looked at adverse credit borrowers,” he says. “We classify those as a ‘credit event’. Something has happened. Something has gone wrong. They may have had multiple ‘events’. One event such as a small business failure, could lead to another event such as divorce.

“Unfortunately, I’ve heard that story too often over the years. The stress on the family from the small business failure leads to a divorce.”

Homeloans’ general manager sales, Greg Mitchell, says all specialist borrowers shouldn’t be lumped into one category and brokers and lenders alike need to be examining individual situations.

“I really prefer the term ‘specialist’ to ‘non-conforming’ because I think ‘non-conforming’ can conjure incorrect images in people’s minds,” he says. “Specialist loans are particularly good where business owners, for whatever reason, have gone into some form of bankruptcy but now have good PAYG employment and have good equity in their home.

“Unfortunately, they often get tarred with this brush because they’ve had previous defaults or previous financial difficulties, but there are legitimate reasons why that sort of thing happens.

“Marriage breakups, tax debts and all those sorts of things can force people into the specialist category. A lot of lenders won’t entertain the payment of a tax debt.”

Mr Mitchell says brokers would do well to get involved where many lenders have dropped the ball.
“It’s good, sticky, tangible business and there is some very, very good business out there,” he says.

SAYING 'YES' TO BUSINESS

Brokers who effectively target specialist borrowers will find that their business and bottom line benefit – but how can you find these clients?

RESIMAC’S Allan Savins estimates that the specialist lending market constitutes about five per cent of the overall mortgage market – a number which, at first glance, may not seem overly significant.

If brokers decide they all want a slice of the specialist pie, will there be enough to go round?

Mr Savins says that instead of thinking about the numbers, brokers need to consider clients they are turning away, contemplate more solutions and think about how many people could have been specialist borrowers if they had said ‘yes’.

“Brokers need to look at the opportunity costs,” he says. “Every person they say ‘no’ to is a potential lead for a specialist lending solution.

“I think it’s important for good brokers to look at diversifying their own product offering and not concentrate on a particular segment. So by having a wider shopfront of solutions, it means brokers can potentially say ‘yes’ more often.”

TARGETING SPECIALIST BORROWERS

Targeting specialist borrowers, then, doesn’t have to be about revolutionising your marketing strategy and overhauling how you source new leads.

Instead, Homeloans’ general manager sales, Greg Mitchell, says it’s about looking at your existing files and clients more closely.

“Most brokers would probably have files sitting on the floor or on the corner of their desk which might have had some extra issues,” he says. “I’ll often tell my BDMs to go into brokers’ offices and say, ‘Give me the files you have and let me go through them so that we can ascertain whether it’s something we can solve within the specialist field’.”

Mr Mitchell says there is no doubt the deals are out there for brokers to pick up.

“I think they’re already there – it’s just asking the questions,” he says. “If someone has a previous default or anything like that, the deal doesn’t have to be dead. If the client gives you a legitimate explanation ... then there is certainly a place for those deals. You can find a home for that debt, which is what you want.”

Mr Savins says the term ‘specialist borrower’ applies to a broad range of loan applicants and brokers shouldn’t limit themselves to a particular borrower segment.

“The term ‘specialist’ is broad,” he says. “Everyone’s circumstances are different. Brokers need to have an awareness of the solutions that are out there. On top of everything else, I think it gives brokers a more compelling offer to clients.”

The only difference in targeting, or catering to, specialist borrowers is understanding the borrower’s story, he says.

“It really is about understanding why they’re coming to you. We’ve got a saying here: ‘Serviceability, security and story’.

“So, serviceability and security is covered off in every loan that we do and making those reasonable enquiries that NCCP requires us to make.

“The difference is the ‘story’ – understanding why they can’t fit traditional lending requirements.”

Brokers then check the story against the facts and decide whether it’s a specialist lending opportunity.

“You need to overlay their story with the facts. If someone explains that they lost their job and were searching for work for six months, but now they’re back on their feet and are meeting their commitments, and you can see that the story checks out, then you can secure them a specialist loan.

“That’s completely different to someone who has been in their job for two months but hasn’t made any of their mortgage repayments. It has to be legitimate and it has to make sense.

“The simple thing I say to myself is: ‘Would I lend this person the money myself?’ That’s always a good acid test at the end of the day. Can they prove they are over the event?”

Mr Mitchell says that if you ‘target’ specialist borrowers by simply opening your mind and saying ‘yes’ more often, more people will be happy with the results.

“If you find a specialist solution for a client, the broker’s happy because they get the deal off their desk, the client’s happy because they find a home for their debt and we, as the lender, are happy, because we get a good quality loan on our book,” he says.

BUSINESS BENEFITS

Mr Savins says that having a specialist borrower on your books has wider benefits than simply giving you an extra client.

“It obviously provides incremental business for the broker from a revenue perspective,” he says, “but you also have the opportunity to retain that borrower for life.

“The borrower is likely to be more loyal because you’ve helped them out of their circumstances. Specialist borrowing gives you that longevity of relationships.”

The benefits, according to Mr Savins, don’t stop there. Brokers are likely to get referrals from specialist borrowers and will be able to cross sell to them in the future or convert them to a prime loan.

“It comes back to understanding the cost of acquisition of clients. If you limit yourself to a particular segment of borrower class, then there will be leads that you can’t service because of a borrower’s profile,” he says.

“It’s about maximising the return on your investment in terms of your marketing strategies – which every broker is looking to execute. Brokers need to build a brand for themselves as being solutions providers – not just someone who secures home loans for a particular segment.”

Geoff Abbott, director of Chardon & Abbott Home Loans, agrees and says specialist clients better understand and appreciate the broker proposition.

“You will find that specialist clients will become loyal,” Mr Abbott says. “They’re also a good referral source because they see that you have gone above and beyond to find them a solution.

“Their circumstances are more difficult. You’re getting them out of a difficult situation and people appreciate that.”

Ausco Trading’s Ray Ethell says having specialist borrowers on your database enables you to weather some financial storms.

“We’ve seen an increase in this segment of the market and in our business, while the reverse is happening in the prime area of the market,” he says.

“As credit tightens, prime lenders will predominately be chasing the prime area of the market, which will squeeze many more borrowers into the specialist segment of the market. This will certainly open up opportunities for some brokers to get involved in this area of the market.”

Once you have the client, says Mr Ethell, the opportunities continue.

“Another benefit for any broker in the non-conforming area is extra income and the opportunity to refinance the client into a prime loan after credit issues are cleared – or in the case of low doc, when financials can be provided. This has the added benefit of a second upfront commission.”

Troy McLachlan, general manager of Future Financial, says that in addition to the strong referral relationships, loyal customers and an expanded database that specialist lending offers brokers, there are other factors brokers may not have considered.

“We experience larger loan sizes on average with specialist loans,” says Mr McLachlan. “Our average loan size is generally $50,000 to $60,000 higher than the industry average. When you look across industry statistics, it normally sits around $300,000. We’re seeing $355,000 and higher as our average for specialist. Self-employed people often take out larger loans.”

Homeloans’ Mr Mitchell adds that with so many benefits, more brokers should get involved in the sector.

“There is good quality, sticky business out there and it’s a fantastic way to build up a long-term relationship with a customer,” he says. “If you help them get out of a spot where they felt they had nowhere to go, they will appreciate it. You’re giving them the opportunity to resolve the problems they’ve been going through.”

Q&A SPECIALIST BORROWERS

RESIMAC’s chief operating officer, Allan Savins, tells The Adviser that more borrowers than you may initially expect fall into the ‘specialist’ category and it’s the broker’s job to help them get back on track

WHAT PERCENTAGE OF THE MARKET COULD USE A SPECIALIST PRODUCT?

I believe it would be at least five per cent of the mortgage market – especially if you consider the breadth of the specialist solutions available. We have solutions for self-employed borrowers who don’t have the full financials, we have PAYG borrowers who don’t necessarily satisfy the employment terms of the major banks and mortgage insurers, we have clients with adverse credit who have experienced some event in their previous life and are now back on track and looking to put themselves into a better solution – the quantum of potential opportunities is quite significant.

WHAT DOES THE TYPICAL SPECIALIST BORROWER LOOK LIKE?

There is no defined characteristic that pigeonholes every specialist borrower together.

Between 30 and 35 per cent of the business that RESIMAC writes is full doc PAYG – which surprises people. Also, 70 per cent of our business is classed what we term as ‘clear credit’. So people say ‘Why would those borrowers come to you? Why would a full doc, PAYG, clear credit borrower come to specialist lending?’

The answer is quite simple: We are more flexible than the mainstream lenders when it comes to our employment requirements.

I think we’re also potentially more flexible in terms of the income we will recognise to service a loan. So we actually write a fair quantum of business as full docs. It’s about providing a solution.

If someone has been in their job for one month, and the normal requirement might be three or six months, then it’s an opportunity cost for the broker. Should you let that lead go and say ‘Come back in six months when you qualify’ – or should you capture that now?

We also see a number of borrowers who have not been in the country long. They’re looking to acquire property but they might have no track record and no savings, or their savings might be coming from overseas. We’re very comfortable with that type of profile.

We have looked at adverse credit borrowers. We classify those as a ‘credit event’. Something has happened. Something has gone wrong. They may have had multiple ‘events’. One event such as a small business failure, could lead to another event such as divorce.

Brokers and specialist lenders need to understand what has caused the event, and if they are over it. And more importantly, will the transaction get them over it and put them on the right foot?

FOR BROKERS, ARE THERE ANY DISADVANTAGES TO CATERING TO THIS MARKET SEGMENT?

I don’t think so. When you think about the opportunities it presents in terms of incremental business, an expanded database and so on – how can there be disadvantages?

I think a number of misconceptions have developed since the evolution of the global financial crisis (GFC) and the National Consumer Credit Protection Act (NCCP). There is no doubt that the low doc space, for example, has been tarnished with unsavoury instances that have played out in the media. If you overlay that with the backdrop of NCCP, I understand there would be a misconception out there that these loans are too hard and too difficult.

But a broker just has to understand what’s required and how to sell it. Basically, it’s the same as selling a prime loan. You still have to make reasonable enquiries in relation to the borrower’s requirements and objectives, reasonable enquiries into their financial situation and reasonable enquiries to verify those.

It’s exactly the same as a prime loan. The only difference is in understanding the story: Why are they coming to the specialist sector?

Is it because they haven’t been in their job long enough? Is it because they went through a divorce and their solicitor said ‘Don’t pay for six months’, and they went into arrears in their mortgage?

We just have to understand the story. So really, it’s just part of your standard discovery questions that you’ll ask a client. Apart from that, there’s really no difference, so I can’t see why there would be any disadvantages in writing it.

MYTH VERSUS REALITY

Brokers and borrowers alike have been subject to misinformation regarding specialist loans. So what’s the reality of the situation? What do brokers need to know before breaking into this area?

Brokers are renowned for their market knowledge and ability to source information and solutions.

It is still possible, however, for misinformation to creep into the market and for brokers to feel wary of certain market segments.

Ausco Trading’s Ray Ethell says previous complexities in the market made a lot of aspects of specialist borrowing confusing for brokers and borrowers.

“Lenders in the past created confusion with different levels and matrixes for each scenario,” he says. “This has now changed dramatically with simplified quoting and experienced BDMs who will help at each step.”

RESIMAC’s Allan Savins says the specialist market and brokers have come a long way – but there are still some presumptions that need clarification.

MYTH 1: SPECIALIST LOANS AREN’T COMPLIANT

“There’s a lot of misinformation out there about interest rates,” says Mr Savins. “People think that under NCCP [National Consumer Credit Protection Act], a loan can be deemed ‘unsuitable’ because of an interest rate.

“Nowhere in the legislation does it talk about interest rates making a loan unsuitable. It’s scalable.

“Of course, if someone can qualify for a prime loan and is instead sold a specialist loan at a higher rate – well that’s unsuitable. Also, if it’s a loan that the borrower can’t really afford and it will trigger hardship, then it’s unsuitable,” he explains.

“But if it’s a legitimate loan and they genuinely can’t get the loan from other providers – that makes it a suitable loan.”

MYTH 2: ALL SPECIALIST BORROWERS ARE CREDIT IMPAIRED

There is a prevailing idea that all specialist borrowers are credit impaired. But as we’ve already discovered, the term ‘specialist’ is far more inclusive than ‘those with an adverse credit history’.

“As well as thinking specialist loans are non-compliant under NCCP, some brokers think it’s too difficult and is centred around catering only for customers with bad credit,” says Future Financial’s general manager, Troy McLachlan.

“But there’s a huge part of specialist lending products targeted to near-prime customers – loans that banks were doing three or four years ago. Specialist lenders are just picking up the slack to deal with current market conditions and traditional lenders’ change in appetite.”

Homeloans’ general manager sales, Greg Mitchell, agrees and says all borrowers in any market segment shouldn’t be lumped together with negative connotations.

“There are obviously borrowers out there who have had credit issues in the past, but I think sometimes specialist loans get bundled together and it’s far more far-reaching than that,” he says.

“It’s simply not the case that all specialist borrowers are credit impaired.”

MYTH 3: SPECIALIST LOANS ARE TOO DIFFICULT TO WRITE

Mr Ethell says it’s also a myth that specialist loans are too difficult, or too time consuming, to worry about.

“The main difference from prime lending is that the broker needs to be in a position to provide the lender with as much information about the potential borrower as possible, to maximise the chances of settlement,” he says.

Mr McLachlan says everything that specialist lending requires of brokers is simply part and parcel of their existing job description.

“Specialist loans aren’t ‘harder’ to write than normal loans,” he says. “There isn’t necessarily extra work. You still make your reasonable enquiries and go through the process. There doesn’t need to be extra work; it’s just about using your existing skills to find a solution.”

Geoff Abbott, director of Chardon & Abbott Home Loans, says brokers simply need to use their sales skills and ‘sell’ the specialist loan to the financier.

“You’ve got to explain their current situation and how they got there,” he says. “Obviously, if we can show the financier that by doing the transaction, the lender and the borrower will benefit, then it’s worthwhile.

“You’re aiming to settle, so it’s just about doing your job as effectively as possible.”

HOW TO SELL SPECIALIST LOANS

Most brokers are already excellent salespeople and have strong relationships with their clients, but do they need extra skills to ‘sell’ specialist loans to clients?

Borrowers are looking for solutions and brokers are uniquely placed to provide them. Recent discussions around mortgages in the mainstream media have, however, focused on rates and discounts.

While all borrowers would love to save as much money as possible, particularly when dealing with their largest asset, brokers need to help them expand their focus to do so.

But when it comes to specialist loans, too many brokers are making the decision for clients, according to RESIMAC’s Allan Savins.

“I think too many times, brokers make the borrower’s decision for them,” Mr Savins says.

“Instead, it’s an opportunity for the broker to put the borrower into a loan, set an expectation and then refinance them back into a prime loan when it’s appropriate.

“That’s far better than letting that lead go today, because potentially someone else may be able to service that lead.

“You want to be able to satisfy the borrower’s needs at that point because there’s no guarantee they’ll come back to you. They may find someone else who does have access to a specialist lender and can get that loan set for them.”

REPAYMENTS, NOT RATES

Brokers should get their customers to focus on repayments rather than rates, says Mr Savins, and ensure the borrower understands how a loan will fit into their existing budget.

“It’s about understanding the incremental difference between what they’d be paying in a prime loan and what they will pay for a specialist loan. You need to give them that opportunity and let them make the decision themselves,” he says.

Rates should still be mentioned but they shouldn’t be the focus. Instead, brokers should frame the loan as a solution and show borrowers how they can use specialist loans as a stepping stone back to a prime loan.

According to Mr Savins, once borrowers understand there is the potential to obtain finance and they see the opportunity costs of not getting their dream home right now, they are often much more receptive to specialist loans.

SELLING THE STORY

The other essential component of selling specialist loans – and indeed, getting them across the line – is the story.

“Basically, it’s the same as selling a prime loan,” says Mr Savins. “You still have to make reasonable enquiries in relation to the borrower’s requirements and objectives, reasonable enquiries into their financial situation, and reasonable enquiries to verify those.

“It’s exactly the same as a prime loan. The only difference is understanding the story. Why are they coming to the specialist sector?”

Homeloans’ Greg Mitchell agrees, adding that brokers also need to reconsider the specialist loan narrative and check that what they believe aligns with the truth.

“Brokers need to remove themselves from this idea that all specialist borrowers are the same and break away

from the mentality that there aren’t enough lenders out there,” he says.
“They need to get to know their borrower, their customer – and they’re already doing that on a day-to-day basis. Brokers just need to understand the customer’s requirements and go from there.

“The lenders out there don’t all have massively high interest rates and they won’t all say ‘no’.”

SAYING ‘YES’, SAYING ‘NO’

Despite this, Ausco Trading’s Ray Ethell says brokers do need to know where to draw the line. Specialist lending isn’t about saying ‘yes’ to everybody.

Mr Ethell says there are three steps to writing quality specialist business for credit-impaired borrowers.

First, he says, you get the full story from the borrower: ‘What happened in their life to create credit problems and have they resolved these issues now?’

Next, he suggests brokers obtain a credit report for the client, so they can make an accurate assessment of the client’s position for themselves – “Don’t just rely on the borrower’s version of events,” he says.

Finally, the hardest step can be making the call. “You do need to be prepared to say ‘no’ if you have any doubts,” Mr Ethell says.