While overall economic conditions remain bleak the consensus is that the broking sector will continue to grow and evolve over the period ahead on the back of first home owner business and the re-emergence of investors, mortgage busniess’ quarterly roundtable reveals.
PANEL
Joe Sirianni (JS)
Smartline
Steven Heavey (SH)
St George
Alan Savins (AS)
Resimac
Melos Sulicich (MS)
Westpac
Patrick Tuttle (PT)
Pepper Homeloans
John Kolenda (JK)
Loan Market Group
Bank servicing levels and service quality have been a bone of contention among brokers in recent months; how do you expect this to play out in the months ahead?
JK: Hopefully the lenders are working to further address [service] bottlenecks and work with the brokers to provide a far better experience – for everyone’s benefit – as ultimately we are there to provide a great customer experience in a highly complicated transaction. Loan Market Group has been working with individual lenders to ensure that there is a process in place for the escalation and fast-tracking of urgent loan applications. This has helped to ease the biggest problem brokers had with processing times, allowing them to properly service clients who require urgent assistance, such as those intending to bid at auction.
SH: Our recent campaign – which ended on 13 March – was highly successful with brokers by providing customers a very competitive offer of 4.39 per cent pa for one year. This coupled with the current FHOG saw our daily lodgements reach their highest levels yet. To cope with this demand St George [had] a strong recruitment drive to increase staff in our loan processing area. Most recently we recruited 18 [staff members] who, while they need some time to understand our full policy and processes, will assist us to gain ground over coming weeks. Further, in order to maintain service levels for brokers we have segmented our database to apply faster turnaround times to those that lodge with us most often.
JS: My view is that the extension of the FHOG will ease some of this pressure. To me it is a temporary issue, a bubble; lenders are doing their best to address the issue and put more resources in place. We’ll return to normal levels eventually. It is disappointing and it’s hard work, but if this is the worst result of the credit crisis at our end I think we’re doing pretty well. Look at the UK for instance! Australian banks are in a far stronger position.
What are your expectations for the year ahead for the domestic economic outlook and interest rates?
JS: I am quite bullish about the period ahead, when it comes to the housing market anyway. We are almost at the bottom of the cycle; there is potential for the cash rate to fall a little further but we are now seeing record low interest rates, rising rental yields, falling median house prices and positive cash flow benefits. In my opinion these conditions represent a once in a lifetime opportunity for investors to return to the market. The first home buyers are already there. Activity won’t boom but it will be steady. All of the ingredients are there for an upswing. Once all the negativity is out of the system I believe we will see a steady recovery.
MS: Domestically speaking, clearly interest rates are on the way down. The Australian economy has softened as indicated through slow-end economic growth, and emphasised through weakened employment figures. However, Australia is still the ‘lucky country’ in the context of other OECD nations like the USA.
SH: The Australian economy will move into a recession this year, most likely in the March quarter. Domestic GDP contracted by 0.5 per cent in the December quarter, with two or more consecutive quarters of negative growth considered to be a “technical recession”. We do not, however, expect this recession to be one as long and drawn out as that seen in the major economies. Indeed, on a similar measurement basis, the contraction in GDP in Australia in the December quarter was much less severe than that seen in the major economies (US: -1.6 per cent; UK: -1.5 per cent; Euro Zone: -1.5 per cent; Japan: -3.2 per cent). A higher unemployment rate would argue for more interest rate cuts by the RBA. The expected low point in Australian interest rates, however, is much higher than that seen in some major economies, where they are very close to zero per cent.
JK: Interest rates will possibly fall to around 2 per cent over the coming months in response to the continuing effect of the current global economic challenges. There is widespread opinion that we haven’t yet reached the bottom of unravelling this financial mess, so look for a short sustained period of no negative news as an indicator of a possible recovery for the economy as a whole.
There has been significant improvement in affordability over the past six months. How do you expect this to impact on lending activity and will it be enough to offset the worsening economic outlook?
MS: So far, improved affordability combined with the [increased] First Home Owner Grant (FHOG) has led to very strong mortgage lending for our bank. Looking forward, clearly key economic factors such as rising unemployment could mean things are likely to get worse before they get better. Nonetheless if you are in a secure job and have been saving it’s hard to think of a better time to be buying residential property.
SH: Our lending activity has increased considerably since October 2008. Improving lending activity would help cushion the overall current domestic economic slowdown. It would not, however, be enough to offset the worsening economic outlook. The synchronised downturn in the world economy means Australia cannot remain immune to developments in the external economy.
PT: For as long as the FHOG remains in place, and there’s a strong possibility it’s going to be extended, I think we’ll see pretty strong lending activity for purchases of properties up to the $500,000-$550,000 mark. Whilst I support the government stimulus, knowing Australians – and the way they approach their mortgage – they’ll probably use some of that to get ahead on their mortgage and keep their head above water in case there is any shock during the year. Australians are inherently conservative so I don’t think that will equate to significant lending activity.
JK: The strong demand from first home buyers and the expected return to the market by property investors will underpin a strong performance in lending over the coming year. This will support an economy facing further deterioration over the coming months and help soften the local impacts of the global crisis.
Last year we saw most lenders announce significant commission restructuring. Have we seen the last of these changes or will broker commissions continue to be revised in 2009?
JK: Shortly after the implications of the global crisis hit bottom line profitability, many businesses began reviewing their costs and banks were no different. When you see your funding costs go up and become difficult to access – after you have experienced historical competition pressure that saw your margins contract and your market share reduce – then you come to appreciate the position the banks faced when deciding to review commissions paid to brokers. Clearly they understand that broking is here to stay and have carefully considered all the variables before introducing reduced commissions – however unwelcome they may have been to the broking [sector].
MS: Commissions are a function of economic reality for everyone in the value chain. The reward for performance is likely to be a continuing driver. Commissions therefore are likely to evolve overtime, based on the economic imperatives of mortgage lending.
JS: Last year we saw some very significant changes and I think commissions are sustainable now and there isn’t any reason for further reductions. The biggest issue moving forward will be quality. We’ll definitely see the banks continue to segment on value; it doesn’t make sense to treat all brokers the same and banks will look for brokers with the best quality.
The role of the broker has been the subject of much consideration in recent months; what key themes will we see in terms of the broker value proposition and service offering in 2009?
JS: The role of the broker in 2009 is more important than ever – the market has never been more perplexing for borrowers. There are rate variations, LVR changes... a lot of confusion. The broker customer proposition is enhanced and customers now recognise the value of a broker. Brokers will need to expand on their credit advice and cross sell other financial products such as insurance and credit cards. It will be all about the broker becoming the trusted adviser.
PT: We’ll see a continued trend towards consolidation in the broker / aggregator market. I think that’s because the larger [organisations] provide much more robust systems and bigger buying power [plus] much stronger compliance processes and procedures; it will be inevitable that those larger groups will gain a more dominant position than what they’ve had. I think the days of mum and dad independent broker shops are probably limited.
SH: There are a lot of lenders trying to push brokers down paths they’re not necessarily comfortable with. It’s not something you can do overnight – you need the experience, and be willing to invest in knowledge, staff and infrastructure to make it [diversification] a worthwhile investment. The market certainly hasn’t grown and we are about to go into a recession but there will still be $250 billion worth of home loans written next year, and whether that’s market share from banks or brokers, there’s a great opportunity for brokers if they can define their own destiny – whether it’s fee for service or diversification – as long as they work out where they want to be and how they’re going to get there.
MS: There is no doubt brokers provide a very valuable service to the Australian mortgage customer. The important theme for brokers is to be appropriately rewarded for the value that they provide to their customers. Part of this may have customers paying a fee for service; in addition to this brokers are in an ideal position to introduce or refer other appropriate products such as... mortgage protection to their customers.
AS: Those brokers looking to build their own brand and focus on service, as well as looking to offer post-settlement service to clients, will drive a flight back to the non-bank sector again. I think the days are gone of the borrower just wanting to focus on a simple transaction.
We have seen a tightening in lending criteria lately including a reduction in maximum LVRs and tougher qualification criteria. Do you expect this trend to continue and how will it impact brokers?
AS: Resimac amended its credit policy in May 2008 with an expected deterioration in the economic environment. All that’s since happened in the general market place has given us market parity in particular in terms of LVRs. The first home buyer grant will no longer be a sufficient contribution [to secure a mortgage]. There is no question lenders are looking for greater equity contributions stemming from what we’ve witnessed already in other jurisdictions around the world.
PT: I think it’s a natural response to market conditions. I think ANZ were a leader in terms of lowering the LVR on low doc loans, and now we’re seeing high LVR loans drop back to around the 90 per cent level – where lenders are more comfortable given the softening property market. So I think that’s a continuing trend.
JK: There is no doubt that until the capital market funding costs and overall liquidity comes back to some normality, credit availability will remain tight. There are lessons that need to be learned from a global perspective regarding compliance matters and future imposed regulatory matters that will weigh into addressing how lenders behave in the future.
JS: I find it strange that the banks have reduced LVRs at the bottom of the cycle – they should have done it years ago when demand was at its peak. As the market stabilises I believe we will see LVRs return to previous levels.
SH: In the current economic environment, and with the expectation of increased unemployment and borrower stress, we are reviewing our credit policies and making amendments as appropriate to mitigate areas of emerging risk. We would expect this to continue as the economy worsens and the expected impacts on home loan performance are felt. Whilst this may result in more restrictive lending to certain marginal borrower types and segments, we would not expect the majority of our business to be effected and we are still proactively seeking to write home loan business.
