Tag: Mortgage Brokers

Major banks change third-party strategy

From The Adviser.

Two of Australia’s big four banks have changed their appetite for broker-originated loans in a move that could curb the growth of the third-party channel, according to a market analyst.

Digital Finance Analytics (DFA) principal Martin North believes underperforming branch networks and regulatory pressure to curb investor and interest-only lending has led CBA and Westpac to rethink their broker strategies.

“Two or three months ago, CBA said they were really looking to drive more momentum through their branch channels and offset the volumes through brokers. Westpac also showed in their latest results a little bit of a fall in broker momentum,” Mr North told The Adviser.

“There is a change of strategy from these lenders. They are trying to figure out what to do with their branch networks. If you think about the digital migration that’s happening, the branch is becoming less and less relevant,” he said.

Mr North believes the two Sydney-based banks are looking to drive home lending through their proprietary channels in an effort to avoid closing branches.

Westpac reported a six per cent fall in broker-originated loans over the year to 31 March. CEO Brian Hartzer told The Adviser that while the bank has “no issue” with brokers, who provide the group with “lots of new customers”, the bank is looking to ramp up its own channels.

“We want to do better in our proprietary channels. We know that customers like to come directly to us online. We know that customers like visiting our branches and talking to our people,” he said.

Mr North noted that recent changes to lending criteria are being used as a lever to control third-party flows.

Last week Westpac capped at 90 per cent its LVR for owner-occupiers on interest-only home loans. Meanwhile, CBA told brokers on Friday that it will reduce the maximum LVR from 95 per cent to 80 per cent for new owner-occupied, and from 90 per cent to 80 per cent for new investment home loan applications with IO payments. The changes will take effect from 10 June.

“They are less willing to take business from third-party channels for that particular category because they are trying to control the volume of those particular loans at the moment, thanks to the imposed speed limits and the need to reduce interest-only loans. It is a way of giving priority to their own channels,” Mr North said.

“The strategic positioning of those two majors is significant,” he said. “I was expecting broker penetration to go up to 60 per cent. But based on what we are seeing now from the two majors, I’m not so convinced that we will see more growth. I think it will hover around that 50 per cent mark.”

Mr North’s comments come after the MFAA released last week fresh figures showing mortgage brokers originated 53.6 per cent of new residential home loans over the March quarter.

Mortgage Choice delivers continued record growth throughout Q3

Following record interim financial results, Mortgage Choice has continued its positive momentum throughout Q3.

In the six months to 31 December 2016, Net Profit After Tax, home loan settlements, loan book and financial planning revenue all grew to record levels.

Throughout Q3 the momentum has continued, with strong growth in mortgage broking and very impressive growth in financial planning.

“Over the third quarter we saw an 8% lift in group office home loan enquiries, setting a new record for the company,” Mortgage Choice chief executive officer John Flavell said.

“This lift in home loan enquiries has resulted in a 6% increase in home loan applications and a 4% increase in home loan approvals, compared to Q3 FY16. Mortgage Choice’s home loan approval result in March was a new record.

“Throughout Q3 FY17, the financial planning division has gone from strength to strength, with the value of Funds Under Advice and Premiums Inforce surging 59% and 30% respectively in comparison to Q3 FY16.

“Our network of mortgage brokers understands the value of providing their customers with access to professional financial advice. As a result, a larger proportion of our customers’ wealth needs are now being met.”

Mr Flavell attributed the continued growth in financial planning revenue and the ongoing strength of the underlying core broking business to two main factors.

“As a group we have delivered continuous productivity gains as well as network growth,” he said.

“To the end of Q3, franchise numbers have grown by 5%, while loan writer and adviser numbers have also continued to increase.

“These strong outcomes have come off the back of the effective execution of a very solid strategy.”

Industry denounces ‘ridiculous’ UBS report

From The Adviser.

Broker associations and several members of the industry have slammed a recent UBS report that claimed mortgage brokers are “overpaid”, saying that the data is “wrong” and the findings are “ridiculous”.

In an analyst note entitled, Are mortgage brokers overpaid?, analysts Jonathan Mott and Rachel Bentvelzen argued that the new bank levy could be offset by the banks if they cut broker commissions.

The analysts suggested that broker commissions exceeded $2.4 billion in 2015, and added 16 basis points, or $4,600 to the cost of a mortgage.

The damning note went on to argue that the cost of broker commissions are factored into how a bank costs its home loans, which the UBS analysts said were then borne by mortgage customers.

“Although mortgage broker commissions are paid by the bank, not the customer, commissions are factored into the bank’s cost of funding and have been a driving factor in mortgage repricing in recent years,” they said.

Touching on the ASIC and ABA reports on mortgage broker remuneration, the UBS analysts claimed that the bodies had “called for sweeping changes to the way brokers are remunerated”.

It also referred to an 18 per cent “blow out” in commissions paid to brokers since the financial year 2012 and said there was an “unrealistic economic rent being extracted by the mortgage broking industry”.

The analysts concluded that “while a mortgage is a large financial commitment, it is a simple, commoditised product” and could therefore “be easily provided by robo-advice”.

Report is ‘garbage’

Several members of the industry have lambasted the note, stating that the analysis is using incorrect data and thus drawing unfair and damaging conclusions.

Peter White, the executive director of the Finance Brokers Association of Australia, called the report “garbage” and said that the average broker commission was between $2,500 and $3,000 a deal (not the $4,500 quoted by UBS).

Speaking to The Adviser, Mr White said: “This report is way off the mark. To me, it just doesn’t make sense. The data is flawed and before they start making comments, they need to ensure that they have information that is actually backed by fact.”

He continued: “To suggest that there are 16 basis points added to every mortgage because of a broker’s involvement is the most ridiculous comment to make. It’s the most ridiculous comment I’ve seen in the last 12 months. The reality is you pay the same rate in the bank as you do through a broker, so where did that come from? It’s the same interest rate.”

Mr White concluded: “The report is garbage and I’m really disappointed that UBS has gone out and released something that is so fundamentally flawed. UBS is a global bank, it shouldn’t be making these sorts of mistakes. It makes them lose all credibility in the marketplace.

“UBS need to restructure their research department. They are certainly not doing their job and they are an embarrassment to UBS.”

MFAA ‘extremely frustrated’ by report

The Mortgage & Finance Association of Australia (MFAA) also said that it was disappointed by the tone of the note, and argued that several points were either “incorrect” or “misleading”.

Backing the value of brokers, the MFAA said that working with a customer to secure a mortgage can be extremely complex and often requires months of work from a broker (not to mention the subsequent years as the broker supports the customer for the life of the loan), and goes far beyond what robo-advice can offer.

MFAA CEO Mike Felton commented: “Complexity gravitates towards the broker channel (as does the need for service) and brokers go to great lengths to help these clients find a suitable mortgage product.”

Mr Felton also said he thought UBS’ commissions calculation was wrong, stating that they had divided the total amount of broker commissions in 2015 (which included upfront and trail commission) by the number of loans written by brokers in 2015.

He said: “This has given them a commission per mortgage that is about double what it actually is in the year of acquisition.”

The MFAA CEO added that an “interrogation of the data demonstrates that the increases to total remuneration to the broking channel are not due to changes to commission structures”, but due to “the simple fact that every year, more Australians are turning to brokers,” Mr Felton said.

“We are extremely frustrated by this report,” he added, concluding that the MFAA was “extremely disappointed that a reputable organisation would issue a report like this without ensuring that the data they’re working with is correct”.

‘A bank extolling the virtues of banks’

Both associations emphasised that the ASIC report had also not recommended “sweeping changes”, but instead “improve” the standard commission model, and highlighted that the ASIC report actually recognised the value in mortgage brokers – with chairman Greg Medcraft telling the media after the release of the report that brokers deliver “great consumer outcomes”.

The interim CEO of aggregation group AFG, David Bailey, said that it was important to note that the UBS report was issued by a company that owns an investment bank.

“This is a bank extolling the virtues of banks”, he said.

Mr Bailey added that UBS’ “elevation of the ABA’s Sedgwick Review to being a significant analysis of the broking industry is quite frankly outrageous”.

“We have said all along that the ABA Review is nothing more than the opinions of a single interest group, the banking lobby group. How can a review of the broking industry not have any serious involvement from the very sector it is purporting to review? And furthermore, why conduct the review when the regulator is already doing so with significantly more scope and analysis?,” he said.

“Secondly, UBS extol the virtues of robo-advice. With over 3,400 loan products sitting within our mortgage broking technology, we believe that a mortgage is anything but a commoditised product…

“We find it simply ridiculous that these conclusions can be drawn and reported as fact,” Mr Bailey concluded.

UBS: mortgage brokers a $2.4bn waste of money

From Mortgage Professional Australia.

Broker commissions are “an illustration of excesses built into the financial system” according to a damning report on brokers by UBS.

Yesterday the global investment bank sent out an analyst note entitled ‘Are Mortgage Brokers Overpaid?’ which argued that broker commissions, which they state exceeded $2.4bn in 2015, should be cut.

UBS analysts Jonathan Mott and Rachel Bentvelzen wrote that “Average commissions are now $4,600 per mortgage, which we believe is disproportionate for advice provided on a simple, commoditised, single product, particularly when compared to the fees charged by Financial Advisors for ‘simple’ financial advice ($200 to $700).”

Broker commissions add 16bp per annum to the interest rate of every single mortgage customer, whether broker originated or not, the analysts claim. They note that commissions accounted for 23% of the costs in the major banks’ personal/consumer divisions in 2015. They do however note mortgage broker costs are not commonly disclosed by the banks.

The report warns that “we expect the banks to negotiate materially lower fee-for-service mortgage commissions in coming months”. They suggest that the advice for mortgages could be provided by robo-advice and the savings could be passed onto brokers “which could help offset anticipated repricing for the Bank Levy.”

Fiery response from the industry

“This report is garbage” responded FBAA executive director Peter White when asked for comment. White questioned the $4,600 figure used by UBS, saying the average commission was more like $2,500-$3,500 a deal. Whilst noting that banks did have the power to renegotiate commissions, White argued ASIC’s recent Review of Mortgage Broker Remuneration identified no reason for such a change.

Brokers should not be concerned by the report, according to White, who said that any changes to commissions would be at most ‘tweaking’.

MFAA CEO Mike Felton claimed UBS’ calculations had a fatal flaw: “Unfortunately, this report’s key finding is wrong. UBS has taken the 2015 upfront commissions plus the 2015 trail commissions (which includes commissions on all loans written by brokers in past years), and divided them by only the number of mortgages written in 2015. This has given them a commission per mortgage that is about double what it actually is in the year of acquisition.”

“We are extremely disappointed that a reputable organisation would issue a report like this without ensuring that the data they’re working with is correct.”

Felton also warned that UBS had misinterpreted the findings of ASIC’s review, which UBS took to show risks posed by brokers but the MFAA saw as showing no evidence of systematic harm caused by brokers.

Banks voting with their feet

Commissions are already under review by the banks, following the publication of the Sedgwick Review. Consequently, all major and several non-major banks have now committed to decoupling commissions from loan size by 2020. Sedgwick did not, however, recommend necessarily reducing commissions.

UBS’ report comes on the same day that HSBC revealed it is re-entering the broker channel in partnership with Aussie Home Loans, a move Aussie CEO James Symond claimed was “a vote of confidence in mortgage broking, considering the ASIC report, Sedgwick Report, bank levies.”

Symond added that “HSBC is such a prestigious, prominent, global player and for them to be jumping into the mortgage broking marketplace is not to be underestimated in terms of the confidence they have in the industry.”

UBS’ numbers

  • Total broker commissions in 2015: $2.4bn
  • 18% increase in broker commissions since FY2012
  • $4,623 – average commission per mortgage
  • 22.6% of banks’ personal consumer costs down to commissions
  • 16bp total cost of mortgage broker commission for every mortgage

Brokers have ‘important role to play’ for stressed households

From The Adviser.

Mortgage brokers have an important role to play for the increasing number of households experiencing mortgage stress, as they are a “very good source of advice” according to a market analyst.

Around 52,000 households are now at risk of default in the next 12 months, according to mortgage stress and default modelling from Digital Finance Analytics for the month of April.

The modelling revealed that across the nation, more than 767,000 households are now in mortgage stress (669,000 in March) with 32,000 of those in ‘severe’ stress. Overall, this equates to 23.4 per cent of households, up from 21.8 per cent on the prior month.

Speaking to Mortgage Business, Digital Finance Analytics principal Martin North remarked that mortgage brokers have a role to play for stressed households in terms of helping them “find their way through the maze”.

“Maybe that’s a restructure, maybe it’s a different type of loan… I think [brokers] are a very good source of advice for households and for people who come and seek guidance [for example] refinancing may help,” Mr North said.

In saying this, Mr North noted that when it comes to identifying an appropriate loan for customers, brokers should remain “conservative” in their estimation of what households can afford.

“Don’t encourage households to borrow as big as they can. That 2 to 3 per cent buffer is really important, and those spending and affordability calculations are really important.

“There’s an obligation both on brokers and on lenders to do due diligence on borrowers to make sure that they’re not buying unsuitably, and that includes detailed analysis of household expenditure.

“My observation is that some of those calculations don’t necessarily get to the real richness of where households are at, so I think that all those operating in the market need to be aware of the fact that how we look at spending becomes really important on mortgage assessments.”

Mr North added that brokers should operate on the assumption that rates and the cost of living will continue to rise, while incomes remain static.

“So, don’t try and flog that bigger mortgage,” he recommended. “I would say be conservative in your advice and the structure of the conversation you have.”

The latest results of Digital Finance Analytics’ mortgage stress and default modelling are “not all that surprising”, Mr North said, considering that incomes are static or falling, mortgage rates are rising, and the cost of living remains “very significant” for many households.

“All those things together mean that we’ve got a bit of a perfect storm in terms of creating a problem for many households,” he said, adding that for many households, any further rises in mortgage rates or the cost of living would be sufficient to move them from ‘mild’ to ‘severe’ stress.

“It doesn’t take much to tip people over the edge. It takes about 18 months to two years between people getting into financial difficulty and ultimately having to refinance or sell their property or do something to alleviate it dramatically, so I think we’re in that transition period at the moment as rates rise… over the next 12 to 18 months my expectation is that we would see mortgage stress and defaults both on the up.”

According to Mr North, Digital Finance Analytics’ data uses a core market model, which combines information from its 52,000 household surveys, public data from the RBA, ABS and APRA, and private data from lenders and aggregators. The data is current to the end of April 2017.

The market analyst examines household cash flow based on real incomes, outgoings and mortgage repayments. Households are “stressed” when income does not cover ongoing costs, rather than identifying a set proportion of income, (such as 30 per cent) directed to a mortgage.

Brokers have their say on IO crackdown

From The Adviser.

APRA’s latest curb on interest-only loans aims to reduce risk in the mortgage market, but several leading brokers have told The Adviser that all is not what it seems.

When the Australian Prudential Regulation Authority (APRA) announced in March that it expected banks to limit the flow of new interest-only loans to 30 per cent of total new mortgage lending and place limits on LVRs above 80 per cent, several brokers wrote to The Adviser about their thoughts on the new supervisory measures.

Some brokers opined that there is still a place for interest-only (IO) loans, as long as the reasons behind putting a customer in such a loan are sound.

There is place for IO loans

Chris Foster-Ramsay of Foster Ramsay Finance, said: “I think there is a place for IO loans for true IO purposes, but for cash flow purposes, which it has become, no, there’s not.”

His thoughts echo those of Brett Halliwell, general manager of Advantedge Financial Services, who said: “There is absolutely a part for [IO loans] in the market already and all sorts of brokers recommend it for different circumstances.

“[But], if I look at the regulators’ role (i.e. APRA and ASIC both together), it’s their role to be really ‘glass half empty’ a lot of the time, and while we are looking at the positives to the customer and why IO might make sense, there are negatives. And, when you look at the fact that we’ve had a really good run in Australia in economic conditions, that, at some stage, will turn.

“So, I don’t think that the regulator is saying that [IO loans] are necessarily bad, they’re saying there is a place for it, there needs to be different standards for it.”

Mr Foster-Ramsay added that he thought the changes had already “created a different direction in the market”, and predicted that “it won’t be too long before there is up to a 120-basis-point difference between an owner-occupier P&I loan and an IO investment loan”.

He continued: “I think the ability to get an IO facility will also become increasingly difficult… I’d go as far as to say that the IO facilities for 10 to 15 years are gone but we may see an IO facility for five years with a loading for the P&I for 25 years.”

Notably, some brokers have taken to The Adviser website to highlight several scenarios where they thought IO loans would be suitable (such as for customers buying a home to live in that could transfer into an investment property or for self-employed customers with lumpy income flow), but said that the crackdown has made them reluctant to advise clients to take out IO loans, even when they are suitable.

‘Precautionary not reactionary’

Other brokers said that they were not surprised by the new measures, with Aaron Christie-David, director at Atelier Wealth, stating that he had been recommending principal and interest (P&I) loans to his clients for the past year, in anticipation of the changes coming in.

He told The Adviser: “We were telling our clients last year that we would put them on P&I investment loans, because we could anticipate these changes were coming. Some brokers have been up in arms about it but they should not have been surprised that IO loans came under the microscope, it was a matter of time.

“If you have the cash you should be paying off debt as quickly as possible. That’s what the banks are telling people and that has been backed up by APRA and ASIC,” he said.

“If rates go up and you roll off an IO period in five years’ time, when rates probably would have risen, and you maybe have a child or have lost a job, that’s a recipe for disaster. Especially if no one will refinance them — your repayments could go up 30-40 per cent. That’s where I get concerned.”

He added: “People think these are reactionary measures in the market, but they’re almost precautionary measures for the future.”

Specialist lending broker Peter Ellis from Lending Mate said he thought the changes should have actually come in sooner, stating: “With property prices rising, and the speed at which they have been selling, something was bound to occur. More concerning, though, is how debt as a percentage of household disposable income is at 187 per cent (according to Reserve Bank figures)… if this was left unchecked we may have well seen a wider raft of changes instigated.

“The regulators have a hard job to do and no matter what move they make someone will always be unhappy. But, in the interests of the nation, some controls had to be put in place to stop property becoming a commodity. Personally, I think change was needed sooner, but better late than never.”

Others, such as Daiman McIntyre of Ruahine Finance voiced the opinion that different levers, other than speed limits, should have been put in place to reduce risk.

The Victoria-based broker said: “APRA (and ASIC) clearly have concerns in regards to residential investments, and are using the tools they have, which are industry wide and sledgehammer like, to implement a task that really needs much finer and delicate management that government tax policy might better address.

“Ideally government should be targeting negative gearing, and creating limitations on properties to produce a better, long-term result without restricting some segments of lending. Industry doesn’t buy equipment to lose money, so why is it almost encouraged in residential property?”

Brokers Under The Microscope At Senate Standing Committee

From Australian Broker.

Lender-imposed conditions that brokers write a certain number of loans per month or year to retain accreditation need to go, said Peter White, executive director of the Finance Brokers Association of Australia (FBAA).

Speaking in front of the Senate Standing Committee on Economics in a government inquiry into consumer protection in the banking, insurance and financial sector on Wednesday (26 April), White said these restrictions – called minimum volume hurdles – were reducing a broker’s ability to write loans for whatever lender they desired.

“What that creates is a very bad consumer outcome because a broker can only give guidance on loans for lenders that they’re accredited to,” he said.

These restrictions mean that while a broker may be doing the right thing for the borrower with regards to the panel of accredited lenders they have access to, there may be another outside that scope which is more suitable.

“Unfortunately they can’t reach into that because they are constrained by the aggregator’s agreements and those accreditations. That’s generally restricted because they don’t have volumes to reach that lender,” he told the panel.

“Those sorts of things need to go.”

White also criticised elite broker clubs, saying he would outlaw them if he could. With brokers given access to better speed of applications, this was “unreasonable” and “completely unfair” to the borrower.

“You have an innocent borrower at the backend there. He’s sitting behind a broker who may only give a specific lender one deal every three months,” he said. “That gets penalised because they don’t have the volume. It’s got nothing to do with the borrower.”

When asked about soft dollar benefits, White said that these incentives needed to become more transparent although completely outlawing them may not be the best solution.

There was also nothing wrong with the current base model of commissions that brokers are paid today, he said, referring to the FBAA’s global research that found Australian brokers were paid below the global average. As for trail, this provided a number of positive consumer outcomes when it was introduced.

“With trail being brought into place, that was there to minimise the outcome of churn and also to provide a greater level of service to the borrower that wasn’t necessarily being provided by the banks.”

The FBAA’s research showed that taking away trail led to higher upfront commissions, a greater level of churn, and sales of additional products that may not be acceptable in the market.

Finally, White expressed his opposition to the fixed upfront commission recommended by consumer advocacy group CHOICE.

“The baseline of lending is very standard,” he said. “But it’s the knowledge and capabilities of what adds onto that to make it appropriate to that borrower’s specific needs or their lending structure. That becomes quite a significant skill set and it’s not the same.

“If you do a mum and dad home loan for example, that’s a very different transaction to doing development finance and working through feasibility studies and presales and all the research and due diligence that goes into that.”

Although these are generally higher loan sizes, the amount of work definitely increased as well, he said.

Separately, ASIC said Improved tracking of broker data is required

Difficulties by lenders to compile clear, robust data on brokers has prompted the Australian Securities & Investments Commission (ASIC) to call for improved systems that allow banks and non-banks to track and report on broker activity.

Speaking in front of a Senate Standing Committee on Economics in a government inquiry into consumer protection in the banking, insurance and financial sector on Wednesday (26 April), ASIC deputy chair Peter Kell said that collecting data for the regulator’s recent Review of Mortgage Broker Remuneration was a challenge.

The main difficulty was that some lenders could not track simple issues such as the loans that were originated from and the amount of remuneration paid to each individual broker. Certain lenders also had no way to track the soft dollar benefits offered.

“One of the recommendations we have made is that this information should be provided through a new public reporting regime of consumer outcomes,” Kell said. “[This will] require lenders to set up systems to allow them to track this [and] also provide some transparency in the market.”

Kell emphasised that these gaps in information were not as a result of any unwillingness by the lenders to provide data. However, “it was apparent that the systems that some of the lenders had in place were not as robust and didn’t give them as clear a picture as I think they themselves would wish,” he told the committee.

The exercise was a “wakeup call” for some of the lenders, he said.

ASIC recommended a public reporting regime to eliminate current issues with the non-consistent structures between lenders with different systems, metrics and numbers.

“Having a public reporting regime is a good discipline to ensure that this data will be collected going forward,” Kell said.

However, the challenge for ASIC now is determining how to compile the collated information in a manner that both the industry and the public can see.

Federal minister urges brokers to identify red tape challenges

From The Adviser.

The federal Minister for Small Business, Michael McCormack MP, has said he is “in awe” of what brokers do and is urging them to email him to highlight any areas where bureaucracy can be reduced.

Speaking at a breakfast meeting hosted by the Mortgage & Finance Association of Australia (MFAA) in Sydney yesterday, the small business minister and representative for Riverina, NSW, said that government “values what [brokers] do” and wanted to help reduce the “burden of bureaucracy” on small business owners.

He said: “What really struck me from the people [I met today] is the fact that your sector does face challenges. There is no denying that… You are facing many challenges and also many opportunities in what you do every day, driven by housing affordability, driven by the banking sector, driven by regulation and government — but also driven by such things as innovation and the need for your sector to get onboard.”

He continued: “I am in awe of what you do. I know how hard it is. I don’t just say that lightly [and] I don’t just say that because I’m the minister of small business, I truly am in awe of what you do…

“You’ve taken the leap of faith to be your own boss, to be someone who is the master of their own destiny and that takes a lot of effort and work.

“I know, and my government knows and appreciates, what you do. Not just for the small business sector but what you do for your customers, your consumers — those people who need finance, those people who need good advice — and that’s the sort of thing you people are doing each and every day.”

The minister added: “You’re starting very early in the morning and finishing very late at night and sometimes when you get home you’ve got more paperwork, courtesy of our government, and that’s what we’re trying to cut through as much as we can; that regulation over-reach.

“That’s why we’re trying to cut through some of the bureaucracy. And if there are examples in your sector, in your industry, of federal government bureaucracy paperwork that you feel is a little bit onerous or a little bit replicated in some other areas of state, please let me know.

“It’s not hard, just google my name and flick me an email or flick it to your industry body. Because we want to lift the burden of bureaucracy, as much as we can as a government, from you.”

Noting the MFAA’s earlier statement that there were 17,000 mortgage brokers in Australia, Minister McCormack said that although a “mere handful” were at the Sydney event, they were a “very important handful” given the fact that Sydney is “a driver of much of Australia’s economy”.

He explained: “What you people do for your customers here in Sydney is so, so vitally important. You’re assisting with not just home loans mortgages but financing many small businesses. This is as many bank branches reduce their retail footprints… making brokers the only source (in some areas) of financial services for what, I would say, is a growing customer base. That’s one of the reasons why your industry is so strong and we as a government want to make it stronger…

“Brokers now do more than half of all home loans and that is exactly what our government wants to see – you people ‘having a go’. And it’s important that its incumbent on government to make policy setting as easy for you to be able to actually have that go, to back yourself to do what you have done so well, for so many years.”

Brokers ‘generally get it right’

Taking a moment to drink some water, Minister McCormack noted that he was drinking from the same glass that MFAA CEO Mike Felton had used and joked: “If you can’t trust a mortgage broker, who can you trust?”

Continuing on the theme of trust, the minister touched on the recent ASIC remuneration review.

He commented: “This was finalised last month and what they found is that, as you would know, current ownership remuneration structures could create conflicts of interest and lead to poor outcomes for consumers. and of course, none of us want to see poor outcomes for consumers, not least of which government, but also not least of which you, the people in this room. Repeat customers, repeat businesses are what makes your small business great.”

Noting that the review didn’t recommend government action, but instead asked the industry to provide feedback, he said he “agreed wholeheartedly with that approach”.

“The government values this industry very, very highly. We put you up there, we really do. And I do personally, and I know people in this sector from my dealings over the years… that you people generally get it right. You generally get it right 99.9 per cent of the time. So that’s across industry models across Australia [and] is pretty darn good. The government wants to help you, and I know you want to help yourself, so I encourage that you engage with the review process.”

He concluded: “More transparency leads to better outcomes to consumers and that makes your industry more sustainable.

“Ultimately, it’s the best outcome for everyone and that’s how the industry will continue to grow and that’s what the government wants.”

Banks exposed to mortgage broker risk

From Investor Daily.

The Australian mortgage market’s heavy reliance on brokers increases system-wide bank risk, warns Spectrum Asset Management.

In a ‘Spectrum Insights’ article released recently, 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 noted 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.”

Mr Wood likened the risks associated with Australia’s use of mortgage broking 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 – 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.

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.

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 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.

MFAA boss rejects Sedgwick review, slams commission reforms

From The Adviser.

The association has warned that Sedgwick’s recommendations will give the banks “complete oversight” of brokers, erode independence, and further empower the major lenders.

The Mortgage & Finance Association of Australia (MFAA) has expressed serious concerns with some of the themes outlined in the Australian Bankers’ Association’s (ABA) Review, conducted by Mr Stephen Sedgwick AO, into commissions and payments, calling on banks to align with the “well-considered ASIC process” that is currently underway.

The association stressed that ASIC has recommended that the framework for the industry’s incentive structure should largely be left in place.

MFAA CEO Mike Felton said that while the ABA Review made a number of observations and recommendations regarding the third-party channel, it did not present realistic solutions.

“This is a review commissioned by the banks that aims to deal with the banks’ reputational problems, but as far as the broker channel is concerned does not create better consumer outcomes,” Mr Felton said.

“We are frustrated that this Review claims to be focused on a ‘customer-centric’ view. Brokers and aggregators already have a customer-centric view. Indeed, they are dependent on a relationship model and must focus on their customers in order to survive,” he said.

“The Review’s recommendations on the third-party channel appear to be based mostly on anecdotal evidence from its members. It is unfortunate that the Review process did not include meaningful consultation with the broader industry in developing this report.”

Mr Felton said there is no evidence provided in review that links consumer detriment to the current remuneration structure.

“This lack of poor customer outcomes has likely driven ASIC’s recommendation to leave the current commission structures in place, with a view to reviewing them again in four years to determine if consumer outcomes were affected by the potential conflicts identified by its Report,” he said.

“This was supported by comments made by ASIC chairman Greg Medcraft after the Report’s release, in which he said that brokers deliver great consumer outcomes, and that lenders are still responsible for lending.”

While the ABA Review assumes consumer detriment as a result of anecdotal evidence, Mr Felton pointed to MFAA data, which demonstrates that consumers are very happy with their brokers. The industry grew by 4 per cent in 2016, and 92 per cent of consumers reported they were ‘satisfied’ or ‘very satisfied’ with their broker’s performance, according to a 2015 Ernst & Young study.

“The data shows default and other metrics are closely aligned with outcomes driven by lenders’ staff,” Mr Felton said.

The MFAA boss further highlighted that the Sedgwick review recommends changes that go significantly beyond those recommended by the ASIC report, seeking to adjust or remove current incentives for mortgage brokers and potentially implement a lender fee-for-service approach.

“The ASIC Report does not recommend removing the link between loan size and commission, nor a fee-for-service model nor removal of trail commission — with good reason. A single, lender-funded, fee-for-service is likely to lead to a degree of standardisation of all fees, which ASIC is not calling for,” he said.

“It may also be considered anti-competitive by the ACCC, and therefore would not be able to be implemented. Ultimately, ASIC concluded these actions are not required because they do not create better consumer outcomes.”

The Review, which was released yesterday and included 21 recommendations, suggested that banks adopt, through negotiation with their commercial partners, an ‘end to end’ approach to the governance of mortgage brokers that approximates as closely as possible a holistic approach broadly equivalent to that proposed for the performance management of equivalent retail bank staff.

In effect, broker commissions would be governed by similar principles that banks would apply in assessing performance against a scorecard for their staff.

“Some commentary has questioned the role of ABA or the banks in this matter,” Mr Sedgwick noted.

According to Mr Felton, the Sedgwick review is essentially recommending a consolidation of power to lenders, giving them complete oversight of mortgage brokers.

“This would lead to a reduction in independence, would do little to enhance competition and tip an already precarious power balance further towards the big four and away from consumers’ interests,” he said.

Mr Felton said he believed the Review sought to re-interpret the ASIC report, providing unnecessary solutions to issues that ASIC had already reviewed and put aside.

“What really matters, in terms of remuneration, is the ASIC process and the regulatory outcomes from it. ASIC’s approach is considered and well-informed, and is based on extensive data and consultation with all parties,” he said.