Cracking the market

And while brokers can’t be blamed for writing predominantly vanilla loans, there are plenty of opportunities they are missing by not embracing more areas of the lending market.

When a potential client comes in with defaults, bankruptcies, court writs, judgements or just plain bad credit, a competent broker will know a lender won’t touch them with a 10-foot pole.

According to senior broker at Home Loan Experts Hank Hong, this is when a majority of brokers will end the relationship.

“Eighty per cent of the people in this category are not bad people,” he explains. “ they've just gone through self-employed businesses which have gone bad, gone through breakups where one or more sides are refusing to pay the debt, or they’ve been involved in a bad scheme where they’ve been defaulted themselves.”

According to Mr Hong, there is actually a large volume of people who have racked up defaults through self-employed ventures. “Since day one I’ve targeted these borrowers,” says Mr Hong.

“There are brokers out there who, when they see the initial credit report, they will just throw it in the ‘too hard basket’.  They can’t sell the advantages of it and they let the client go.

“This is when a lot of clients come to me.  They tell me they’ve spoken to two or three brokers who haven’t helped, but I can help them.”

While going through a specialist lender – like Pepper – costs more, when getting a home is the priority, clients are often grateful for the chance.

A broker is not expected to uproot their business and turn it into a brokerage that targets non-conformers – although one Western Australian broker has proven that specialist lending can be integrated into an existing business model.

“I don’t really target them, I just service the clients we have,” says Tony Willis, 14-year veteran and principal of Mortgage Choice Willerton.

“At Mortgage Choice, we get a flat fee so we really look at it from a solution point of view. We only put them with a specialist lender if that’s where they need to go and if it’s the right solution that fits that person.”

Against the tide

Given the significant number of non-conforming borrowers out there, it’s a wonder brokers aren’t clambering over one another to win their loyalty. So what’s stopping them?

According to Mr Willis, many are worried about breaching NCCP regulations.

“The thing that a lot of brokers don’t seem to get is that it’s not avoiding or skipping being compliant – [writing specialist loans] fully meets the NCCP rules,” he says.

Recommending a loan with a high interest rate might be perceived as risky since it could be considered unsuitable, although Mr Willis believes it is more risky not to recommend a specialist lender.

“What concerns me is that in a few years’ time, after the client’s had to sell their home because they hadn’t been offered a non-conforming loan – which is on the panel of the aggregator – they’re going to say, ‘Well, why wasn’t this offered?’”

Some products within the specialist lending space are non-coded and work outside the NCCP which, according to Mr Hong, allows brokers to be flexible with their client.

“One example is [that] the low-doc products some lenders have require four months’ worth of BAS statements, they want to see two years’ tax returns etcetera,” he says. “But they might be a seasonal worker or they may be a subcontractor where only two BASs are strong. Pepper will take them on those two BASs and say, ‘Yes, that’s their income’.”

When it comes to lenders, however, it is a lack of education and knowledge of the sector that has driven away most interested parties.

“They don’t know the specialist lenders; they’re worried that their processes are going to be different,” says Mr Hong.

“We need to feel more comfortable with nonconformers. There’s repeat business with these clients because you’re getting them out in a couple of years’ time. You’ve done them a favour by getting them into a house.

“Brokers are used to dealing with everyday mums and dads. They don’t know how to position the clients to understand that this is a stepping stone, not the  final destination.”

Making your case 

Your client has just learnt they are ineligible for that prime mortgage product.

With specialist lenders now the only option available, some brokers prefer to cut their losses rather than try to sell them a rate that is almost double what the client may have been expecting.

“It’s an automatic reaction for a broker,” says Mr Willis. “If they show their client something with a much higher interest rate, they think it’s just not going to work.

“Maybe the client doesn’t want it, but I believe that if it’s on your panel and it’s a last solution, you should at least offer it to your clients from a compliance point of view. Let the clients make the decision about whether or not they believe that’s suitable.”

The beauty of a nonconforming loan, however, is that it’s analogous to a bridging loan rather than a ‘proper’ mortgage – a trial run to see if the borrower is capable of managing their finances.

Your client won’t be paying the higher rate forever – even a bankruptcy doesn’t last on a credit report. Brokers need to startseeing the nonconforming loan as a means to an end.

“If you explain this, along with showing them that property prices are rising fast, you can show them that it’s worth the small extra cost now rather than saving an extra $20,000 in four or five years’ time,” Mr Hong said.

Director of sales and distribution at Pepper, Mario Rehayem, has put together a  five-point plan to help brokers sell a nonconforming loan.

“We went out and asked 120 to 200 brokers about what struggles they have offering a specialist loan,” he explains. “They all said it’s great to use but find it hard to actually speak to a client when the rate was initially 4.99 but now the rate is 6.49.”

Pepper surveyed borrowers and found that they too felt uncomfortable because brokers had skirted around the reasons why they had to pay the higher rate.

“The first step is that you have to get acceptance from the customer by explaining the reasons as to why they are no longer eligible for the actual prime loan. Once you’ve done that, you need to actually offer the alternative,” Mr Rehayem says.

“You need to actually marry up why they’re going to a brand like Pepper – who they maybe haven’t heard of before – so you need to associate the brand with the reasons as to why [they could use] this particular lender.

“If it’s for credit score reasons, then tell them that you’re going to a lender like Pepper because they don’t have a credit scoring model.

“The whole process is just breaking it down and talking their language,” he says.

Working within NCCP

While caution and treading carefully is always advised when it comes to non-conforming loans, many brokers believe that rather than risk the attention of ASIC it is better simply not to touch them.

According to partner at Gadens Lawyers and NCCP expert Jon Denovan, however, so long as brokers ask the following three questions, non-conforming loans can be not only acceptable but encouraged.

Is the loan unsuitable?

There are no grounds for finding a loan unsuitable just because the interest rate is higher than other loans, so long as the borrower can repay without substantial hardship.

Will I be acting ‘honestly and fairly’ in arranging the loan?

Brokers won’t be acting honestly and fairly if the interest rate is substantially higher than the broker could arrange from other sources. BUT there is no need to compare the interest rate to prime rates as the deal is not prime.

What is my contract with the customer?

Did you promise to find the cheapest loan, or to find one or two ‘fair’ loans that the borrower could choose from?