Australia’s mortgage industry is in a state of flux. Higher interest rates, lower loan volumes, compressed margins and a lack of liquidity have driven lenders to bring pricing, products and – to the dismay of many – broker commissions under review. Mortgage Business has brought together a panel of industry experts to discuss these changes and what the industry can expect to see in the coming months.
Australia’s mortgage industry continues to struggle under significant economic pressures. What will be the main challenge for residential mortgage lending in the coming months?
RH: Until the wholesale funding markets free up there will be capacity constraints. Nobody can predict future margins on RMBS so most players are conserving warehouse facilities or putting a hold on origination. Since late last year PLAN Australia has had 20 per cent of its lender panel cease or significantly reduce origination.
MR: As credit markets have tightened and a number of lenders have struggled to maintain their funding capabilities, most aggregators have reduced the number of lenders on their panels rather than expanded them. While this will limit the lenders and products potentially open to brokers, I believe it will essentially reinforce their offering and service proposition to clients since they’ll have greater confidence in the products they recommend. They’ll be funded by established, robust lenders with proven ability to sustain funding during fluctuating market cycles.
The concentration of lending that has materialised since the end of Q407 towards the main banks at the end of the day is probably not going to be a very good outcome for the consumer.
PC: I think from a broker’s point of view [there will] be a continued focus on finding the best solution for the customer and to be able to offer [a full range of] products without focusing on any market environment influences like commission structures or downturns. We need to focus on the client: what’s the best solution for them and the relationship that we have with them.
A number of groups and some analysts have predicted an overall slowing in the growth of the mortgage industry. How will your business address this?
KC: The market has slowed. However there are still areas of growth. We’ve been working on our products – as well as other initiatives – in line with current market conditions. We’re also looking at innovative products that allow people access to [loans in] a tighter market – like 100 per cent home loans and first home buyer products.
PC: We have handled and will continue to handle the industry slowdown through offering competitive products. We’ve probably challenged the market with our one per cent discount off the standard variable [rate] of the four majors. We advertise it actively and that’s exactly what the client has decided is the right price for them. The volumes that we write speak louder than anything.
SW: Like many others, we’ve reduced costs, adjusting our size to match the business volumes we are currently writing. We have also instigated a renewed focus on technological improvements. We have become more efficient, with our cost base becoming even more variable, allowing us to match costs against peaking or troughing volumes rather than carrying significant fixed costs.
MR: The market slowdown really doesn’t have a material impact on us because GE Money still has a lot of growing to do. There were still $21 billion in commitments over the last few months and a two to three per cent reduction of that is not material to the total size of the market.
We still intend to grow and haven’t reduced any of our growth projections. If anything, there are more opportunities materialising for GE Money. We see a lot of upsides to what is happening in the market.
RH: PLAN Australia expects to grow its membership numbers as brokers question the ongoing viability of certain aggregation models... and look for a group that can provide the necessary tools, support and revenue diversification opportunities.
PL: We would agree that there will be a slowdown in the mortgage market. In a time of uncertainty consumers turn to quality and trusted consumer brands like Mortgage Choice.
We’ve recently seen some re-thinking around certain mortgage products – particularly in the low doc and high LVR areas. Can further changes be expected?
MR: We were previously seen as a relatively conservative lender. I wouldn’t say that in the future, as market conditions continue to unfold, that will always be the case. We will continue to distribute more products but priced appropriately for risk. In some segments we have seen some products get pulled back because the distributors of the products got ahead of themselves and were distributing products at a price that didn’t reflect the risk that they were taking on.
KC: You might see a re-pricing of risk – for example, around the low doc products – but we have made sure that we’ve got the right level of servicing parameters to support those products and to support the customers going into those products so that we do get quality business.
The term mortgage stress is becoming increasingly common. How much of a problem is it for borrowers?
SW: I think the term has been overused, sensationalised and it’s made good headlines – but that’s something different. When you look at the environmental factors of rising interest rates, rising fuel and food prices, undoubtedly that is going to make it tougher on the household budget. But Australian borrowers have proven over many years to be amongst the most resilient in the world, with most people willing to make (sometimes difficult) adjustments to suit their financial circumstances.
KC: I would question whether it is really mortgage stress or lifestyle stress? CBA has not seen any deterioration in our arrears rate. We are very comfortable that it is at the same level that it was this time last year and in actual fact mortgages in arrears have decreased since the start of 2008.
PC: BankWest has a very strong portfolio and for me and my staff it [mortgage stress] is not something we see as a concern in our business. In the market however with property values either flattening or declining in some states there is a concern that some people may have surpassed their capacity. Hopefully in 12 or 18 months we’ll be at the end of the cycle.
PL: There is no doubt that household budgets are being stretched by the number of interest rate rises we have experienced over time. In the current financial year we have seen the RBA increase rates by one per cent and the majors increase their rates on average by 0.45 per cent.
Cross-selling is now top of mind for many lenders. What challenges will this shift in focus present for brokers?
PC: I think a lot of brokers have accepted the fact that they need to diversify to get the full package. That’s not just about income but because now more than ever they have the opportunity to go down that path with financial planning… to really be a full service end to end. There is a little bit more work to diversify into those cross-sells and the income is a lot less for the work that is there.
MR: I think this is a huge opportunity for brokers. Cross-selling allows brokers to close the gap in income [sustained as a result of] mortgage commission reductions but it also allows the organisation to have a greater revenue income per customer – which makes the channel much more sustainable and everyone can embrace it.
KC: Really we believe it’s about the broker staying focused on their core business and positioning their client for their other financial services needs to cover off their duty of care where LMI is concerned. What we’re asking them to do is to send their clients into the branches to work with the branch staff so that they can do the cross-sell. We are going to pay brokers and pay them quite well for the referral.
RH: Successful brokers are focused on customer service and to the extent that cross-selling other products is consistent with excellent customer service, brokers will adapt comfortably. Sometimes the cross-sell will only be a referral of the customer to someone expert in that particular field. Brokers cannot be all things to all people and generally customers do not want them to be.
Broker commissions have had their first major shake-up. Is the new structure sustainable for the industry as a whole?
MR: Thirteen years ago, back in 1995, some industry commentators didn’t think the commission structure that had been put into place – which was the 0.70 up-front and 0.25 trail – was sustainable at that time… now with margin compression and the increased cost of distribution to a degree [that decision] reflects the strength of brokers.
The mood at the moment looks to be much more aligned to putting brokers and the funding groups on the same side of the table. It’s come down to rewarding people for the service they provide and there are also enhancements for quality type drivers, so it’s becoming a more genuine share of profitability.
SW: Some lenders have made changes to broker commissions... some on the other hand will use this [the current environment] as an opportunity to maintain their competitiveness and to grow their business – which may result in attractive alternatives being available to brokers.
With all the noise about interest rates now being out of step with the RBA, the broker proposition has never been stronger because consumers are looking for independent, informed and expert advice to guide them. Right now, the broker proposition looks like a very strong option in a market full of uncertainty.
KC: We think commission changes are reflective of the economic environment and I would hope that people understand that they are not immune and they need (like any business) to reorganise and reevaluate and change their business so that they can operate profitably in a changed environment. It doesn’t matter if you’re a sole operator, if you have three people working for you, or if you are an aggregator – no business will survive without changing its key dynamics to meet market conditions.
PL: The Mark Twain quote “reports of my death are greatly exaggerated” holds true for the mortgage broking industry. Yes, commissions have been reduced, and yes, some lenders have exited the mortgage or broker market. But the channel will remain viable and profitable going forward. What are most important for both sides are quantity, quality, conversion rates and electronic lodgement – all of which are hallmarks of our model.
RH: It is unfortunate that some lenders have taken the attitude that brokers just need to write one more loan a week to maintain their income without recognising the market is tighter. Not everyone can write another loan when the growth in loan numbers is slowing. Brokers are used by consumers because we provide choice, advice and convenience... these reasons will not disappear and neither will brokers. Sustainability of third-party origination requires all the players to be profitable. The relative shares of that profitability will increase and decrease from time to time.
Which areas of the aggregation industry are we most likely to see consolidation in and what are the main factors driving change?
MR: The reduction in commissions will drive contraction. Those brokers who are writing one or two loans a month will find it hard to build a sustainable income following a 30 per cent drop in revenue and I would estimate that as much as a third of the industry’s 15,000 brokers could disappear – driving consolidation amongst aggregation groups.
PL: There is no doubt that the mortgage broker market will consolidate. Smaller brokers will be hardest hit by the new broker commission regime as some of the banks move towards remunerating the larger broker groups differently to the smaller groups.
The other driver will be [the introduction of] national uniform mortgage broking regulations. The cost of compliance and the investment of time required will be too much for some operators. It is to be expected that the bigger players will get bigger as the smaller players consider their options.
RH: Competition has reduced margins in aggregation over the years as new business models have evolved and groups try to attract brokers and achieve critical mass. Those aggregation groups that are reliant on high volume, because of low margins, are most under threat in the current environment. Good quality niche operators with adequate margins and established groups with strong broker numbers, robust infrastructure and good management will thrive. Those groups in “no man’s land” will have cause to review their business model and/or viability.
KC: I think there is a place in the market for a group of small to medium-sized operators but they – and the lenders who work with them – need to understand and work towards sustainable productivity levels. There is no room for inefficiencies in this industry and for people who think they can throw an application in and hope like hell it settles, well, that’s not how it works.
PC: There will definitely be more consolidation and this will be a test of the models out there and the services they provide. It’s not just about the highest payment; it’s the support and programs offered.
Groups need to think about what they are and what they want to be. Do they want to be a massive numbered platform or a boutique group that offers support in regards to a network for their brokers?
