Look at the trials and tribulations faced by the mortgage broking industry over the last decade. Should we be surprised if the pandemic has had an impact on the most valuable asset your business has, and which you have grown over its life?
The answer: absolutely not.
As a company that has bought, sold, valued, and lent against thousands of trail books, we have eagerly (and anxiously) sat in front-row seats observing how the COVID-19 pandemic has impacted trail book valuations over the past year, and here is some of what we’ve seen:
What climbs with COVID-19 cases? Arrears rates
The economic damage inflicted by statewide lockdowns has led to increased financial stress for many, and resultantly, an uptick in mortgage arrears. According to research from Finder, cited in the MPA in April 2021, nearly one in three home loans is in arrears, meaning around 899,000 mortgages are behind on payments by at least 30 days. Almost one in five mortgages (18 per cent) are in arrears by 30 days or more, 8 per cent by 60 days or more, and 5 per cent are considered “seriously delinquent” as they are behind by 90 days or more.
The mortgage trail books we have valued, since the arrival of COVID-19, contain average arrears rates across Australia, which have risen from 1 per cent (the benchmark used in our trail book valuations), to 1.14 per cent, rising 9 bp in 2Q21 alone. Interestingly, however, the average arrears rate for loans settled via the broker channel remain substantially lower than that reported in the branch channel.
How much trail commission do you earn when a client of yours slips into arrears – even by one day? Zero! Given arrears rates are indicative of trail book loan quality and health, this is something you should watch, both in your own book and when purchasing trail books.
What runs in parallel with a reduction in interest rates? A reduction in run-off rates
When hard times hit we look after those closest to us. As cash rates dropped to a record low of 0.1 per cent in November of 2020, this gave brokers the opportunity to “work their book of existing clients” with attractively lower interest rates.
Many brokers, restricted by lockdowns in networking opportunities and outbound prospecting, have worked harder to retain clients through refinancing. We’ve consequently seen a reduction in run-off rates. Within a valuation, a lower run-off rate implies that the book expects to earn trail for longer, having a positive effect on the trail book’s underlying value.
With crisis comes opportunity
Half of the companies in the Fortune 500 started during a bear market or recession, half. As a mortgage broker, this opportunity has come to you in the form of an increased divide among the brokers in the industry: the pandemic has added more uncertainty, consequently forcing more brokers to reconsider whether they want to retain a place in the industry. Do you increase your activity, hire, buy other books and double down, or do you leave the industry altogether?
With this comes a surge in business consolidation. We have sold a record number of trail books in the past year. In part, this is due to us running dedicated trail book buy-sell programs for two of the nation’s largest aggregators. They realise that their brokers are reaching an inflection point in their careers and want to ensure that their loyal brokers get to exit on the best terms, whilst providing opportunities for the younger ones in their ranks. Yet for every seller, six to seven eager buyers remain. The combination of this demand and lower interest rates (making things more affordable) has seen record prices achieved for trail books. Yesterday’s record is now becoming today’s expectation. Naturally, a rise in demand has triggered multiples to rise to record highs.
If this continues, which we predict it will, we will soon break the three times annualised net trail income ceiling for the highest quality trail books.
COVID-19 has played its part in driving many to make a decision that may have been delayed for years. Perversely, whilst other industries have suffered, your trail book may well be worth more today as a result of COVID-19 than ever before, despite poorer underlying arrears.
Jeff Zulman is the founding Managing Director of TrailBlazer Finance a specialist financial services lender offering business loans, valuations and M&A advice and execution services, specifically tailored for financial intermediaries, principally mortgage brokerage and financial planning firms, and finance brokers.
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