The lending market of today vastly differs from that of the noughties. Non-banks have increasingly gained popularity following on from the impact of the GFC, and fintechs and non-majors are taking a growing proportion of the market. The Adviser reflects on how lending has changed in the past 10 years.
It’s amazing how much can change in a decade. Go back 10 years, and the mortgage market was home to several mortgage managers, which – along with non-banks were giving the majors a run for their money. Low-doc loans abounded, householders’ total financial assets were at a record high of 300 per cent of annual disposable income, and the NCCP was but a pipe dream. Getting a loan was easy and, some may argue, too easy.
Then, the GFC hit, and the securitisation market came to a grinding halt. The mortgage managers and non-bank lenders, which had accounted for around 14 per cent of owner-occupied housing finance in 2007 fell off a cliff. By April 2008, their share of the market had fallen to 5.5 per cent. Those reliant on short-term funding couldn’t keep up, the major banks reaped the reward, as consumers shifted over to the ‘safe’ deposit-taking banks.
One mortgage manager that weathered the storm, however, was Homeloans. According to Ray Hair, general manager of branded relationships at Homeloans, the fact that the company was 20 years old and had well-established business was one of the main reasons it (and RESIMAC, with which it has now merged) survived.
“Having been around and having good funding partners who were banks and their balance sheets, at that point was probably a major strategy or reason for Homeloans not only to be able to survive but continue in business. If you were solely relying on securitisation at that time, your business pretty much stopped overnight,” he says.
But, he notes that mortgage managers aren’t gone from the industry, they’ve just morphed into something else; white-label providers.
“What would have been the old mortgage management model 15 years ago is now more of a white-label model — so they've got a brand, and distribution network but they don’t have the infrastructure to be a mortgage manager so they white-label someone's product.”
Mr Hair says that, ultimately, the GFC highlighted “the risks of the traditional mortgage management model where the mortgage manager really did play a role in origination, credit and collection and customer service and management”.
Banks look to aggregation
As well as transforming the mortgage manager market, the fallout from the GFC saw another major change in way home lending worked, in that smaller aggregators consolidated, to become much bigger players that worked much more closely with the banks.
In August 2008, Commonwealth Bank bought a 33 per cent stake in Aussie Home Loans and the following year, the National Australia Bank (NAB) purchased the Challenger mortgage management business the first time a major bank had taken a significant stake in the third-party distribution channel (with around one-third of all brokers falling under its control).
The big four bank showed a great deal of faith in the broker channel by taking on FAST, Choice and PLAN, which Anthony Waldron — NAB's executive general manager of broker partnerships — has previously said came about from “a realisation of the importance of the broking channel, that it was going to grow” and that there was an opportunity for their white-label business and white labels generally to “really become a fast-growing segment of the Australian mortgage market.” It has repeatedly voiced its support of and faith in the broking industry, which has in turn sent an increasing proportion of loans to the bank (nearly a third, as at the end of March 2017).
Likewise, CBA focused its sights on the broker channel, not only with the acquisition of Aussie but also in trying to protect the way it paid broker commissions. Unlike Westpac, which cut the funding to broker channels and sought to focus on the proprietary channel, Commonwealth Bank went down a “partnership /relationship approach”, says Kathy Cummings, who headed up the bank’s third party channel at the time.
Ms Cummings says that it was “shock” to many brokers how quickly the banks’ mortgage funding became restricted, adding that CBA did not want to do the same. “We were really looking at the economics of the business and how we could realign the economics to maintain profitability without doing what Westpac did, which was just significantly reducing commission without consultation,” she tells me. “So, we strengthened up our quality metrics and the changes that we made around the commission model were designed so that the brokers could still sustain their business.”
She adds: “We had gone to market with a robust partnership model and that was a large part of the success, I believe, we had. We were very much aware that these businesses were depending on us staying in the market and they were an important part of building our mortgage distribution strategy. The branch network did not have the capability or resource to deliver the volumes that the bank required in the mortgage space so therefore the broker channel was largely the way to deliver it.”
Much as we are seeing now with increasing competition and broker numbers, the key element for mortgage brokers to stay in the game was diversification. The threat of concentrated risk terrified the industry and it became about being more than a one-product business. Ms Cummings says she remembers that at CBA it was “very much about trying to get the economics right” and “achieving the appropriate cross sell of complementary products to satisfy the customers’ needs”.
“Brokers have to review a customer’s total financial needs so it wasn’t just about getting the mortgage,” she explains. “It was about also providing the transaction account, the credit or debit card and importantly home owner insurance so that a holistic approach was taken to a customer’s financial position.
Return to the channel
The banks that weren’t able to claw their way out of the impact of the GFC left the market entirely; in early 2008, Macquarie, and subsequently Virgin Money, pulled out of the home loan business.
But, less than 10 years later, and these two lenders are back in the market once more (find out more about the return of Virgin Money home loans in the profile on page 12), and other banks are also re-engaging with the third-party channel, such as HSBC (which sold its broker-originated loan book to Firstmac in 2006).
HSBC’s head of mortgages and third-party distribution, Alice Del Vecchio, who was head of mortgages and operations at Aussie from 2003 to 2009, told The Adviser earlier this year that the fact the broker market is now writing around 54 per cent of home loans was a key draw.“[I]t is really an untapped market for us,” she said.
The bank has, perhaps unsurprisingly, chosen Aussie Home Loans to be its sole distribution partner to begin with, but plans to partner with “a limited number of groups” in future.
Aussie Home Loans CEO James Symond said: “I think this is a really positive sign for mortgage broking.
"The industry goes through challenges and changes, but the mortgage broking proposition in the Australian marketplace is so compelling that very senior banks like HSBC realise the opportunity and want to take part.”
Digitisation of mortgages
It’s not just banks wanting to take part in the mortgage broking boom though – online lenders are getting involved too. New platforms such as HashChing have sprung up in the past few years, looking to deliver a digitised mortgage process to customers, while making broker expertise available.
Speaking to The Adviser, COO of HashChing Siobhan Hayden explained the reasoning behind partnering with brokers: “What is the preferred service model in Australia for fulfilment of mortgages? Brokers. It's 55 per cent, give or take. So, if you then have a business model that then tries to disrupt the preferred service model, it's going to have to be pretty compelling to work. So, to me it makes perfect sense to partner with brokers and it's one of the reasons I aligned myself with HashChing and feel pretty passionate about what they're doing.”
She added: “Often, what brokers do is obviously work out what the client's requirements are and start understanding those and then showing them the discounted rates available across a suite of lenders. We showcase those straight up so there's no confusion. And then to transact or to fulfil that financial requirement we instantly partner them with professional brokers. So, that's a real, I think, point of difference.”
Other online platforms, such as uno. (backed by Westpac), have taken a different tack, but note the need for mortgages to become digitised. Vince Turner, CEO of uno. says: “When we first launched, we talked about being the third wave of innovation… customers first went to banks, then brokers hit the scene, and now we're saying, digital mortgage service is going to be the next wave of innovation. That's what we're delivering… But that's not to say, that brokers may not end up being providers of that proposition as well.”
Mr Turner says that uno. differs in that the whole process is done remotely: “We have people today who jump onto our platform at 6am on a Saturday morning, by 9:30am they decide they want to do a loan, and by the middle of the day, they've got a credit proposal.
“They've never left their home, but they've got advice and they've talked to someone, and they've had the broker experience without having the physicality of it. So, we believe mortgages should all be happening digitally. They shouldn't require me to leave my home or have someone come into my home. That's the next wave of innovation that's going to hit.”
While technological disruption and fintech business has been the word on everyone’s lips in the past few years, the fact that so many people increasingly rely on the third-party channel is testament to its value.
Mr Hair concludes: “The fact is that 50-55 per cent of customers are choosing to use brokers, if not more (and in some cases significantly more), is because of choice, expertise, and customer service.
“The banks don’t have that level of care and capability and experience that you're seeing in the broker market so I think the last 10 years we've seen significant growth in the broker market and yes there have been challenges — new digital players, online players etc. — but there is a need and a desire to have someone provide advice and hold my hand and walk me through the most important transaction of my life; buying my original property and/or my investment strategy in conjunction with my financial planner or adviser. It might be challenging, this environment, but it’s great.”
Ms Cummings agrees, stating: “It’s not just about making sure the interest rate and product are best for the client but also ensuring the deal smooth passage through the processing system. This often means having a relationship in place with the back office so that they can get the business transacted within the customer’s expectations. That’s what highly successful brokers do. I think the savvier and more time poor customers become, the more embedded the broker proposition will become in the mortgage distribution strategies of retail banks.
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