Australian Broker magazine Issue 8.16 by Key Media

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ISSUE 8.16 August 2011

AFG to lift clawback veil

Mark Hewitt

 Aggregator to go head-to-head with ‘evil’ of industry

Australian Finance Group will soon commence calling 1000 clients of its national broker network in an effort to combat the now widespread “evil” of lender commission clawbacks. After seeking the permission of its broker members, AFG has indicated it will begin calling clients who have been the cause of a lender clawback, to understand why those individual clawback cases have occurred. AFG general manager of sales and operations, Mark Hewitt, said the aggregator is conducting the client research in an effort to minimise clawback impacts.

“We want to get a better understanding of why they are occurring so we can put in place some action plans to prevent this occurring going forward,” Hewitt told Australian Broker. “We just want to get a bit more information and a bit of research on why they are occurring so we can have a more considered approach. We are going into it with a pretty open mind.” Hewitt said the aggregator was against passing on the cost of the channel to consumers via a Finance Broking Contract clawback clause, which could be enforced to recoup upfronts. “We fundamentally don’t agree with it and we haven’t had a member request yet to do it [alter a contract to include a clawback clause], so we’d rather tackle the

whole issue of why they are occurring in the first place,” he said. “I think that approach is a very defensive strategy, and that has never been our way of conducting business; we prefer someone to get on the front foot and prevent things occurring rather than try to react once they do occur.” Mortgage Choice recently issued a policy document to its franchisees, following publicity around the viability of FBC clawback clauses. In the document, the franchise ruled out imposing a fee on clients in the event of a clawback, due to potential impacts on its brand image. Despite the move, Hewitt said AFG still saw FBC clawback clauses as a “non-issue”. “What we are actually more focused on is the reason why the clawbacks are occurring,” he said. “Clawbacks are regarded as an evil of the industry – no one likes clawbacks. But they appear to be here to stay, so we have to learn to live with them, and I suppose put in place plans to try and minimise them or make them work to our advantage if we can.” The key to preventing clawbacks is “getting closer to your customer”, Hewitt said, and that apart from unforseen circumstances, many brokers can manage clawbacks effectively. “The brokers that are close to their customers understand what their customers’ plans are, and have the ability to pick up the next loan – they don’t lose the refinancers to other banks,” he said. Brokers from AFG will be able to opt out of the research, Hewitt said. “We respect the right for them to not want us to contact their customers if they don’t like. But if they do want to be involved we’ll go ahead and we’ll share the general feedback with our membership base.”

Degree heat University education plan given passionate defence Page 2

Firstfolio fracas Lender volume hurdles cause broker outrage Page 4

St.George’s Sulicich New third party head to preserve small soul Page 6

Inside this issue Analysis 20 Pundits clash over low-docs Viewpoint 22 The fixed rate outlook Forum 23 Brokers on 80% conversions Insight 24 The qualification question Market talk 25 Shane Oliver gives insights Toolkit 26 Know your lending market Insider 30 Big brother gets smaller

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News The future is saying ‘university degree’ Liberty Financial’s John Mohnacheff has delivered a passionate case for a university degree future for mortgage brokers, John Mohnacheff calling on them to “listen to what the future is saying”. National sales manager of personal business for the non-bank lender, Mohnacheff said his 15-year-old son was able to complete the current minimum Certificate IV mortgage broking qualification online and “pass with flying colours”. He said in order for mortgage brokers to be treated as true professionals by both consumers and lenders – which would allow them to charge a fee – they would need to embrace further education and provide more value than a “simple comparison” to their customers. “What does a degree do for a person? Does it make you a better mortgage broker? No, a tertiary education teaches you how to

think, and broadens your thinking horizons – it gives you a much broader understanding of how to run a business,” Mohnacheff said. “A degree in banking and finance will open their eyes to the wonderful broad spectrum of finance opportunities available to them, that the majority of mortgage brokers miss every single day.” Mohnacheff said brokers were missing out on these chances because they had not invested in themselves through further training. He said this could include training in areas of funding, asset finance, commercial lending, debtor finance, and plant and equipment finance. “They come across these opportunities every day, but quite often all they understand is the mortgage,” he said. “If they become a finance professional – and there are quite a few out there – they won’t have to say, ‘Well why should I work for $50,000?’, because they would be doubling that income through supplements to their

mortgage business.” Mohnacheff said higher minimum qualifications created barriers to entry which would be good for professional brokers, and said it would also result in lenders and consumers holding the profession in higher regard. He said this would enable brokers to charge a fee. “No one grizzles about seeing an accountant and paying a fee for professional advice. Likewise, solicitors are professionals, and people have no problem paying a fee to get the right, best possible advice,” Mohnacheff said. “If you want to keep on just doing mortgages, what you are doing is providing a minimal level of advice – you are showing consumers a little bit of a product comparison. If you become a trusted advisor to consumers and business people, then instead of your client running to a bank for advice from a bank manager, clients will come to you for advice, for which you’ll be entitled to charge a fee.”

Second tiers ‘buggered’ without brokers Adelaide Bank expressed support for calls for second-tiers to work together against the majors, saying second tiers would be “buggered” without the broker channel. In a recent communication to brokers, National Mortgage Brokers managing director Gerald Foley asked second tier lenders to “find ways to work together to make the broker experience a better and easier one”. Adelaide Bank general manager of third party lending Damian Percy also supports second tier unity. Percy said he has long advocated standardised forms and accreditation processes in order to reduce complexity for the broker channel. “There is a lot of silly and unnecessary duplication around

what lenders do,” he said. Standardisation of some of these practices, Percy commented, would both reduce broker errors and make it simpler for brokers to deal with smaller lenders. He commented that second tier banks are best positioned to drive this standardisation. “It is the second tier lenders who are more likely to do it,” he said. Percy defended comments made recently by ING Direct’s Lisa Claes, saying they were not intended to be a threat to the broker channel. Claes argued that brokers risked irrelevance if they continued to heavily favour major banks. Percy commented that the statement was not an ultimatum, but rather a plea. “It’s not that if

the channel doesn’t support us we’ll go do something else. We don’t have something else. We’d be buggered,” he said. Percy said second tier commitment to the channel was highlighted by the fact that smaller lenders use intermediaries as a preferred method of distribution, not due to customer preference. He argued that major banks have no such commitment to the channel. “If broking fell over tomorrow, the majors would probably write the same share of business as they do today. A number of second tiers, though, would be dead in the water. That is the measure of where real long-term commitment lies,” he said.

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Broker outrage follows Firstfolio fee Brokers have expressed outrage at a recent move by Firstfolio to impose a $150 per month fee on originators who don’t hit volume targets with the lender. The fee will be deducted from the commission payments of brokers who have failed to settle at least three loans with Firstfolio in the past 12 months. The fee came into effect from 1 August. In a broker communication from the company, Firstfolio indicated the fee was an amendment to its broker origination agreement. However, a spokesman from Firstfolio promptly told Australian Broker the fee had always been part of its agreement with brokers, and was only now being enforced. Tony Inglis of Educated Finance & Property called the fee “harsh and unjust”. He commented that he no longer felt comfortable referring clients to Firstfolio due to deteriorating service levels. “Firstfolio should be the first people to put their hands up and say that they have dropped the

ball with regards to customer service, so how can I refer them new business when they cannot provide a satisfactory level of customer service? Yet they penalise me for not referring them new business even though they cannot provide a reasonable service proposition,” he said. Inglis argued that the fee was excessive, and did not reflect the true cost of administering commission payments. But Firstfolio has contended that the fee – which will affect around 80 of the company’s 300 accredited brokers – reflects the ongoing compliance costs associated with maintaining non-performing brokers. “There is increasing compliance cost to maintain a broker’s accreditation. This compliance cost is not able to be offset where a broker is not submitting any loans. The cost of maintaining accounting and admin costs in relation to commissions and in customer management queries

that brokers should be handling is a fixed cost and increases relative to interest margin when a broker’s loan book is in run-off mode,” a Firstfolio spokesperson said. Inglis questioned this rationale, calling the fee a “money grab”. “If in fact there was a cost of $1,800 per annum to pay my commission, then writing new loans would not pay this fee,” he commented. Another broker who wished to remain anonymous echoed Inglis’ remarks, saying the move was “aggressive”, and argued that the company’s service proposition made it difficult to refer clients. Firstfolio answered the claims that its service proposition had suffered, and argued that brokers often fall short on service as well. “On the flip side, some of our customers are unhappy with their brokers. Whether it is product related or in regards to undertaking a variation, the broker is at times not available to address these issues. It is left to

Firstfolio to manage the client and to re-explain how certain accounts work. This is undertaken at no cost to the broker,” the company said.

Vow takes aim at Firstfolio Vow CEO Tim Brown has criticised the fee levied by Firstfolio, calling it a “revenue grab”. Brown said the fee unnecessarily penalises brokers struggling in a difficult market. “We think the timing is pretty bad given this market. It’s a tough time when companies need to support their brokers and not hit them with extra costs,” he commented. “If it were a cost they were bearing because someone else was charging them and they were passing it on, that’s one thing, but that doesn’t seem to be the case. It seems to be a revenue grab,” he said.

Tighten up referrals for growth: Macquarie Broking business can increase revenue growth if they tighten up their referral networks, according to Macquarie Practice Consulting. A survey of 117 mortgage broking businesses conducted by Macquarie’s consulting arm has found that average estimated revenue growth for those businesses surveyed over the past 12 months was 13%. Of these businesses, 66% credited strong management of their referral networks from existing clients for

this growth, while 55% said referral networks with business partners contributed. Macquarie Practice Consulting found that almost half of all ‘larger’ businesses – or those with four or more people – had formal referral agreements in place with referrers. This contrasted with 65% of individual brokers who only have informal referral arrangements. Macquarie Practice Consulting senior consultant Fiona Mackenzie said that while all broking

businesses are aware referrals are critical, smaller broking businesses are not taking such a business-like approach to their relationships with referrers. “This highlights an opportunity for smaller businesses to tighten up some of their referral networks and put more formal arrangements in place,” she said. In addition, the survey found that the average business earned approximately $363,000 in revenue during the 2010 financial year. The average

revenue per broker among businesses surveyed ranged from $142,000 in individual businesses to $175,000 for larger businesses. The average mortgage book across all businesses surveyed was $93m. However, Macquarie Practice Consulting found brokers in smaller businesses typically manage larger books – with an average book size for individual broker businesses being $51m – while larger businesses averaged $40m per broker.

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St.George will remain Choice big switch ‘a storm in a teacup’ unique: Sulicich New head of third party distribution for St.George, Melos Sulicich, has declared that the St.George brand is very unique and that he will be aiming to “keep it that way”. Becoming head of intermediary distribution across the St.George group of brands following the resignation of Steven Heavey, who will remain with the bank until September, Sulicich said that St. George will seek to maintain its unique broker proposition. His commitment comes despite stepping across from previous responsibilities at parent bank Westpac, where he was until July general manager of third party distribution for Westpac, working with general manager of mortgage broker distribution Huw Bough. “Each of the brands are different, they appeal to different segments of the market, they appeal to different consumers, and they appeal to different brokers,” Sulicich said following his appointment. “We recognise and understand that, and my role is now to work with the St.George brand proposition and bring that to the market. So, they are very different, they are very separate, and they are very unique and we want to keep them that way. That’s why I no longer have responsibility for the Westpac broker business.” The management reshuffle sees the grouping of RAMS – where Sulicich was, and still is CEO – within the St.George group of brands, which includes the new Bank of Melbourne and Bank SA. Sulicich said it made sense for

Westpac for those brands to sit separately. “From a group perspective, moving RAMS into the multiMelos Sulicich band St.George group made sense, and as part of that role I’ve picked up the executive responsibility within that group for St.George’s third party distribution,” he said. Sulicich said brokers remained a “critical, vital and very important part of the group’s distribution channel”. “I’m looking forward to getting to understand that business and continuing to drive it and grow it in the way that Steven has for the past six years,” he said. Sulicich flagged continued development in the St.George value proposition, to ensure it remained “what brokers are looking for”. “We will continue along with the Flame program, and the Gold program that Steven implemented and try and drive the business forward,” he said. “My view is that I want to live the St.George brand, grow the St. George brand, and continue to make it relevant to the marketplace.” Sulicich also acknowledged Heavey’s contribution since he joined St. George in 2005. “Steve’s done a fantastic job over the past six years – he has decided to move on and he has our best wishes. We’ll have a couple of months for him to give me all of the knowledge he has built up over those years, and he leaves behind a fantastic team,” he said.

The furor over consumer group Choice’s mortgage switching campaign may be a “storm in a teacup” according to one broker. The Big Bank Switch campaign promoted by Choice and run by One Big Switch, aims to register mortgage holders and lobby lenders for group discounts. One Big Switch has revealed it will receive commissions for any loans it originates, and Choice has disclosed it will receive a referral fee. Laurie Parkes from Front Runner Mortgage Group has said he believes the campaign will sputter out. “I think this will blow over once they realise it’s not going to work,” he said. Parkes questioned whether the campaign’s aim of securing group discounts will be effective. Without providing credit assessments or calculating serviceability for clients, Parkes said the campaign is unlikely to generate the discounts it is expecting. “Lenders are going to assess each application on a case-by-case basis, so market forces will come into the equation,” he said. The campaign could also encourage consumers to switch loans when it is not in their best interests, Parkes commented. “Sometimes it’s better not to switch. You hear so much talk about churn, and here Choice is encouraging churn in the market.” Parkes also said Choice should be called to account for its involvement. “Where has their independence gone? Choice is supposed to be an independent

body, and yet they’re going to take referral fees,” Parkes said. The MFAA has also criticised the consumer group’s involvement in the campaign, and called into question the legal standing of One Big Switch. Though One Big Switch holds an ACL and is a member of COSL, the company claims it is not providing credit assistance and therefore is not required to abide by NCCP regulations. However, the MFAA has challenged this assertion, and has requested an ASIC investigation into the claims. Choice CEO Nick Stace has defended the company against accusations it has lost its independence. In a post on the Choice website, Stace has claimed the campaign will not undermine the group’s focus, and that any fees the group receives will be clearly disclosed.

What you said: From the Forum Seems like an opportunity to see if ASIC is serious about policing the industry. How you can offer to negotiate a rate to switch somebody, give them the lender you have organised, take a commission or referral fee and then claim you are not providing credit assistance? Stuart on 03 Aug 2011 12:07 PM Maybe Choice should stick with comparing washing powders and the likes. marco meloni on 03 Aug 2011 03:40 PM

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ASIC mulls changes to mortgage education

ASIC has released proposals that could change the training requirements for lending staff, and refine the definition of mortgage broking. The proposals come after feedback from the industry expressing concern that lending staff not directly involved in mortgage advice could be caught

out under RG 206 and require Cert IV qualifications. The changes would narrow the definition of mortgage broking to allay these concerns. ASIC commissioner Peter Boxall said the proposals would relieve lender employees who do not play a role in influencing consumers’ home loan decisions from the need for more onerous training. “The proposals aim to reduce licensees’ compliance burden, while still ensuring a high standard of training for those who do play a significant role in such decisions,” Boxall commented. ASIC has proposed two possible modifications to RG 206. The first would refine the definition of mortgage broking to limit it to providing credit assistance in the form of “suggesting” products. The second proposal would allow for credit provider employees to take portions of Cert IV training relevant to their role, without the need for a full Cert IV

qualification. However, ASIC spokesperson Andre Khoury said, even under the proposed changes, the difference between the training received by lender staff and that undertaken by brokers would not be significant. “While mortgage broking representatives would still need to undertake the full Certificate IV, if we implemented this proposal, credit provider licensees would also need to ensure that representatives undertake additional training if necessary, so this should not result in a large discrepancy between the amount of training undertaken by the two types of representatives,” Khoury said. While the first proposal would only impact employees of credit providers, Khoury said the second could impact on employees working within broking businesses. The proposal could allow these employees to remain credit representatives while focusing

their training on only the portions of the Cert IV qualifications relevant to their role. “We are hoping to receive specific feedback on how this change is likely to affect mortgage broking businesses,” Khoury commented.

ASIC is proposing two possible changes to RG 206 • Refining the definition of ‘mortgage broking’ in RG 206, so that it is limited to providing credit assistance in the form of ‘suggesting’, where credit is secured by real property • Allowing those falling within the definition of mortgage broking who provide services on behalf of a particular credit provider to undertake a proportion of the Certificate IV in Finance and Mortgage Broking

CRM data is your greatest asset: Kane Brokers have often failed to use CRM systems to their full potential, FAST managing director Steve Kane has said. The aggregator, along with fellow Advantedge constituents Choice and PLAN, has seen more than a year’s worth of profit invested in its CRM system. “That’s one of the benefits of scale,” Kane said. This investment presents the potential for brokers to ramp up their revenues through properly utilising CRM functionality, Kane said. Kane indicated that proper use of CRMs can increase cost and time efficiencies in brokers’ businesses. He used the example of a FAST broker recently introduced to the aggregator’s

CRM who completed a mortgage application “end to end” in three hours. While some brokers may be able to complete the process faster using traditional paper applications and documentation, a good CRM platform collates data to ensure compliance and provide certainty in the case of an ASIC audit. However, merely using CRMs to collate information is overlooking the systems’ full functionality. Kane has commented that many brokers overlook the opportunity presented by their existing customer database. “Many brokers don’t do anything to utilise their existing customer database. Brokers have mainly used CRMs as static repositories of information. Many

don’t realise that data is their greatest asset,” he said. CRM systems should be used to generate greater business flows, Kane said. To use CRMs to their full potential, Kane said, brokers must not only capture client data, but must track the data and utilise it to identify customer needs. “The technology makes it less onerous to meet customer needs,” Kane remarked. Kane commented that the data contained in CRMs can be used dynamically to perform customer needs assessments. He indicated that brokers can use the data to generate leads, referrals and identify crossselling opportunities. “The CRM is the centre of the business

rather than just an information repository. We want to help more brokers understand that,” he said.

Steve Kane

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We are ready for disclosure: MFAA The MFAA’s Phil Naylor has declared the mortgage industry ready for tougher consumer disclosure requirements, after the final version of the rules were finally released. Naylor said that the final shape of the disclosure amendments ended up “as expected”, following lengthy negotiations with Treasury that have lasted since well before the original implementation date of 1 January this year. Naylor said the MFAA would soon be issuing to members a disclosure update, which would inform them of what would be required under NCCP. However, he suggested that the MFAA membership base was well prepared. “No MFAA member should have difficulty in complying with the disclosure regulations,” he said. A new implementation date of 1 October has been announced, following the expiry of the 1 August deadline. “Two months should be sufficient time as MFAA members have been aware of the general nature of the regulations for some time,” Naylor said. Gadens Lawyers senior partner and MFAA lawyer Jon Denovan was not so upbeat, saying all MFAA members are “not up to speed yet”, but would be adequately prepped after the release of analysis of the disclosure regulations and example documentation.

He added that there may be some “systems and training issues” for larger brokers and aggregators in the market, due to the short time given by the government between the release and 1 October. Naylor previously championed the association’s leadership in saving mortgage brokers from a potentially “horrendous” compliance impost, after the initial draft of disclosure regulations last year presented the industry with what he called a “compliance nightmare”.

Disclosure ‘surprise’ for lenders Lenders may be caught out by a technicality in the freshly-drafted disclosure regime, requiring them to publish mortgage manager rates. Gadens Lawyers has identified that new disclosure regulations will require lenders who fund mortgage managers to show on the lender’s website the maximum rate at which a mortgage manager can lend. Partner Jon Denovan said while the reason for the requirement is to prevent unscrupulous mortgage managers from increasing the interest rate above a market rate, funders may not want to show these rates on their website for many reasons, including not wishing to identify their managers and not wishing to confuse consumers by publishing two sets of rates.

Bromley slams banks over ‘desperate lending tactics’ Fierce mortgage competition between the majors is seeing credit standards eroded, a lender has claimed. LJ Hooker Finance general manager Peter Bromley accused the major banks of relaxing lending standards to a dangerous degree in their bid to win new home loan customers. “To attract new customers in an increasingly competitive market, the big banks have loosened LVRs to a point where borrowers need only a 5% deposit. It seems that some lenders have already forgotten about the causes and the ongoing impact of the global financial crisis,” he said. The admonition comes after APRA reportedly cautioned banks on loosening credit standards in order to ramp up home loan volumes in a sluggish market. LJ Hooker argued that banks were irresponsibly “wooing” borrowers with high LVRs, and criticised them for “desperate lending tactics”. The lender stated that it would appeal to borrowers with equity rather than attempting to lure borrowers with minimal deposits. LJ Hooker Finance has cut rates on its Classic Home Loan Range for LVRs of 75% or lower by 20bps, and Bromley said the move highlights responsible lending standards. Bromley said low credit demand could tempt lenders to relax standards, but that the

Peter Bromley

industry needs to find other ways to attract borrowers. “The subdued mortgage market requires an innovative approach to attract customers. However, lenders need to provide their brokers with attractive products and services that also promote responsible lending,” Bromley said. LJ Hooker has stated the discounted rates will be available for all applications received between 1 August and 30 October which reach formal approval by 15 November. The rate cuts will apply for the life of the loan, and will bring the lender’s Standard Classic Home Loan to 6.79%, and its Pro Pack Classic Home Loan to 6.69%. The offer will also be available on the low-doc version of the products. Bromley said the discounts would not eat into broker commissions.

Capture internet leads or ‘suffer’

Broker businesses that do not harness the growing power of internet lead generation are likely to suffer in an increasingly cluttered market, according to MoneyQuest.

The business – which is itself a branded national brokerage supplying internetgenerated leads to a current network of 18 brokers – argues that 80% of home loan shoppers begin their research online. However, unlike in other internet and phone-delivered mortgage models overseas, general manager Gill McLean said in Australia, consumers “don’t necessarily like to transact online”, and in the majority of

cases want to consult a broker before going through with a deal. “Ultimately, if brokers are not aligned to an online business that has got a strategy around capturing those consumers, effectively those businesses will suffer,” she said. McLean said many mortgage brokers are currently struggling in a “cluttered market”, including in the traditional referral space, where they are like many others trying to do business with real estate agents and accountants at a reasonable cost. She said over time, broker businesses that do not embrace the ‘online revolution’ to generate fresh business will see their businesses shrink as their books deplete.

“I think that what will happen is that their existing book will run off, they will re-write the existing book at a lower margin – but commissions have dropped – and effectively they won’t be growing the value of their business – they will have diminishing asset.” MoneyQuest has brokers based in NSW, Queensland, Victoria and WA, and is targeting growth in broker numbers to 50 from the current 18 by the end of 2012. McLean said the business is targeting revenue of $2m per month per broker, and is currently averaging over $1m a month across its network on average, which McLean said puts the team in the top 15% of the broking market by loan volumes per broker.

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Tumbling fixed rates woo borrowers Lenders, meanwhile, have engaged in a frenzy of fixed rate cuts. Commonwealth Bank has cut up to 60bps off its fixed home loan products. The cuts will bring the bank’s one-year fixed rate to 6.59%, with its five-year fixed rate at 7.59%. CBA group executive of retail and banking services Ross McEwan said the move will deliver certainty to nervous borrowers. Westpac has followed the move with its own cuts, slashing 20bps from its

to its fixed rate products on the same day as CBA, Westpac and St. George. MPA Top 100 Broker Justin Doobov of Intelligent Finance said the moves portend an RBA rate cut, and betray uncertainty in the global economy. “The market has now started to price in reductions of the cash rate in the coming months, hence the lenders reducing their fixed rates according to market indicators. Some of the extremely low fixed rates have further indicated that the market expects

the cash rate reduction the next time the RBA meets, or even earlier,” he said. Doobov, who regularly advises clients to fix part of their loans, nevertheless urged consumers to avoid the temptation of chasing cheap fixed rates. “Choosing to fix your loan’s interest needs to be done in relation to your future needs and requirements. Don’t just fix the interest rate because it is cheap, fix it to give you certainty about your monthly repayments,” he commented.

Turbulent fixed rate demand

March

April

May

June

13.30%

12.30%

11.10%

three-year fixed product to bring the rate to 6.79%. Westpac subsidiary St.George also entered the fray, cutting 10bps off its two-year product and 30bps off its three-year product at the end of July, and following the move with a further 20bp cut to the products earlier this month. ING Direct was close behind, announcing cuts

12.20%

Fixed rate demand has again seen an upswing as the products are increasingly discounted by lenders, and a top broker believes an RBA rate cut may not be far behind. New Mortgage Choice data shows demand for fixed rate loans climbed to 13.3% in July, up from 12.3% in June.

10%

Fixed rates as a proportion of all approvals

July

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Lenders can help boost conversion rates Lenders and mortgage managers can make it much easier for brokers to hit higher conversion hurdles, according to Loan Ave sales and marketing manager Michelle Collins. Collins said Loan Ave’s conversion rates from application to formal approval are above 90%, while rates from formal approval to settlement are between 95 and 99%. She said that achieving such high conversion ratios were a result of very close relationships between the manager and its finance brokers. “For example, our credit people are not untouchable, including the credit manager. If a broker needs to contact the manager responsible for the ultimate credit decision, they can simply pick up the

phone,” she said. Collins said that prior to loan submission, Loan Ave “does the homework” required to ensure the success of a deal. “We speak with our wholesale funders and mortgage insurers and get verbal buy-in from them. We then attach that to the file to approve it,” she said. In addition, Collins said relationship managers can help by ensuring the credit quality of the deal is there. “Every deal is not as black and white, not as vanilla as we would all like – there are nuances to every client. If the deal doesn’t tick a box, we have got to do the homework first so that those boxes are ticked,” she said. However, Collins said that much of the

The conversion challenge Before announcing his resignation from St.George, Steven Heavey left the industry with a challenge, by claiming 80% conversion ratios were realistic for most brokers. The comments followed the bank’s decision to restructure commissions, to reward 80%-plus conversion rates with a 15 basis point bonus. “With all the tools brokers have these days, such as serviceability calculators and upfront valuations, 80% should be reasonable,” he said. responsibility for conversion still lies with the broker. “At the end of the day, we rely on the broker. They are face-toface with the client, and they know more about that client than we ever will, so their discussions need to be fed back to the lender or manager.” Collins said it is in everyone’s interest to get deals over the line.

“We all don’t get paid unless the deal is settled.” The comments follow a recent argument made by outgoing head of intermediary distribution at St. George Bank, Steven Heavey, who argued that the industry could manage an 80% benchmark after the bank’s 15 basis point commission bonus was set at the higher figure.

Consumer fear causing Funding pressures to grow in spite of record profits sales slump: AFG Consumer unease led to declining mortgage sales in July, AFG has indicated. The AFG Mortgage Index for the month showed a 3.7% drop in mortgages sold. Refinancing continued to account for the most active segment of the mortgage market, representing 39.1% of home loans. Owner-occupiers moving house or upgrading their current home accounted for just 11.7% of sales. AFG general manager of sales and operations Mark Hewitt said the results indicate continued wariness among consumers. “These figures confirm a much more worrying trend: that most Australians are still fearful about their financial future. Ever since the interest rate rise last November, homebuyers have gone into their shells. Western Australia, supposedly the prime beneficiary of a resources boom, has the most depressed property market of all. Domestic financial news is dominated by talk of rate rises and the carbon tax. Gloomy

international financial news has seen stock markets slump. We’re all looking for strong economic leadership to provide the market with some much needed confidence,” he said. Loan Market has echoed Hewitt’s claims, and said fears surrounding the carbon tax have led many potential homebuyers to steer clear of the property market. A survey from the company has found the proposed tax has shaken the confidence of many potential buyers. Asked if the carbon tax affected their confidence in purchasing a property, 57% indicated they were wary of buying due to the tax. Of the proportion who indicated they were deterred by the tax, 35% said they expected cost of living increases brought about by the tax to scuttle their plans of buying property. “Our survey shows the carbon tax is not something that looks likely to encourage consumers,” Loan Market chief operating officer Dean Rushton claimed.

Lender choice by loan type 22.40% 77.60%

First homebuyers

17.00%

20.20% 79.80%

83.00%

Refinance

Investors

Major Source: AFG

Non-major

Bank chiefs have warned of funding pressures and economic headwinds in the future, even as they report record profits. Commonwealth Bank has reported a record cash profit of $6.84bn, as well as an increased return on equity. However, the bank argued that lending growth was subdued, and outgoing CEO Ralph Norris commented that competition in the lending market was “intense”. Norris said the bank’s results came in turbulent economic conditions. “The 2011 financial year has been a challenging one for the Group and many of its customers. While the resources sector has performed well, other parts of the economy have been subject to headwinds including fragile consumer and corporate confidence, political uncertainty, a strong currency and natural disasters,” Norris stated. Norris warned that offshore “instability” could put further pressure on funding costs for Australian banks. The remarks were echoed by NAB chief Cameron Clyne. The bank has posted cash earnings of $1.4bn for the June quarter, up 27.3% from the June quarter of 2010, but Clyne said the economy was challenging, and that the market ahead looked difficult. “This was achieved despite considerable challenges, including Australia’s multi-speed economy, subdued system credit growth and fragile consumer confidence in all the markets in which we operate,

and concerns about US economic growth and European sovereign debt,” Clyne said. The bank claimed strong Cameron Clyne growth in mortgage lending, building on its first half momentum. NAB said in a statement the growth came amid slowing credit demand and increased home loan competition. CBA subsidiary Bankwest, meanwhile, posted a $463m cash profit for the year, a turnaround from the previous year’s $45m loss. Also reporting strong lending growth was Bendigo and Adelaide Bank, which said an upswing in lending drove a 41% surge in profits for the company. The bank’s full-year results have indicated a net profit after tax of $342.1m, with cash earnings of $336.2m. Bendigo put much of the profit down to above-system lending growth. The bank saw lending increase by 8% over the year, while system growth was at 5%. Amid this lending growth, Bendigo has claimed its mortgage portfolio remained sound. The bank said 90-day mortgage arrears remained steady at 1.18% over the year. The result puts the bank’s arrears below its rate for the previous financial year, in spite of seven RBA rate hikes occurring from 2009.

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Aussie housing deemed Fee-for-advice a matter of ‘when’, not ‘if’ ‘severely unaffordable’ Fee-for-advice is unlikely in the short-to-medium term, but is not a matter of ‘if’, but a matter of ‘when’, according to Aussie executive director James Symond. Following recent research from Mortgage Choice that showed 61% of consumers were not ready to pay a fee for broking advice, Symond said that “in the short to medium term I don’t see it happening”, but that “in the long term I do see it happening in some form”. Symond said the transition to a fee-for-advice is an education process among consumers, and that over time these consumers would begin to realise the value. “Mortgage brokers add tremendous value. We are one of the last professions on the planet that don’t charge a fee for service, so I think we will evolve into an environment where there will be a fee,” he said. “You can’t go to a lawyer and spend two hours picking their brain and not expect to be charged something. But you can go to a mortgage broker, spend two hours

sitting with and talking to them, and then take that knowledge and go to a bank or elsewhere,” he said. Symond said James Symond a ‘no go’-style fee is still the option of choice in Aussie’s perspective, despite the Mortgage Choice survey results. “What is wrong with charging a fee for advice, for a couple of hours of sitting down, and giving a customer a structured health check, and a structured plan – if they do settle the loan, it would then be refunded at that stage.” Symond argues that refunding a fee at settlement avoids a ‘double dip’ scenario of charging both upfront fees and a fee when the loan is settled, hosing down the argument that lenders may reduce commissions as a result of a more widespread uptake of broking fee models.

Aussie teams up with RP Data Mortgage broker Aussie has signed a deal that will see it provide RP Data’s property market intelligence to its broker franchisees. Under the deal, Aussie brokers will be able to provide their customers with a range of property information, including property reports, valuation estimates, ongoing property value tracker and detailed information on properties for sale or recently sold. Aussie executive director James Symond said the deal equipped brokers with better tools with which to service their clients. “This enables us to power our brokers with this property intelligence, adding to the already impressive arsenal of mortgage intelligence and broker innovation Aussie is renowned for,” Symond said when the deal was announced.

Housing in Australia has become “severely unaffordable”, and it will take 10 years of flat-lined prices to rectify, a study has found. The AMP.NATSEM Income and Wealth Report has found median house prices increased 147% over the past decade, while after-tax incomes grew only 50%. Average median values are still more than 7.3 times larger than after-tax incomes. Sydney has reclaimed its place as the least affordable capital city in Australia, followed by Melbourne, Adelaide and Perth. Affordability issues have also spread outside capital cities, with Wollongong, Newcastle, Mandurah and the Gold and Sunshine Coast now on par with the capitals. The report’s lead author, NATSEM principal research fellow Ben Phillips, said affordability issues have led to more and more Australians experiencing housing stress. The study defined housing stress as devoting greater than

30% of after-tax income to mortgage or rent payments. “Housing stress is most strongly felt by those buying a home, with 31% stressed, or those renting, with 30% stressed. Nearly one in 10 buyer households spend at least half their after-tax income on housing, which pushes them into the severely housing stressed category,” he said. AMP Financial Services managing director Craig Meller indicated it was becoming increasingly difficult for buyers to gain a foothold in the market, regardless of where they resided. “Just 10 years ago, more than 50% of suburbs in our five major capital cities were affordable but today only 4% are. Not a single inner-city suburb is affordable. And the regional areas haven’t been exempt from this either,” Meller said. The report noted recent drops in property values, but argued that these were insufficient in easing affordability.

Proportion of Australians in mortgage stress 28% 23% 18%

19% 16% 13%

Sydney Melbourne Brisbane Source: APM.NATSEM

Adelaide

Perth

Hobart

14 www.brokernews.com.au

News

For all the latest mortgage industry news, visit www.brokernews.com.au

NSW MFAA looks for regional relevance

Insurance advice should be minimum

The NSW MFAA has launched an initiative to provide greater support and networking opportunities for regional brokers. NSW MFAA state president Warren Prince said the association is supporting the formation of local chapters throughout regional areas. Prince said this would provide regional brokers with the ability to network together, and have a greater voice with both the state and national levels of the MFAA. “The state council of the MFAA has been talking for some time about getting the association to be more relevant in regional areas. What we’ve come up with is the initiative to roll out local chapters. The chapters will be locally run with their own chairperson, and they’ll allow brokers to have a closer link to the state council as well as the management and board of the MFAA,” he commented. Prince said regional areas have often been neglected, and that brokers working in such areas can face a sense of isolation from their industry peers. He commented that local chapters will not only help to reduce this isolation, but will also provide the opportunity for local professional development days. “Most professional development days are held in Sydney, and that makes it very difficult and

Risk advice should be a minimum standard for broker-client interactions, Advantedge has contended. While much of the conversation on diversification in broking has centred on risk advice, Advantedge general manager of broker platforms Steve Weston has commented that risk advice should not be considered diversification, but a normal part of the mortgage advice process. “We do not see a mortgage broker recommending a client who seeks further advice on life and general insurances as diversification, rather we see it as part of a good customer process. A broker must not only focus on the benefits of a particular loan transaction, they must also point out the risks and recommend how such risks could be dealt with,” Weston said. Weston indicated that any client conversation surrounding mortgages should naturally include risk advice. Such conversations could also provide an opportunity for increased revenue in a market currently at 30-year lows, he said. While Weston said it was the role of mortgage brokers to assimilate risk advice into their normal operating procedures, he commented that aggregators had the responsibility of helping brokers add such procedures

Warren Prince

expensive for regional brokers to attend,” he said. In providing the option of locally-run professional development, Prince said NSW MFAA members can fulfill some of their CPD requirements without the need to travel to Sydney. The content of these professional development days would be decided by local chapters, and could be specifically tailored to challenges faced by regional brokers, he said. “It will be up to the local chapters to determine the content of their PD days. It certainly would be advantageous to local chapters to have subjects centred on regional broking,” Prince said. Prince said local professional development days, as well as social events, could receive financial support from the state council. In addition to this, he said the state council could provide some funding for local advertising campaigns.

to their businesses. “Good aggregators will not merely add other products to their panels; they will educate brokers about the benefits for Steve Weston their customers and their own businesses by having a risk discussion with their clients. We know many already do this. The real need, however, is to help brokers to develop and mature their practices and customer conversations and to incorporate these into their business. “It is our experience that many brokers want to be successful in this area but struggle to successfully embed a modified customer process. That’s where an aggregator can add value,” he said. Along with the assimilation of insurance products into the mortgage broking industry, Weston also predicted a continued convergence between mortgage brokers and financial planners. He said for most brokers, this would not mean holding both an ACL and AFSL. Rather, he stated that brokers must look to build proactive referral relationships with financial advisors.

Reverse mortgages see lender exit as demand grows The list of reverse mortgage providers is shrinking as the number of people needing to utilise equity release programs is growing, an industry body has stated. The Senior Australians Equity Release Association (SEQUAL) chairman and managing director of Australian Seniors Finance John Thomas has stated that the reverse mortgage market has seen an exodus of participants. He commented that a difficult funding environment had seen many lenders withdraw. “A lot of providers are suffering from a lack of funding. We have about nine members in SEQUAL. If you go back three, four, five years ago we probably had something like 25 members. “Some have withdrawn, and some have closed their books to new business. Funding at the

moment probably prohibits a lot of people from entering the market,” he said. While the lenders may have exited the market, Thomas stated that demand for the products remains strong and that equity release programs could become increasingly important. “There are lots of seniors out there who, given the right considerations, want to look after themselves and want to fund themselves, so the demand for equity release is there.” This demand recently led to the reverse mortgage market in Australia hitting $3bn. The government has also turned its eye to the reverse mortgage market. Proposed legislation for the sector would enshrine in law many standards already applied by SEQUAL. Under the recently released

John Thomas

draft legislation of phase two of the NCCP, reverse mortgage holders would be protected against entering negative equity. The exposure draft has also called on reverse mortgage providers to conduct additional responsible lending inquiries over

and beyond those already required by NCCP. The inquiry obligations include using an ASIC-approved website to generate projections showing borrowers the effect of a reverse mortgage on their equity over time, providing customers with a reverse mortgage information statement and notifying borrowers of potential impacts to pension entitlements and tax. Thomas said the draft regulations largely mirror the industry’s self-imposed standards. The one area of the regulations which Thomas said needs further discussion involves borrowers nominating non-title holding residents to occupy their property. “That would possibly need some more discussion, because it may cause some providers to consider whether they would maintain the product,” he said.

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Recruitment a ‘zero sum gain’ without new blood Aggregators need to begin looking outside the industry for their recruitment needs, Choice CEO Stephen Moore has said. Too few aggregators are focused on recruiting new entrants into the mortgage broking industry, and that most merely look to recruit from other aggregators, Moore said. “At an industry level, unless we also recruit new brokers, ultimately it will be a zero sum gain. We need to focus on attracting new entrants for the

longer-term success of the mortgage broking industry.” Moore has called on the industry to band together to recruit new talent. He commented that attracting new-to-industry brokers has been left to only “a few players”. “I would like to see the industry unite behind this. There is far more we can do including scholarships, mentoring and facilitating alignment with experienced brokers. An industrywide focus is needed in order to

Flashback: plan for succession In Australian Broker’s recent analysis on succession planning, Vow CEO Tim Brown commented that the mortgage broking industry must attract new entrants or risk cannibalising itself. “I think, as an industry, what I’ve seen in my experience is that margins continue to reduce and reduce because we continue to cannibalise each other by not bringing new people in. There are only a finite number of people you can do that with before the margins begin to get down to nothing at all,” he said. Brown has tipped that Vow will launch a mentoring program by year’s end which aims to attract new entrants rather than drawing brokers away from other aggregators.

grow overall broker numbers and our industry,” Moore said. Recruitment to the industry can be difficult, Moore said, as the interim period required to see positive income can deter some potential entrants. However, Moore believes mortgage broking can continue to draw entrepreneurial individuals. “Mortgage broking is a unique profession. Very few career paths play such an important role for Australians. Brokers play a fundamental role in helping Australians in arguably the most important financial decision: the purchase of the family home. That has significant social benefits and is really satisfying work,” he commented And while entrance into the industry now has greater barriers due to educational requirements and licensing, this could have a positive impact in the long term. Moore said the perception of

Stephen Moore

increased professionalism in the industry will draw quality talent. “Looking beyond short-term volatility, higher barriers to entry via educational and professional standards will be a positive. It’s the higher hurdles for new entrants that lead to improved industry perceptions by consumers and to more clients seeing brokers,” he commented.

18 www.brokernews.com.au

News Little hope ahead for LoanKit looks to double broker numbers housing market Australian Bureau of Statistics figures provide little hope for the housing market, the HIA has claimed. ABS housing finance figures have indicated a 0.4% decline in the number of loans for the construction or purchase of a new dwelling. HIA senior economist Andrew Harvey said the result means new home lending is down 13.7% in the first half of 2011 when compared to the same period last year. “New home lending is a leading indicator of residential building activity so unfortunately the current low number of loans reinforces HIA’s view that dwelling starts will fall by at least 14% in calendar year 2011,” he commented. Master Builders chief economist Peter Jones said further trouble could be ahead for the housing market in light of economic uncertainty across the globe. “The figures show the market has found a floor after eight months of interest rate stability, but sharemarket turmoil and global concerns will act to increase household caution and threaten to derail a turnaround,” he commented.

ABS data has also shown continuing declines in property values. Median house prices across capital cities fell 1.9% in the year to the June quarter. The weighter average house price for capital cities declined 0.1% from the March quarter to the June quarter, with every capital city except for Sydney and Canberra experiencing declines for the quarter. Perth and Brisbane saw the largest year-onyear drops, falling 4.1% and 3.6% respectively. Hobart and Canberra were the only capitals to see year-on-year improvement. In spite of the dire numbers, RP Data research director Tim Lawless predicted the market could soon find a floor. “In January we saw Aussie home values fall by 1.2%, which was the weakest monthly result on record. Over the March quarter home values were down 1.8%. Since that time we have seen the rate of decline slow, with an improvement in our leading indicators, like vendor discounting and time-onmarket,” he commented. Lawless said these indicators show the market may be reaching the bottom of its cycle. However, he said any return to capital gains for the market is unlikely to come soon.

LoanKit has appointed a new business development manager as it strives to double its current broker numbers. The aggregator recently announced the appointment of Kim de Bonde as Victorian BDM. De Bonde previously worked with Advantedge, NAB and Bank of Melbourne. Incoming LoanKit CEO Simon Dehne told Australian BrokerNews the appointment signals a period of expansion for the company, and said LoanKit’s goal is to double its broker numbers, currently above 150. He said the aggregator hopes to reach this goal within six to 12 months. “Our first opportunity is to expand our sales team, which we have started to do. We will continue to make our presence known via the various media channels, both traditional and new, and via a range of marketing and public relations efforts. We also have several initiatives that will be announced soon, one of which

is with our current brokers and a number of others for the greater mortgage market,” he said. Dehne commented that the company would heavily promote its proposition to brokers through industry media, and run a number of campaigns to “help communicate our ‘wow’ factor and provide a call to action”. The company also plans to run internal recruitment promotions with its existing base of brokers. “Many of our new sign-ups are referrals from our existing brokers. LoanKit brokers recommending us to others is probably the best type of referral,” Dehne commented. Dehne said that the company plans to recruit across Australia, though its BDM team is currently confined to the eastern seaboard. “Our brokers are mobile and we recognise the need to cater to that at all times while also being aware that they enjoy and often need face-to-face time. Needless to say we travel a fair bit,” he said.

Flashback: New CEO wants LoanKit ‘on the menu’ Upon his appointment as LoanKit CEO, Simon Dehne told Australian Broker he wanted to raise the profile of the aggregator. Dehne said LoanKit had a good proposition that too few brokers were aware of. “We’ve got a really good story that no one knows about. One of our challenges is to put LoanKit on the menu for people who might be thinking about switching,” he said.

WORLD

Mob riots ruin business

Prizes boost mortgage business

US brokers split on change

Recent mob riots in the UK and London have left mortgage brokers with cancelled appointments and personal distress due to the violence, according to Mortgage Introducer. The UK publication reported that one broker located at Ealing Broadway near the epicentre of the riots said the events had left him “terribly distraught”, and that he was too scared to reveal his identity in case of any further attacks on his business premises. Mortgage Introducer reported that other brokers were left without customers due to clients opting out of travelling anywhere in London during the riots, due to safety concerns. Ealing Broadway-based Phil Browne at Mortgage Advice Bureau told the publication: “I’ve had two cancellations. Business has quietened down as no one wants to come in obviously.” He added that the riots had caused havoc in the area. “Shops were all barricaded as people tried to seek shelter, the Foxtons office has been smashed in entirely and the Tesco down the road got fully torn down.” Browne said the action taken by the rioters was “completely unnecessary”.

‘Free’ and ‘win’ are two of the most powerful words in the English language, and Canadian brokers are increasingly using them to bring prospective clients through the door. Canadian Mortgage Professional magazine reports that brokers are increasingly launching giveaway campaigns in order to capture new originations in a slowing market. Darick Battaglia, owner of Dominion Lending Centres, recently launched a sweepstakes offering up to $1,000 per month for 12 months. The contest is open to customers who apply for and get residential mortgages. “We’ve already done our ‘Great Mortgage Giveaway’ twice before,” Battaglia told CMP. “It helps to drive new originations.” CMP reports that no fewer than 12 brokerages across Canada are now using consumer contests to market themselves. At the same time, the campaigns give agents a tool to create dialogue with leads. However, marketing analysts say quantifying the success can be hard, and are sceptical of the benefits of giveaways tied to bigticket purchases such as homes and cars.

The National Association of Mortgage Brokers in the US has warned against the US government mandating that governmentsponsored enterprises Fannie Mae and Freddie Mac should have low to moderate income mortgage targets. A survey of its membership has found that 71% of members believe that such targets were partially why the GSEs failed in the first place. However, this left a further 29% of members who still believe that such targets help people to get a mortgage. Membership was split down the middle on whether the GSEs should remain as they were prior to the financial crisis. However, 82% of members were firmly against merging Fannie Mae and Freddie Mac – as well as other government mortgage programs – into one entity to create better efficiencies and consistency. Members were also fiercely against government ownership and management of the mortgage programs, with 93% voting against the government permanently taking over Fannie and Freddie.

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INDUSTRY NEWS IN BRIEF Intellitrain travels to the regions Education provider Intellitrain will hold face-to-face training courses in regional areas to assist brokers in obtaining their Diploma. With a spike in Diploma demand, the group has scheduled courses over coming months in locations including Far North Queensland, in east coast regional cities such as Newcastle, Wollongong, Ballarat, Cranbourne and Albury Wodonga, as well as in Tasmania. Intellitrain CEO Paul Eldridge said brokers in regional areas are often forced to undertake their training by distance or travel to a capital city to attend a face-to-face workshop. Brokers in Tasmania, for example, normally travel to Melbourne. “We’ve already run courses in several regional centres and feedback from brokers has been extremely positive,” he said. YBR grabs nine ad deal Fifty per cent of Nine Entertainment’s investment in Yellow Brick Road will be in the form of advertising. According to an ASX announcement from the company, YBR will receive $6.5m worth of advertising over the next five years. The advertising will be placed across Nine’s television stations, its stable of ACP magazines and its Ticketek platform. YBR has stated the deal will also include access to Nine’s in-house production services. The company will receive assistance from Nine in developing TV programming and “other concepts”. One mooted programming move is the development of an Australian version of reality program Celebrity Apprentice, with YBR executive chair Mark Bouris as host. Consumers fail to see refi benefits While refinancing is on the rise, many consumers are failing to see benefits from it, the MFAA has claimed. The MFAA Home Finance Index has shown 30.9% of respondents refinanced their mortgage in the past 12 months. However, only 52.9% said they had seen benefits from refinancing. MFAA CEO Phil Naylor has warned that churn created by the removal of exit fees could see consumers wooed into refinancing deals that will not prove beneficial. “Simply refinancing doesn’t always achieve the desired goal, and switching for a better rate may not be as important as the terms of the loan,” he commented. As competition between lenders heats up, Naylor said, consumers may be targeted to their detriment. Aussies expect property declines A growing number of Australians expect property prices to fall over the next year, a new survey has found. The poll by Metropole found 43% of respondents expect property values to decline over the coming year. The proportion has grown from 27% in a previous poll six months ago. Among those who didn’t

foresee declines, optimism was still scarce. Twenty per cent of respondents indicated property values would see little growth, while 34% said they expected values to remain flat. In spite of the outlook for property prices, 59% of respondents still indicated they planned to buy an investment property in the year ahead. Consumer caution trumps inflation The RBA left the official cash rate on hold in August, but has expressed concern over rising inflation. In its decision to leave interest rates untouched, the RBA board indicated that consumer caution is having a dampening effect on the economy. The bank pointed out declining credit growth, and said demand for credit has dwindled, even as lenders loosen credit criteria. RP Data national research director Tim Lawless said this is unlikely to change, even with the RBA’s rate decision. “The stability in interest rates over the past nine months would have been welcomed by many mortgage holders, however speculation about future rate lifts is likely to continue to dampen market conditions anyway,” he said. Broker David Brell of Smartmove said he has witnessed the effects of wariness in the Sydney market. New home sales hit a wall New home sales experienced their biggest monthly setback in five years in August, the HIA has claimed. The HIA–JELDWEN New Home Sales Report showed an 8.7% drop in the number of new homes sold in June. The decrease is the largest monthly decline since May 2006. HIA chief economist Harley Dale commented that the figures confirm anecdotal evidence that the demand for new homes “hit a wall” in June. He said prospective buyers may be wary of an impending RBA rate hike, a wariness he said was unwarranted. “Amidst the roller coaster of interest rate sentiment that has unnecessarily become the norm in 2011, the idea that an imminent rate hike is now unavoidable is misplaced,” Dale commented. APRA cautions banks on mortgage war APRA has cautioned the major banks for loosening lending standards in the fight for mortgage market share. According to a report in the Australian Financial Review and later widely reported, the regulator sent a letter to lenders, urging them to maintain prudent lending standards as they compete for home loan customers. The communication was sent to the chairs of the boards of banks, credit unions and building societies. The report has claimed the APRA letter expressed concern over rising LVRs and higher LMI thresholds. APRA has also cautioned that a return to pre-GFC lending standards may no longer be appropriate.

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Analysis

Low docs: A tarnished image An industry analyst has claimed the vague nature of the NCCP puts lowdoc lenders at risk, but lenders themselves argue low-doc is safer than ever

Sadly the origination risks – from later regulatory or borrower action – appear to have increased substantially

ow-doc lending may face severe difficulty meeting NCCP definitions of responsible lending, an industry analyst has said. As low-doc lenders such as Pepper look to ramp up volumes and Bankwest returns to the low-doc marketplace, Steve Paterson of SAKS Consulting has questioned the viability of low-doc lending. Paterson said non-conforming lending would face greater regulatory scrutiny, and could be the target of borrower litigation. Paterson expressed concern that origination risks for non-conforming lenders have greatly increased since the advent of NCCP regulation. He commented that he cannot see a place for low-doc loans under the definition of NCCP responsible lending. “I have many doubts. I simply don’t see how a lender can make reasonable enquiries to determine a standard style low-doc loan is ‘not unsuitable’ if there is no separate data evidencing capacity to pay. Modest LVRs don’t help,” he said. Low-doc lenders could well face risks from litigious borrowers, Paterson suggested. In such an environment, the viability of non-conforming lending may not be known until lenders found themselves serving as test cases in courts. “It seems lenders and brokers have to wait around to become case law fodder,” he said. Specialist lender Pepper Home Loans disagrees. The company’s director of sales and distribution, Mario Rehayem, said market players are “tarnishing” low-docs, and that low-doc lending can be carried out in a manner that mitigates origination risk. Rehayem said the mortgage industry has attached a negative stigma to low-doc lending, and that this is a stigma he feels is unfair. “The market keeps on tarnishing low-doc and confusing it with no-doc,” he said. “Low-doc back in the day was where the customer would fill out an income declaration form and hand it to the lender and the lender used to take it as gospel. Today they will send in the income declaration form, we will then assess the statements and advise the borrower if we agree with what they think they earn. Before, the onus was on the customer.”

‘Responsible’ low-docs

While Paterson said uncertainty surrounding the definition of responsible lending and reasonable enquiries make low-doc lending dangerous, Rehayem argued that the openness of the way NCCP regulations are worded allows for responsible low-doc lending. “If you have a look at the Act, there’s no such thing as full-doc and low-doc. The Act just says there are PAYG borrowers and self-employed borrowers. How the lender and broker assess income is completely scalable,” he said.

Rehayem commented that Pepper is meticulous in assessing borrowers’ income declarations through tax records and business trading statements. He said the company tries to go beyond the requirements of NCCP in order to ensure sound lending practices. Mario Rehayem “We always ensure first, genuine capacity to repay the loan, and second, the loan must be of benefit to the customer. If both the broker and lender carry out those assessments, where could you go wrong? There’s minimal risk,” he said. “There’s no one deal out there that is worth our reputation,” Rehayem added. Resimac national sales manager David Coleman agrees, and commented that brokers have no reason “to be fearful” of promoting low-doc loans. “A loan contract will be unsuitable where either it does not meet the consumer’s requirements and objectives, or the consumer will be unable to meet the repayments. This means that once the lender and broker make their reasonable enquiries to verify these requirements, low-doc loans can be presented to applicants as a viable home loan option and still meet the definition of responsible lending,” Coleman said. These assessments, Rehayem said, have led to a quality loan book for Pepper. “The business we’ve been writing in the last 18 months has performed on par with any prime book out there. That’s a clear statement to us that the business we’re writing today was deemed prime business yesterday,” he said.

Brokers beware

Paterson still contends that the vague nature of the way the NCCP defines responsible lending and reasonable enquiries means some borrowers may find lenders unwilling to take a risk on them. He said this could leave a gap in the marketplace, with some consumers unable to obtain credit. “I do see a legitimate spot for the idea of low-doc loans, but sadly the origination risks – from later regulatory or borrower action – appear to have increased substantially,” he said. Likewise, Paterson believes risks also exist for brokers dealing with self-employed clients. He commented that it will be important for brokers to ensure they mitigate their liability in such cases. “Make certain that lenders fully accept origination risk – NCCP driven or otherwise – and they don’t get caught out by vague standards like ‘good origination practice’,” he said.

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What a difference a year makes … or not. Australian Broker reflects on the punditry, breaking news and trends that made headlines in the magazine 12 months ago Australian Broker issue 7.16 Headline: Support for second tier needed: Foley (page 6) What we reported:

What’s happened since:

Headline: Interest rates: period of stability ahead (page 16) What we reported:

What’s happened since:

National Mortgage Brokers managing director Gerald Foley last year appealed to brokers to give more support to second tier and smaller lenders following nMB end-of-financial-year numbers that indicated the major banks, not counting their subsidiaries, wrote 72% of residential loans for the year. Foley warned that if brokers did not show more support for second tier lenders, smaller financial institutions would seek out new channels. “If brokers don’t support those brands then those businesses will make a decision to go another way,” he said.

Last August’s RBA board meeting ended with rates being kept on hold at 4.5%. At the time, RBA Governor Glenn Stevens noted that inflation was lower than expected. Industry analysts and pundits tipped a November rate rise as the most likely scenario. RP Data analyst Tim Lawless said he expected the RBA to move in November, and follow the hike with a protracted period of stable interest rates. He indicated that such an environment might lead to a temporary uptick in first homebuyer activity.

In a move that echoed Foley’s admonition, ING Direct recently issued a statement calling on brokers to support a broader range of lenders. The communication argued that brokers risked irrelevance both to consumers and smaller lenders if they did not begin to look outside the major banks when placing loans. The statement ignited a firestorm of debate, as brokers accused second tier lenders of falling behind on service propositions. Foley again weighed in, urging second tier lenders to unite behind a common marketing campaign, and to standardise their forms and procedures to encourage greater broker volumes.

Tim Lawless of RP Data may well be clairvoyant, because his predictions were dead on. As everyone no doubt remembers, the RBA lifted rates on Melbourne Cup Day in November of last year. This year’s August RBA meeting was strangely similar to last year’s, with the RBA leaving rates untouched and economists tipping a rise in November at earliest. The big difference this year is the RBA stayed on the sidelines in spite of higher than expected inflation numbers. Flagging consumer confidence and a marked two-speed economy kept the Reserve Bank at bay.

Headline: Russell issues call to arms on diversification (page 16) What we reported: What’s happened since: Following ABS figures showing declining demand for mortgages, Mortgage Choice CEO Michael Russell issued a call to arms for brokers to expand their product offerings. Russell commented that brokers needed to provide complementary products such as mortgage protection and personal lending, while keeping home loan products as their core proposition. He argued that this would create “stickier” clients, as well as expand revenue flows.

Further diversifying its product base, Mortgage Choice this year launched a white-labelled vehicle finance loan. As demand for credit has continued to remain weak, Mortgage Choice spokesperson Kristy Sheppard said product diversification would help generate more leads and create a more loyal client base for brokers. She commented that embracing diversification would help the industry expand public perception of mortgage brokers’ value proposition.

Headline: Mortgage demand plummets as stimulus disappears (page 13) What we reported: What’s happened since: Along with the wind-up of the government’s first homebuyer stimulus measures came a marked decrease in home loan demand. Demand for new mortgages nosedived by 20% in the June quarter of 2010 when compared to the previous corresponding period. The June quarter result followed a 15% year-on-year fall during the March quarter. Veda Advantage’s Chris Gration said Australians were focusing on saving.

The RBA recently indicated that credit growth had slowed to its lowest level since the central bank began keeping records in 1976. According to the HIA, new home lending was down 13.7% in the first half of 2011 compared to its already poor result in the first half of 2010. A survey by property investment firm Metropole found Australians have developed a gloomy outlook on the future of the market. Forty-three per cent of respondents said they expect property values to decline in the coming year, while 34% said values would remain flat at best.

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Comment VIEWPOINT

The attractiveness of fixed rate offers have been increasing, as the global economic outlook deteriorates. What do our commentators say on the fixed rate outlook?

Belen Lopez Denis

Mardee Crane

Ian Jordan

Citibank

1st Street Home Loans

The Selector Group

What’s the outlook for fixed rates? You can actually see that a lot of the three-year fixed rates now are under 7% for a majority of the lenders, and I wouldn’t be surprised to see further drops after the most recent economic news that we are hearing from Europe, the UK, and even what is happening in the US, as well as the RBA holding rates, rather than dropping them at this point in time. Most likely what we will find is the yield curves will keep dropping for the swaps – which is the main basis for fixed rates – so we might see further drops in the three and five-year fixed rates in the near future. How is the rate environment impacting enquiries? We have actually seen a significant increase in fixed rate enquires, as well as people applying for fixed rates as new-to-bank business. It has increased up to 8% of our business, and is still growing.

Are fixed rates looking competitive? We’re at a time where fixed and variable rates are a lot more on par, whereas a year ago or so, the 3-year fixed rate was about a per cent different to the variable rate. So, there’s definitely a lot of movement from the fixed rate side of things. What impact is this having on your clients? It’s definitely bringing a conversation to the table. I think people who are questioning fixed are definitely in a set kind of wage – not the type of people that have different levels of income each month. Because then they know that there is not going to be any variance in what is going to happen going forward. But you’ve still got those self-employed – where one month might be good, and another might be so so – and keeping some variable is obviously something they need to keep that access to redraw.

What are you advising your clients on fixed rates? A few years ago there was also a unique period, where we were able to fix in rates below 5%, for extended periods, so I think now we are hitting another one of those milestones, as we are able to get fixed rates at around the 7% mark. People who think that rates are going to increase, like myself, over the next three years, are certainly going to be counselling locking in within the next few months. Are there advantages for clients in fixing? I definitely see advantages in fixed rates, specifically in an upward economy. Everybody agrees that at some stage our economy is going to grow, and the RBA is indicating that rates are going to increase. So an extra 50 points or 100 points is where people are going to start to feel the pinch. So are they better off saving for a rainy day, or putting a fixed rate in place?

OPINION

Have aggregators forgotten their roots? Have you ever wanted a larger lender panel and been frustrated by your aggregator? You should be lobbying them for updates, argues this anonymous letter from a representative of a non-conforming lender As a broker, you must wonder what it is your aggregator does to justify the fees you’re being charged as a member. Despite varied fee structures, all aggregators charge some form of membership and for this, what do they offer? Is it access to the major banks and a few non-traditional funders? Maybe a little back office support? Maybe some lead generation work? For most brokers, your aggregator is simply a means of getting access to funders without having to hold all the individual accreditations yourself or meet the lenders’ required volume levels individually. In return, you would expect your aggregator to keep this list of accreditations as up-to-date as possible, giving you access to the best priced and optioned facilities in the market. As a representative of a non-conforming lender (who unfortunately must remain anonymous in this case), which offers one of the best priced facilities in Australia (as well as funding options available that aren’t currently being met by any other non-conforming lenders), you would think aggregators would be jumping at the chance to get access to our products. I should point out that while not too well known, we’re no fly-by-nighters and have quite a few years’ experience. Yet, what’s the

most common response when approaching aggregators for 20 minutes of their time? More often than not, a blunt and often rude “we’re not interested”. If this is the attitude they take to keeping their list of panel funders as up-to-date and cost conscious for your clients as possible, I ask again: what are you paying them for? If a competing broker has access to these products you’re being priced out of the market and you are losing business. This response is not just limited to aggregators; it extends to originators, subaggregators and even those offering franchise opportunities. What’s worse, it’s normally the small-to-medium sized groups that you would think should be working harder to compete with the big boys. And I’m sure there are many more niche funders just like us, knocking on the door looking to get access to the brokers these groups represent. If you are not given access to funders like us, then you may be putting your clients into inferior and higher-priced facilities, which will undoubtedly come back to bite you when the client finds a cheaper and better alternative. Obviously aggregators don’t want to just keep accrediting lenders and have more than they can manage. However, having seen the list of accredited lenders available on most aggregators’ panels, I believe most are outdated. In fact, many still have funders listed on their web pages and advertising material – despite the fact they no longer exist or lend. Let’s face it, most brokers only join an aggregator to get access to their lending panel

and all the other bells and whistles they offer are irrelevant. But most aggregators have forgotten that this point is why they exist. Aggregation groups need to take the time to see what’s out there on offer from all current funders, as they may be doing their brokers a massive disservice compared with the broker next door. Finance is a cutthroat, competitive industry and it really is survival of the fittest. So aggregators should be looking to sign up with new funders who can offer their members new and superior products. And if you’re a new broker looking to join up with an aggregator or an existing broker looking to change, please take the time to have a look at what funders are on offer and ask the aggregator, when was the last time they added a new funder to the panel. If they’ve made no changes to the panel in the past 12 months, then ask them – why not?

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FORUM An 80% target for loan conversions might sound good in theory, but our readers were split on the practical realities. (Poll: Is an 80% conversion benchmark realistic? 28/07/11)

case, differing serviceability calculators (from those we have, as opposed to those used by credit). So, taking into account the above, how can we be held to account? BONED on 02 Aug 2011 01:26 PM

I think 80% is achievable if a bank doesn’t credit score. With not knowing the goal posts (i.e. credit score) how can you possibly know whether a deal will pass or not? Dave Alexander on 02 Aug 2011 12:20 PM

Theoretically it’s possible. My biggest bugbear is when lenders count preapprovals that aren’t converted to full approvals. With a 90-day expiry period, most lenders are requiring brokers to submit a complete new application and the previous one counts as “not proceeding”. There’s very little a broker can do to make a client buy a property when they haven’t found the one they want. petert71 on 03 Aug 2011 12:16 PM

What is the in-house conversion rate of lenders for applications taken by their own employees? Also, simply discussing conversion rates means absolutely nothing unless the criteria for measuring conversion rates is spelled out. John Black on 02 Aug 2011 12:24 PM Steven Heavy is correct in this. It’s not only achievable, but should be made the benchmark. The lenders have enough to do without needing to do the brokers work for them. When a broker submits a deal he/she should know that it will be approved and able to be settled before it even gets to submission stage. They should know the positives and negatives of the deal. It’s called being a professional. The only unknown factor should be the credit rating. If a broker isn’t sure the deal will work there are avenues available to help determine the viability of the deal. The banks need to share the responsibility as much as the brokers for lack of training in this area. Having said that the brokers should clearly understand the lender’s policy and understand what the lender is looking for. Going on a bout of bank bashing won’t help the situation. Train yourselves and be professional. Unfortunately it’s something the broker industry is sadly lacking. I can say this because I am a broker with 12 years’ experience and predominantly deal with HNW clients and have had to fix many deals that brokers lacking in the basics have put to lenders – with declines following. Garry on 02 Aug 2011 12:58 PM I’ve said it many times before, what reasonable broker doesn’t aim for 100% CR? The fact is, a number of factors outside our control conspire against us, as there is only so much we can control. Credit score, valuations, previous history with lender, in some cases interpretation of policies due to inexperienced credit officers, and in St.George’s

Garry, all that is fine and yes we all would love to hit 80%–100% conversion rate, but there has been plenty of times over the years where I have rung and spoken to a BDM or policy hotline to discuss a particular part of a deal and been told that what I was proposing was acceptable, only to have it knocked on the head for the very reason I brought up the discussion with them in the first place. Getting the correct answer first time would save a lot of time for us and them. mortgageandlease on 02 Aug 2011 03:18 PM Our conversation rates are a lot higher than 80%. However, we ensure that we do all the work for the broker prior to them submitting a deal. We couldn’t operate with the conversion rates that others operate on. Banks need to work on the relationships a lot more than they do. That’s why mortgage management is so successful. A personalised service and quality applications. No one gets paid unless the loan settles. Michelle – Loan Ave on 03 Aug 2011 11:49 AM Our readers supported nMB’s Gerald Foley when he called for second tiers to unite to take on the major banks (Second tiers should band together: Foley, 27/07/11). Exactly. Having dealt with many second tier lenders it is only human nature to cringe when you make a recommendation that you just know will be fraught with so many reasons for the deal to fall over when you know it will fit exactly with a major. Post codes, valuation policy, stability in employment, mortgage

insurance and credit score… Would love to have real alternatives although how many times do you get knocked back and look like an idiot in front of your client before you just take the smartest and easiest option that will save you all the grief. I fully appreciate this is only a short-term solution and would love to support competition moving forward when they get it right. Cuz on 27 Jul 2011 12:42 PM Second tiers should have been doing this years ago! Linda M on 27 Jul 2011 12:58 PM Excellent. He’s looking for ways to win the consumer’s trust in a broker, not just the broker’s trust in a lender. Gerald makes very good sense; rather than arguing that brokers support the non-majors, simply to save the second tier. May confidence be restored. SteveMc on 27 Jul 2011 02:03 PM This is the most sensible, constructive and consumer-focused comment I have heard on this very important subject. What a fantastic idea that actually proposes a win win win solution to the problem of the rapid evaporation of competition within our industry. WIN for the Lender, WIN for the Broker and most importantly, WIN for the consumer! Gerald Foley, please get this idea off the ground...

Poll: Is an 80% industry conversion benchmark achievable? Setting the goalposts at 80% for loan conversions is what some industry players think would be fair. Here’s what our readers think about the 80% challenge.

Yes 39%

No 49%

Undecided 12%

Source: Australian BrokerNews Poll date: 28/08 To vote in our latest online poll or get involved in our forum, visit our home page at www.brokernews.com.au

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Insight

A question of qualifications W The benefits of education are being debated as the MFAA raises the minimum qualification bar. Are there real benefits for brokers? We asked the educators for their take

hen it comes to formal education, many brokers are cynical. Coming from an industry where practical experience has in the past been the most important consideration, the value of completing a Diploma – or even a potential university degree – is questioned. So is there real value to mortgage broking formal qualifications? We asked the National Finance Institute managing director Peter Heinrich, AAMC Training Group managing director Jeff Mazzini and Intellitrain general manager Byron Gray for their take on the value of further education.

What are the benefits of education?

Peter Heinrich: For many years now the mortgage/finance broking industry has been striving to be recognised as a profession. Many or most of the brokers I have canvassed the issue with say to me Peter Heinrich that the industry needs to be recognised as financial planning or accountancy is. The inescapable truth is that the other “professions” currently demand a much higher standard of education to gain a qualification and thus recognition as a profession. If we attain the same level of training they do then we can indeed claim [the status of] a profession.

But are their real, practical benefits?

Peter Heinrich: The inescapable truth is that clients value qualifications. They would never visit a lawyer or accountant who didn’t have formal qualifications. They are becoming increasingly demanding that their brokers not only have good industry knowledge but also a formal qualification. The ability of a broker to be able to advertise a higher qualification is going to certainly mean more work. The broker with qualifications and other strings to their bow are going to be more in demand and will be able to maximise returns from a client.

What’s your view on a university qualification? Jeff Mazzini: The education system of the past has not equipped us all for the new world and the only way to come into that space is to continually upgrade your

knowledge and skills via education. Universities are adapting and now designing more relevant courses to meet the ever changing environment in which we all operate and hence without further education pathways being offered people will get left behind in attempting to Jeff Mazzini achieve their dreams. Peter Heinrich: I don’t think existing brokers will rush to get a degree even if it is mandated. I think it is a stretch too far for existing brokers and if we use the financial planner analogy they have not gone down that path although many are obtaining an Advanced Diploma as a logical step. What is happening though is that many degreed people are entering the industry by choice because they are seeing it more and more as a profession to be in. Byron Gray: The days of doing a course once and then not doing any further study for the rest of your career are well and truly past. As for a degree it’s possible down the track degrees will be developed that encompass a full range of professional financial and credit advice. So future graduates have a greater scope of services they can provide. A degree will never replace good old real world experience but provides a good foundation.

Is education or practical experience more important?

Byron Gray: Neither is more important. They both support each other. In my own experience, formal studies helped me understand what I should be doing in my business. I was able to study and learn from the successes (best practice) and Byron Gray failures of other businesses. Real world experience helps to inform your decision-making just as much as formal training. Peter Heinrich: The two are totally interdependent. No trainee from any university or training college can finish a course and go out and write loans. An experienced loan writer can no longer go out without qualifications and legally write loans. The newly qualified student needs a guiding hand to gain experience. The experienced loan writer needs a qualification to write loans – there has to be synergy there. Either way ASIC won’t allow it, the lenders won’t allow it, the MFAA won’t allow it and the public won’t accept it. It is the new paradigm – grasp it, get used to it, this is the future and it is good for the market.

How is the Diploma different? Jeff Mazzini: The Certificate IV was a great course to teach people the basics of the industry and the products being sold, along with how to complete applications, selling and regulatory issues, in what was a splintered national regulation before NCCP. Basically, this course was an entry level to the industry, but did not equip you for the new regulatory requirements. The Diploma is clearly a step-up from the Cert IV qualifications and it actually addresses vital information and skills that a finance broker needs when acting as the trusted advisor. The Diploma will offer some of these but is not limited to the following: • the ability to understand corporate and trust structures; • understanding risk assessments from a borrower and lender point of view; • being able to read financials effectively and being in a strong position when discussing issues with clients and their accountants or other professional advisors; • being able to place a loan submission before the lender with all required data and information presented in a format that the lender understands To summarise, the Diploma actually gives you the required professional skills whilst at the same time placing you on the same level as the client’s accountant and other trusted advisors.

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Market talk markets have factored in rate cuts. In the middle of last year, in fact, they factored in rate cuts. Every time there’s a global upset the market has to factor in cuts. It’s not a perfect predictor, but the fact that we’re seeing a significant increase in downside risks regarding global growth is pointing in one direction, and that’s toward eventual rate cuts.

If rates do fall, how sharply can we expect them to drop?

The market has factored in 150bps of cuts. That’s probably a bit rich. In fact, the market has factored in a 100% chance of a 50bp cut by next month. I’d say that’s possible, but unlikely unless we get a full-blown economic meltdown.

Land of interest Q rate confusion

If rate cuts are on the cards, what about inflation? Aren’t inflation figures still tracking higher than expected?

nterest rate predictions have been wildly divergent for the past few months. First analysts tipped two rate hikes, then they tipped one, then they began pushing the possibility of interest rate cuts. With global markets faltering amid sovereign debt crises, and Australia increasingly showing the impact of a two-speed economy, how long can the Reserve Bank stick by its tightening stance? We asked AMP economist Dr. Shane Oliver for his take on the next rate movements.

What’s the outlook for interest rates? With an array of different predictions amid global turmoil, we asked AMP economist Shane Oliver to cut through the confusion

Where do interest rates go from here? Will the RBA stay on hold, ramp up its hawkish stance or begin to ease monetary policy?

The most likely scenario is rates on hold for the time being, but probably a rate cut or rate cuts starting next year in response to slowing inflation. If, alternatively, the economy goes into complete meltdown a la GFC, then I think a rate cut would be brought forward. We could be looking at 100bps of cuts if we’re looking at complete panic in the market.

There’s growing talk of deteriorating economic conditions leading to rate cuts, and global markets are already factoring this in. How likely is this? I think it’s a good indicator, but you’ve got to be a bit careful. There’s a few occasions where the money

They were in 2008 as well. Inflation always lags the cycle. In these figures there was a lot of upward pressure on inflation from petrol and bananas. I’d say the RBA didn’t really have an inflation problem. It had a petrol and banana problem. Government-related prices have been going up as well. Private sector stuff has been non-existent. I think the RBA’s inflation worries will evaporate very quickly if the economy continues to struggle. Inflation is still a threat here, as it is throughout much of Asia, but that will vanish pretty quick if economic growth slows down, particularly given that a lot of inflation was food and petrol.

How will the current economic environment affect the housing market? Are we going to see recovery from such a long period of cash rate stability?

The history of the GFC was that the property market got worse before it got better. Some people are likely to be kicked over the edge by more difficult economic times. There are a proportion of people geared to the share market, and they may be forced to sell. Many small business owners are facing hard times, and they may be forced to sell. If unemployment goes up, those people might be forced to sell as well. Mortgage stress has already picked up overall, as have arrears. If the economy takes a turn for the worse it will only increase the supply of houses on the market. The next six to 12 months are going to be pretty rough, but once rates start coming down that may put a bit of a floor under the market. But that’s probably more a 2012/2013 story than now.

NUMBER CRUNCHING How will the carbon tax affect potential buyers’ plans?

Home loan demand: July

Still planning to buy

3.3% 4.7%

Will budget around it Holding off to gauge impact

35%

38.6%

Will put buying out of reach

Introductory rate Line of credit Ongoing discount Standard Variable

19.9%

Basic Variable Fixed

22%

13.3% Fixed Source: Loan Market

Source: Mortgage Choice

20.2% Variable

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Toolkit

Know your target lenders The lending universe can at times appear complex, when you move beyond the familiar major banks. Semper Capital’s Andrew Way demystifies the lending spectrum

Andrew Way

The one constant in Australia has always been a wide array of market participants

here can be no doubt that the operating environment for today’s mortgage broker is far more challenging than it has ever been. Regulatory changes have brought increasing responsibilities and the threat of criminal as well as civil charges for offenders. Against this backdrop lenders and products have changed too, but this is nothing new. Brokers with experience know that the continuous evolution of lenders and products is as inevitable as the shifting of sand. The one constant in Australia has always been a wide array of market participants; something every government should be keen to promote. There are APRA-regulated banks and ADIs, building societies, mortgage managers, managed investment schemes, unit funds, finance companies and private lenders. Each offers something different and together they offer the spectrum of products that fulfil the varied demands of borrowers. An important strategy for successful deal flow is maintaining a broad knowledge of lenders’ attitudes to risk across this spectrum, although brokers in broker or aggregator groups might be restricted to dealing with on-panel lenders. So what influences lenders in regard to risk? And how can understanding this help with successful deal placement? The factors that affect credit decisions with every lender are: 1) Capacity of capital; 2) Price of funds raised; 3) Margins for profit; and 4) Appetite for risk. In simple terms the graph (pictured opposite) represents lenders across the spectrum of the market. It provides a simplified representation of their funding capacities, risk motivations and credit flexibility.

Banks

Banks have the greatest number of funding options but they are by nature high volume / low margin operators. Under APRA regulations and international banking protocols they may borrow funds at a multiple of the value of assets on balance sheet. They can also do the things non-bank lenders can, including but not limited to the securitisation of assets (packaging a pool of mortgage receivables for sale), the issuing of bonds and soon perhaps, covered bonds (debt instruments issued to investors where the mortgage assets and receivables are quarantined from the balance sheet and other liabilities, and held for the benefit of bond holders).

A bank’s capacity to borrow and the rates they pay for funds is determined by the prevailing Reserve Bank capital adequacy and other prudential requirements, interest rates on wholesale markets as well as balance sheet strength and credit rating. Australian banks came through the GFC fairly unscathed. Their exposure to other international banks (counter-party risk) and governments (sovereign risk) was low. Their profitability is high and their rates of defaulting loans are currently low. But their options for funding have diminished somewhat; the securitisation market is currently static and the international banking accord (now Basel III) has made changes to the way banks calculate asset-values for prudential purposes and to liquidity requirements, which has sent many Australian banks scrambling to increase deposits. Luckily for the banks competition has also diminished. The cost of international wholesale funds has risen and, since Australian banks rely on this as part of their funding requirements, their margins – as represented according to the bank bill swap rate (BBSY) and RBA cash rate – have increased. Where three years ago the average bank margin above the BBSY might have been between 70-90 basis points, today it is nearer 300. High volume/low margin businesses typically de-centralise decisions. The credit process begins with the relationship manager who packages information and enters the deal into credit. From credit the file passes to legal. Once documents are signed it goes back to credit for checking, then legal for the same, then lodgment and legal again, before drawdown. Decisions are by nature objective rather than subjective. In short, lower margins mean less flexibility and less tolerance for credit deviation. Banks appear to have become cherry-pickers, choosing the best deals from the market. They seem to be reducing exposure to commercial property, and lowering acceptable LVRs to tighten credit exposure and further protect their balance sheets. They are showing less appetite for so called non-conforming loans from, for example, selfemployed persons and small businesses. Also, the time they are taking to administer applications has significantly lengthened. Brokers with anything less than a vanilla residential, municipal, high-doc, low-LVR deal scenario can expect high levels of credit scrutiny.

Non-bank ADIs

Non-Bank ADIs include credit unions and building societies, many of which are not rated and, as such, do not enjoy

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Low Volume / High Margin

p y for Capacity funding

High Volume / Low Margin

y Credit autonomy/ exibility flexibility

Australian Deposit-taking Institutions (ADIs) - Regulated by APRA

Non-bank lenders regulated by ASIC Mortgage Managers

Banks

Building Societies

MIS/Unit Funds

Credit Unions

Process driven / low flexibility

the same benefits in terms of access to international wholesale funds. Along with the banks they benefit from the Government’s Deposit Guarantee, which protects deposits of up to $1m without charge, and sums above $1m and wholesale facilities with a fee. While this has brought stability to ADIs and a flood of deposits from nonguaranteed entities, it has not translated into a truly competitive, so-called “Fifth Pillar” alternative to the banks. They are lower volume and enjoy a slightly higher degree of autonomy but they are largely process-driven and traditionally prefer residential assets of a certain class and location.

Non-bank, non-ADI lenders

Lenders in this group include originators, mortgage managers, managed investment schemes, unit funds and finance companies who raise funds by issuing debt and/or equity instruments. Each of these is regulated by ASIC and provides a unique alternative to the banks, particularly in relation to commercial and rural risk. They vary in size from companies that manage tens of millions of dollars to those that manage billions. Some are rated and listed whereas many remain unlisted and unrated. Most lenders in this category raise funds from wholesale or retail investors by way of a prospectus and pay a fixed rate of return, or coupon. These companies were excluded from the Government Guarantee. Their costs of capital vary from lender to lender but fluctuate less in relation to the BBSY rate because their coupon rates bear no relation to it. They may also securitise, when the market is receptive. These lenders are lower volume/higher margin operators with generally fewer participants in the credit chain. They are often specialists who departmentalise according to asset classes, which provides for a higher degree of credit autonomy. There are some surprising benefits of dealing with lenders in this sector at present. While the cash rate has risen only slightly, the margin banks charge in comparison to the cash rate has risen more. But rates paid by banks on deposits have remained closer to the cash rate. Conversely, the coupon rates offered by nonADI lenders have traditionally been higher than the deposit rates offered by banks, but the margins they charge borrowers is currently less than (or comparable to) the banks, making them increasingly competitive. Furthermore, they are extremely flexible and enjoy a high degree of credit autonomy. Non-ADI lenders are currently perhaps at their peak of competitiveness with the banks. However, their capacity to rapidly grow is limited by their capacity to match deposits in with loans out. If they raise too many deposits they suffer cost of capital overhangs that add to their

Finance Companies Debenture / Note Issuerss

L Lesser regulated Private Funds / Private Lenders

Bespoke appro approach oach / hi higher flexibility

Weighted Average Cost of Capital, unless they have wholesale facilities to take up this elasticity of demand pending repayment by deposits. Smaller companies with less than $200m under management may not enjoy the economies of scale that their larger counterparts enjoy. Brokers should get to know some of these lenders. They are receptive and surprisingly approachable. A relationship with a strong non-ADI lender will often prove an asset in settling a deal that makes perfect credit sense, but falls outside the matrix of ADI lenders.

Private lenders

There is a surprising number of private lenders in Australia. They range from single, wealthy investors, to private company funds and larger mortgage managers such as my company, which manages risk on behalf of a number of funds and non-ADI finance companies. Most private lenders suffer from limited access to capital and their credit decisions and rates of interest are dictated by this. They tend to occupy the risk areas where the highest return for a manageable risk can be attained, such as in short-term and bridging finance. Lenders with less than $5m under management will be largely equity funded, and expensive. Lenders with greater than $20m under management have increased funding options such as wholesale and warehouse facilities from the banks. The benefits of obtaining funding from a private lender are: a high degree of autonomy in credit decisions, a bespoke approach to risk, and speedy drawdown. But brokers should exercise a high degree of caution dealing with private lenders particularly in the non-consumer space, which remains largely unregulated. Despite the current lack of regulation, brokers can find themselves at risk of breaching “responsible lending” obligations. Rather than be tempted by expensive private lenders’ offers of iPads and other trinkets or the promise of high commissions, it pays to compare and compare, then choose wisely. Don’t let clients pay fees unless a loan is provided.

The lending market

If effort is spent extending lender options beyond mainstream banks and bank-funded or bank-owned ADIs, the chance of placing deals will improve greatly. Call lenders and discuss their credit processes and target market, then meet with them and get acquainted. Treat lenders as you treat prospective borrowers; maintain a CRM system for them because as a broker you rely on upstream and downstream relationships; lenders upstream and borrowers downstream. If you manage relationships well with both you will greatly improve your chances of successful deal placement. Andrew Way is the director of bridging finance and commercial lending provider Semper Capital.

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People Chairman to assist Sugars named SA ‘Woman of the Year’ Connective dominance Myrtle Bank local franchise owner and mortgage broker Belinda Sugars has won the Franchise Council of Australia’s South Australian Franchise Woman of the Year award. A broker at Mortgage Choice, Sugars was given the honour for her positive influence on other women, leadership, business achievements and contribution to franchising in her community. She will attend the national awards on 11 October along with other Mortgage Choice franchisees who have been nominated for national Franchise Council awards. Mortgage Choice spokesperson Kristy Sheppard said Belinda’s award was a “wonderful recognition” of her dedication to the franchising and mortgage broking industries and her community. “She is an inspiration to so many in our nationwide network – female and male – for passionately following her dreams and exceeding expectations,” Sheppard said. Sugars said that it was fantastic to have efforts praised by the franchising industry and peers. “It’s an honour to think I may be inspiring other women to pursue their professional goals,” Sugars said. “Being acknowledged for my

Belinda Sugars

business acumen, leadership and community involvement is the ultimate accolade. This recognition will help me to grow my profile and involvement in women’s networking events within the state – something I’m truly looking forward to.” Sugars acknowledged the role her customers played in winning the SA accolade. “All of this wouldn’t be possible without the support of my customers and my passionate team. I thank them for their encouragement and patience. My attention is now on trying to win the national award and bringing attention to the success of women in the franchising industry.”

Connective has appointed professional director Graham Maloney as a new chairman of its board, where he will be responsible for the aggregator’s strategic management and control. Maloney, who is a fellow of the Australian Institute of Company Directors, is a current director of financial planning firm Snowball Financial Group, risk software provider Infrarisk, not-for-profit Circus Oz, and Epilepsy Action Australia. His experience includes several years as group treasurer of NAB, time as an equities banking analyst at Macquarie and then UBS, as well as a period as divisional director in Macquarie’s Financial Corporate Advisory Group. Connective principal Mark Haron said the creation of the new position reflects the growth of the business, and the opportunities that lay ahead for Connective. “Graham Maloney is a new appointment to the board. Up until now the principals of the business have been responsible for Connective’s strategic management and control. The recruitment of Maloney to the position of chairman of the board has been undertaken to continue to improve the business’s already

excellent growth and governance,” Haron said. “Bringing in someone external who has so much experience and such a strong reputation will assist Connective and enable it to increase its market presence,” he said. The current principals of Connective are Glenn and Murray Lees, as well as Mark Haron. According to Haron, the appointment will assist in growing Connective dominance. “Connective is Australia’s fastest growing aggregator and Graham’s appointment will ensure we continue to deliver rigour around our governance and compliance responsibilities while we take the next steps along our evolving path,” he said.

Graham Maloney

Shane Tregillis is new ombudsman

LoanKit appoints Victorian BDM

The Financial Ombudsman Service will replace outgoing chief ombudsman Colin Neave with ASIC’s Shane Tregillis, it has announced. At present a commissioner at ASIC, Tregillis has previously worked in a number of senior management roles at the corporate and securities regulator, and has also worked at the Monetary Authority of Singapore as its deputy managing director. FOS said Tregillis’ experience in leading change and fostering constructive stakeholder engagement would be “invaluable” to the service at a “critical time”, as FOS aims to cement and build

LoanKit has announced that it has appointed Kim de Bonde as Victorian business development manager, after he commenced in the role on Monday 25 July. Kim de Bonde has previously held client relationship, account management, administration and loan services functions within companies including Advantedge, NAB, Bank of Melbourne and Cobb & Co Coaches, for a period of over 20 years. In his new role, LoanKit said his key brief will be to recruit new brokers into the LoanKit fold and “provide the support needed to grow their skills and business”. Kim de Bonde holds a

on its creation from the merger of five predecessor EDR schemes. Tregellis’ appointment comes as a result Shane Tregillis of present chief ombudsman Colin Neave’s decision not to continue in the role. Tregillis will commence in his role at FOS in September. FOS is a national external dispute resolution scheme. Under current NCCP legislation, practicing mortgage brokers are required to notify their customers of their external dispute resolution scheme membership.

Certificate IV in Financial Services (Finance and Mortgage Broking) and is reportedly actively involved in the Victorian Kim de Bonde Water Ski Kite Flyers Association. He also enjoys recreational waterskiing, golf, tennis and motorcycling. Incoming LoanKit CEO Simon Dehne has said that Kim de Bonde’s appointment signals a period of expansion for the company, and that LoanKit’s current goal is to double its broker Greg Sugars numbers, currently above 150.

Have you got people news? Send your movers & shakers to the editor at ben.abbott@keymedia.com.au

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Insider

Got any juicy gossip, or a funny story that you’d like to share with Insider? Drop us a line at insider@ausbroker.com

Small brother

in question some consternation. Legal? Doubtful. Courageous? Assuredly. So, credit officers and banks, be careful what you say, small brother just got bigger.

Crying poor

This time of year always brings about a flurry of profit announcements, which Insider watches with baited breath, his super fund hanging in the balance. The most recent spate of announcements from big banks seemed to carry with it a common – and somewhat comical – theme. Bank CEOs lined up to bemoan the terrible economic environment and spin woeful tales of how difficult business has become… directly after announcing record profits. Now, don’t get Insider wrong, times are definitely tough out there. Lending has slowed to a trickle as consumers avoid the housing market as though it were covered in oozing cold sores. Mortgage competition between the banks has gotten so fierce Insider wouldn’t be surprised to see actual gladiatorial combat erupt between the Big Four CEOs. But, it’s a little bit of a tough sell to talk about how hard the business environment is when your annual profit has that many zeros behind it.

A bit of coin…?

No, what you actually said was…

enders beware… small brother is watching you. Of course, lenders will have heard of Big Brother. That all-pervasive, bureaucratic, dictatorial cooperation of the powerful, that finds titillation in invading the privacy and controlling the very minutiae of everyone else? Well, enter small brother… and guess what, he’s a broker – and probably doesn’t wear a moustache. For all those credit officers sitting in the comforting anonymity of big bank call centres giving brokers the all-clear, “she’ll be right – it’s a deal mate”, just to get them off the phone so they can hit your KPIs, only for those same poor brokers to have their deals knocked on the head later – watch out. You could be being recorded. That’s right, a small ‘gorilla’ contingent of brokers, armed with state-of-the-art $10 recording

software, has been secretly recording their conversations with lender credit teams, in what these ‘conversion crusaders’ deem only fair game in their fight against the vagaries, and vagueness of credit policy, scoring, valuations and opaque serviceability calculators. Armed with their bourgeoning archive of recorded conversations (which could one day develop into a large underground network of shared data to be used by all crusading brokers, and used as a key piece of leverage in a final, victorious ‘commission coup’), these individuals – if they should get a deal rejected after being given the green light – are hitting credit officers and banks back with their surreptitiously-sourced weapon – that credit officer’s own conversation. That’s right, all they have to do is hit play – which reportedly causes the credit officer

Ever get tired of inflation eating your hard-earned cash away? How about being charged bank fees, for stowing away an electronic balance figure somewhere in a computer database? Well, more and more individuals around the world have decided to dispense with tiresome central bankcontrolled fiat money, in favour of their very own pet currency. And the technology has been termed ‘Bitcoin’. According to Bitcoin advocates, this new age electronic peer-to-peer currency

promises to do to the banking system what email did to the postal service – that is, make it completely obsolete through use of technology. That’s right – no bank holidays, no bank fees – just cryptographic key access to your new currency on as many of your own portable electronic devices as you please. So what about those gold bars you’ve just bought, on the back of a continued lack of confidence in fiat currencies amid daily talk of debt defaults? Well, even gold might now be obsolete. After all, it’s much easier to pay in the smallest denomination of a bitcoin (0.00000001 – or ‘Satoshi’, for those in the know) than it is to shave a sliver of gold of your nearest block of gold. And yes, portable electronic devices will surely be much easier to lug around than the traditional chest of gold.

Madoff would be proud

You may remember a few months ago Insider brought you the story of a Kiwi mortgage broker accused of scamming customers out of $2.5m. The industrious broker somehow managed to get clients to take out mortgages for the purpose of loaning her money, promising returns on their investment. Well, after allegedly bilking a lot of trusting people then promising to use a new business venture to pay them back, our entrepreneurial Kiwi has embarked on her new enterprise: a pyramid scheme. She’s now involved in a multi-level marketing scheme of a widely discredited fuel additive. So, she’s paying people back from her last scam by ripping people off in a new scam? When you stop to dissect it, it becomes apparent that our Kiwi friend has actually started a pyramid scheme of pyramid schemes. And now your head has exploded.

It’s like a riddle wrapped in an enigma wrapped in a scam

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Services

Receive breaking news updates direct to your inbox. Sign-up for the FREE e-newsletter at www.brokernews.com.au AGGREGATOR / WHOLESALE BROKER PLAN Australia 1300 78 78 14 www.planaustralia.com.au Page 16 & 17

BANK Bankwest 13 17 18 www.bankwest.com.au Page 32

COMMERCIAL Think Tank Property Finance 1300 781 043 www.thinktank.net.au deal@thinktank.net.au Page 7

LENDER

NCF Financial Services Pty Ltd. 1300 550 707 www.ncf1.com.au Page 8

Liberty Financial 13 23 88 www.liberty.com.au Page 3

WHOLESALE

MKM Capital 1300 762 151 www.mkmcapital.com.au Page 2

Resimac 1300 764 447 www.resimac.com.au Page 9

Pepper Homeloans 1800 737 737 www.pepperonline.com.au Page 11 Provident Capital 1800 668 008 www.providentcapital.com.au Page 4

OTHER SERVICES RP Data 1300 734 318 Page 19

www.residex.com.au The House Price Information People

Residex 1300 139 775 www.residex.com.au Page 31

FINANCE Drive Finance 02 8817 7780 www.drivefinance.com.au Page 13

LEGAL SERVICES Bransgroves Lawyers 02 9221 9522 info@ bransgroves.com.au www.bransgroves.com.au Page 6

Westpac www.westpacbrokerbase.com.au Page 5

Trailerhomes 0417 392 132 Page 23

SHORT TERM LENDER Mango Media 02 9555 7073 www.mangomedia.com.au Page 1

To advertise in Australian Broker call Simon Kerslake on +61 2 8437 4786

Australian Broker magazine Issue 8.16

Published on Aug 23, 2011

The no. 1 news magazine for Australian brokers.

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