Funding woes, commission cuts, lenders leaving the market and the demise of mortgage managers. The Adviser’s James Mitchell explores how the GFC shaped the third-party channel.
The full impact of the GFC on the consumer psyche is difficult to comprehend from this sunny corner of the world. In the US and UK, the financial crisis was truly felt. Unemployment soared. Banks collapsed. People lost their homes. As the world slowly came to understand what the hell had happened, thanks in part to documentaries like Inside Job and Michael Lewis’s The Big Short, consumers were left with a deep resentment towards major financial institutions.
Meanwhile, in Australia, The Rudd government announced a $40-billion stimulus package to avoid a recession reaching our shores. In October 2008, the government doubled its first home owners grant (FHOG) to $14,000 and tripled it to $21,000 for those buying new homes. This had a strong inflationary impact on the housing market.
At the same time, the government announced that it would guarantee bank deposits and pump $4 billion into the non-bank sector.
Mortgage broking had been growing at a rate of knots in the years leading up to the GFC, which most people will say began with the collapse of Lehman Brothers in September 2008. However, broker market share actually started to decline before that, in 2007. Between 2002 and 2006, broker share of new mortgages almost doubled from 23 per cent to 44 per cent. By the end of 2007 it had dropped below 40 per cent. At the close of 2008, it was hovering around the mid-thirties.
“In many ways 2005 and 2006 were the high-water marks in terms of pricing and commissions and risk appetite from the banks, as well as the number of brokers in the industry at that time,” RedZed managing director Evan Dwyer recalls.
“In the funding markets the cracks started to appear in early 2007. It probably took another 12 months for that to flow through to the market, but we could sort of sense that it was going to be a problem,” he says.
Industry veteran Steve Weston was general manager of residential lending at Challenger in 2007 when they noticed that funding markets were beginning to tighten.
“That was really the start of the GFC, although it didn’t really bite the banks for another 12 to 18 months, when Lehman crashed,” he says.
“That was very difficult. It was the start of the vast exit of mortgage managers. Some exited the industry altogether and others changed their operating model and have become very successful brokers.”
Prior to the GFC, mortgage brokers and mortgage managers co-existed in a vibrant market. Some of today’s largest brokerages began their lives as mortgage managers, such as Aussie Home Loans.
“There were several hundred and today there are only a handful,” Mr Weston says.
Lisa Montgomery was working at mortgage manager Resi in 2007 and saw the industry transform through the GFC.
“In terms of support, it was really tough. It was tough because the MFAA had close ties with brokers, they had close ties with the big banks and the non-banks weren’t really using brokers as a channel as much at that time,” Ms Montgomery says.
“As non-bank lenders, we were selling our own product. We were championing that product. It was tough. Only the strong survived. We were lucky that we had a really healthy back book.”
Resi was acquired by Yellow Brick Road in 2014. Only a few mortgage managers remain in the market today. The GFC’s impact on funding markets was responsible to a large degree, but consumer preference was also an important factor in a changing of the guard. Borrowers demanded choice, which ultimately only a broker could provide. But the third-party channel was not immune to the GFC either.
As funding pressures began to impact Australian lenders they were forced to pull levers. For some, brokers were the obvious choice.
In April 2008, Westpac announced that it would cut 20 basis points off its upfront commission and 10 basis points from its trail. The bank faced harsh criticism from broker groups and the industry feared the other major lenders would soon follow suit.
Speaking to The Adviser at the time, Challenger Mortgage Management general manager of broker platforms Alex Moulieris said Westpac’s announcement came without warning.
“No consultation, no discussion – we were just called in and told,” he said.
However, Mr Moulieris conceded that the impact of funding costs was hitting the lending sector hard.
“There’s no doubt funding costs have gone through the roof. They [lenders] have not been able to pass on all of those costs to borrowers, so there’s pressure on all lenders,” he said, adding: “We’re in discussion with all lenders to see what we can do to help relieve the pressure.”
The GFC led some banks to make far more drastic decisions than cutting commissions. In 2008, Macquarie left the mortgage market completely.
“That was a huge deal,” Outsource Financial chief executive Tanya Sale says. “But we survived.”
Indeed. Macquarie faced a tough road back to broking but they returned nonetheless. The bank’s comeback speaks volumes about the importance of the third-party channel to the mortgage strategies of Australian lenders, and, more importantly, where customers are going to get their home loans.
“Sometimes these things have to happen for the industry to become stronger. Now Macquarie is a strong third-party operator,” Ms Sale says.
“In terms of Westpac cutting commissions, it all comes down to the third-party divisions of the banks remaining profitable. For that third-party division to survive and then rise from the ashes they needed to do that. Now look where Westpac is sitting in 2017 — they are one of the leading third-party divisions in Australia. I think they should be commended for their commitment to the industry. They didn’t bail out. They worked with the third-party industry to survive and grow,” she says.
An opportunity to diversify
Finance Made Easy’s Tony Bice is one of the few mortgage professionals to have successfully integrated a financial advice offering into his business. Here he explains how Westpac’s commission cuts triggered a decision that would transform his broking business and double his bottom line.
I STARTED out in broking just over 10 years ago, in about 2005 or 2006, after leaving Lawlab. I drifted out of the senior management side of the aggregators and became a mortgage broker.
When Westpac cut their upfront commissions from 70 basis points to 50 basis points overnight, it struck me as a broker that I had no control over what the banks could do regarding my remuneration. I remember speaking to a senior mortgage broker at the time. I said if Westpac can do this, what’s to stop any of the other banks from doing it too? I asked him what he was going to do and he told me he was just going to have to write more business.
I’ll never forget that. I thought: “You’re going to have to write twice as many home loans to bring in roughly the same amount of remuneration as you were getting before.” I knew there had to be a better way. I started thinking about what would be a good fit with the mortgage suite of products. That’s when I started gravitating towards risk insurance.
A friend and I went and got our diploma in financial planning, which took us about six months. Having a friend helped a lot. Together we got through the diploma and then found a dealer group and went about getting our accreditations.
For the next two years, I struggled writing mortgages and cross selling the obvious products like life insurance, income protection and TPD. Most of the customers were knocking it back. It wasn’t until I sat down with a few of the insurance groups and understood a better way to structure risk insurance to make it more affordable, and that was to put it in the client’s super. In the last five years, I’ve more than doubled my monthly remuneration by bringing financial planning into the business.
James Mitchell has over eight years’ experience as a financial reporter and is the editor of Wealth and Wellness at Momentum Media.
He has a sound pedigree to cover the business of mortgages and the converging financial services sector having reported for leading finance titles InvestorDaily, InvestorWeekly, Accountants Daily, ifa, Mortgage Business, Residential Property Manager, Real Estate Business, SMSF Adviser, Smart Property Investment, and The Adviser.
He has also been published in The Daily Telegraph and contributed online to FST Media and Mergermarket, part of the Financial Times Group.
James holds a BA (Hons) in English Literature and an MA in Journalism.
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