In a Spectrum Insights article released yesterday, Spectrum Asset Management principal Damien Wood put forward his views that the third-party channel is a significant risk that could spark problems for Australia’s banks.
Mr Wood claimed that while high levels of household debt and interest-only mortgages have received plenty of attention, Australia’s preferred home loan channel is also a cause for concern.
“Spectrum sees another potential source of pain for Australian banks — the heavy reliance on mortgage brokers,” he said.
“Around half of the mortgage market originates from brokers. These agents can be far more financially motivated than bank branch employees to sell mortgages.”
The assertion comes despite a recent review by the financial services regulator stating the remuneration structure of brokers "did not identify trail commisions [as] directly leading to poor consumer outcomes" and the chairman's view that brokers deliver "great consumer outcomes".
Mr Wood likened the risks in the third-party channel to the pre-financial crisis in the United States, where he said controls and borrowers’ best interests are “subordinated behind brokers’ financial gain”.
“System wide, this high reliance on brokers is a concern. At the individual bank level, it may also be a key differentiating factor in a bank’s financial health should Australian mortgage losses start to rise,” he said.
The crux of Mr Wood’s argument came down to remuneration. He argues that brokers are primarily motivated by commissions, unlike bank staff, who, he says, are motivated by a “broader range of benefits — the cornerstone of these factors is a career as a banker.”
Mr Wood said that the downside for a mortgage broker, if bad loans are written, is some foregone trailing commission in the future.
“However, the downside for a bank employee is job loss and potentially lost hopes of continuing in the field of banking,” he said.
In an effort to compare the current Australian home loan market to pre-GFC America and the era of 'liar loans', Mr Wood pointed to a 2016 UBS study in Australia that found 28 per cent of mortgagors claimed to have factually inaccurate applications.
“The ratio rose to 32 per cent for those using brokers. What is worse is that the study found 41 per cent of those who lied in their applications did so at the encouragement of their brokers!” he said.
“Of course, many brokers are honest and we suspect the bulk of the borrowers using them are creditworthy. Banks, however, are leveraged around 15 times. It takes just a small amount of mortgage losses to make a big dent on profits.”
The UBS report was condemned by the FBAA when it was first released back in October last year.
The FBAA’s Peter White questioned the accuracy of the entire survey, highlighting that the number of people purportedly surveyed represented only an estimated 0.09 per cent of all mortgages settled over the two-year time period.
He also pointed out that the study’s figures were inconsistent with APRA and industry data, and emphasised that there was “zero credibility” in the claims of borrowers who admit to falsifying documents.
“Let’s be honest — if you are admitting to misrepresentation on a legal document it’s very easy to blame someone else and claim they made you do it,” he said.
Spectrum’s Mr Wood fears that the “extensive use of mortgage brokers and embellished loan applications” will cause financial pain among lenders when borrowing conditions in Australia deteriorate.
“At Spectrum, should we foresee mortgage stress rising, we will look to further scale back our underweight position in Australian banks,” he said.