Is the recent spate of industry M&As just a spurt of activity or a sign of things to come?
When you consider some of the deals going down it would seem the wider industry is awash with action, and that we should expect more. Witness, for example, GMAC-RFC’s purchase of Capital First, Challenger Mortgage Management’s 40 per cent stake in ASX-listed Homeloans Ltd, and just this week, the pending nMB and Mosaic merger.
But what about the non-bank sector? Is it poised for a period of consolidation? Mortgage Business uncovers mixed views about the sector’s future.
Days of plenty
The mortgage industry has undergone an amazing transformation over the last five years – the residential housing lending market alone has nearly tripled in size from $350 billion in 2001 to more than $800 billion today.
Much of this growth is thanks to product innovation and the non-bank sector having woken up to the opportunities in the low-doc market. The sector’s also benefited from a ‘new wave’ of thinking among brokers, who reckon that mortgage managers and originators beat the banks when it comes to service.
Coupled with growing concerns over client ownership and channel conflict with the banks, brokers are now seeing that mortgage managers and originators equal security.
But non-bank lenders have been feeling the squeeze over the last couple of years as slower markets and tighter margins have begun to bite into profits. Thanks to a host of factors, including the banks ramping up their third party distribution channels, mortgage lending’s no longer a licence to print money.
These are indeed testing times for players in the non-bank sector – and they know it. So can we expect to see those struggling to turn a buck snapped up by some of the bigger fish in the pond?
“The non-bank sector has been affected over the last 18 months by shrinking markets, new trends and influential events such as internet banking, legislation, economic conditions and the employment of a resurgence strategy from the banks,” explains Lee Boueri, managing director of Yes Homeloans.
According to Boueri, the banks are driving consolidation in the industry as mortgage managers fight to win back market share. If the pressure to offer higher broker commissions continues, Boueri says many managers will have to diversify to stay in the game.
Belt tightening ahead
Brian Jones, managing director of Homeloans Ltd, also predicts major changes ahead for the industry. In 2006, Homeloans Ltd acquired Melbourne based mortgage manager IMC for more than $13 million. The lender has stated that more acquisitions are on the cards, provided the right opportunity comes along.
“Changes in market share, increased competition and new distribution channels are sculpting a new future for the industry. As we near the end of this growth phase, a period of rationalisation is needed to streamline the industry’s offering and overall efficiency,” says Jones.
But there’s more growth in the market yet, says Jones, who sees the Internet as a source of untapped potential. And there’s evidence to back this up. More borrowers are hitting the Net to research their mortgage options and the trend of buying on-line has grown dramatically over the last five years. While some groups have been quick to adapt to e-based opportunities, they won’t, however, always suit every business model.
Boueri says the pressures to adapt, and the reality of a shrinking market, may see some managers merging with their larger rivals or some bailing out altogether. He reckons the next six to seven years could see the industry dominated by three to four large mortgage managers as the result of mass amalgamations.
“Mortgage managers will only be able to compete in a shrinking market on volume and efficiency. There is no efficiency in being a medium-sized business in this market, so managers either need to get small, get big, or get out,” Boueri warns.
According to Jones, the difficulty for mortgage managers is knowing where their business sits in the scheme of things – and where they should be taking it.
“Annuity streams can make it tough for a business to gauge its position accurately,” says Jones. “A disruption in the distribution chain may take a year or two to take effect. By and large, businesses are better off capitalising on a healthy loan book rather than waiting for the medium-term effects to take place.”
Hold your horses
Not everyone sees the future in black and white. Better Mortgage Management managing director Murray Cowan predicts change, but not on a widespread scale.
“There are phases of consolidation in every industry and ours is no different,” says Cowan. “There’s no doubt that a combination of slower markets and the banks’ entry into the low-doc arena over the last couple of years has impacted mortgage managers; as a result I could see that there will be some consolidation, but I can’t see mass consolidation as an outcome.
“Of course there will always be groups with an exit strategy and timing in mind, which may or may not involve the sale of their loan book – regardless of market forces. Well run businesses with sound infrastructure and product management – and with the right business development, service and marketing – should be able to continue to grow independently without either being swallowed up by bigger players or forced to sell off their income streams,” he says.
Other mortgage managers, like Geoff Wilson from Wilson National in Queensland, are convinced that the industry is heading into a purple patch as more brokers look to re-invent themselves – and look to mortgage managers for help.
“There’s a lot of pressure on brokers at the moment and many are simply tired of the treatment they receive from the banks. Branding is important in this industry and I believe we’ll see more brokers white labelling their own products and using mortgage managers to undertake the processing,” says Wilson.
Relationships and support, according to Wilson, are still important in the minds of brokers and their customers, especially in uncertain times. That’s where mortgage managers will have the edge, he says.
“In the wake of the monetary crisis in New Zealand, many brokers in Australia will be looking to disassociate themselves from the banks, and mortgage managers can offer brokers more support and greater exposure. Essentially, mortgage managers will become the new aggregators of the industry.”
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