Will non-bank lenders be forced to cut broker commissions to combat tighter margins? Mortgage Business investigates.
For many brokers it was a rite of passage: build a loan book, install systems, develop a network, and then quickly move into mortgage management.
Today, according to Homeloans Ltd's general manager of sales Troy Phillips, that door has been firmly slammed shut.
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"Wholesale lenders are already cutting back on funding to mortgage managers and in the end the smaller players are going to find it increasingly difficult to access funding. Funders simply don't want to deal with hundreds of mortgage managers anymore," Phillips says.
Trevor Solomons, general manager of origination at AIMS, agrees with Phillips' take on the evolving non-bank sector.
"It is changing fast; business models that were successful in the past may be obsolete in the future," Solomons contends.
"Non-banks need to think more like banks — the focus needs to be on bringing in additional fee income streams through debit card services which support the 'transactional mortgage'. Banks generate over 60% of their profit via fee-income services."
Facing tighter liquidity and leaner margins, Solomons says the mortgage management industry is undoubtedly under pressure and it's only going to get worse.
"I can't see margins increasing. The cost of funds has increased for the short- to medium-term, but when normality returns, market forces will dictate that lenders' rates will drop accordingly," he says.
"Competition between lenders on price has been hot for some years and it will not change. The question I ask is whether non-bank lenders can continue without scale. My thought is probably not."
The lending landscape has changed dramatically since the mortgage management industry boom at the beginning of the decade. In the early days, mortgage managers could comfortably undercut the banks and still have plenty of margin left over to pay generous broker commissions.
Broker commissions: under pressure
But with shrinking margins hurting mortgage managers, will broker commissions now come under pressure?
For Phillips, the answer is not a simple one. Pointing to the role brokers have played in developing the non-bank sector, Phillips says it's unlikely that non-bank lenders will have the weight or the mettle to sideline one of their key distribution channels.
While he acknowledges that non-bank lenders have taken back some ground by way of clawbacks — which effectively represent a reduction in commission — he says they're unlikely to take the lead in cutting broker commissions to arrest declining margins.
"If they [mortgage managers] are looking to avoid paying broker commissions, they will need to turn to retail distribution — which is expensive to set up and requires considerable ongoing resources to manage," Phillips says.
Whether broker commissions in their current form are sustainable, however, is a question AIMS' Solomons is asking, saying a re-think of the flat commissions structure is overdue.
"There needs to be a different commission model which is aligned with different product margins. Today there's only a 'one size fits all' commission model," Solomons says.
"Internal commission models in banks and other intermediaries recognise the difference in product margins and hence different products attach to different commissions structures."
The question of commissions aside, Solomons says increased costs of sourcing funds remains a concern to lenders and may force a rethink of distribution strategies.
"Everyone is looking at their distribution costs and we're no different," says Solomons.
"We've recently increased our distribution by partnering with brokers but we are also putting significant resources into other distribution channels."
Opening new networks outside its traditional lending channels has been a key driver for AIMS as it aims to strengthen its distribution network through engaging brokers.
There is still a considerable focus on building the business' retail distribution via the lender's franchise and direct models, however, which Solomons sees "as the backbone of our distribution".
Solomons says non-bank lenders will have to decide for themselves whether broker distribution is a viable standalone channel.
"What we may see is the non-bank lenders becoming the aggregators of tomorrow and effectively entering the broking market in one form or another."
