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ISSUE 8.20 October 2011

Banks put broker share in the balance

Martin North

 Broker market share future to depend on bank desire for client ownership

Mortgage broker market share has increased, but whether it continues to rise will largely depend on the strategies employed by major banks, a leading mortgage industry analyst has said. The recently released JPMorgan/Fujitsu Australian Mortgage Industry report indicated that broker share of the loan origination market rose 2% to

43% over the previous six-month period. Fujitsu executive director Martin North said the continued recovery in the channel’s share of the home loan market to near preGFC levels showed its proposition remained strong. “Certainly a couple of years ago there was quite a bit of speculation over what the role of brokers would be and what share of the market they would have going forward. The trend continues to be that brokers have a very significant share of the marketplace,” North said. However, the rise in market share – which comes after North previously predicted the channel

Date with disclosure

may have stabilised at a level of 41% – comes alongside a decline in broker profitability. The report confirmed that broker commissions were at around two-thirds of pre-GFC levels, and reiterated previous predictions that market power has slipped from brokers towards the major banks. Where this market power leads will largely be dependent upon bank strategy, with North saying the banks may seek to prioritise ownership of the client relationship via direct lending. “The issue is, if they originate loans through the third party channel they may not have the same relationship connection with the customer, and that may in the long-term have some implications because many brokers are beginning to build their own customer relationship management systems and are trying to understand consumers to have a better relationship with them,” he said. JPMorgan banking analyst Scott Manning agreed, pointing to Westpac as an example of a lender focused on ownership over its client relationships. “Westpac has pulled back substantially in terms of broker usage, primarily through their St.George brand post-acquisition. One of the reasons is, it’s simply not a case of throwing your balance sheet at whoever wants a loan, but they are specifically focused on products per customer and increasing customer profitability.” Page 18 cont.

>>

Brokers navigate new NCCP disclosure requirements Page 2

Not a ‘piss up’ FBAA promises a more robust industry conference Page 6

Low-docs, not lie-docs Low-docs still viable under new legal responsibilities Page 8

Inside this issue Analysis 20 Channel conflict and commission Viewpoint 22 Engaging with consumers The Futurosophist 22 Australia turns Japanese Insight 24 Become your own Facebook fan Market talk 26 The stamp duty conundrum Toolkit 27 Fighting against fraud Caught on camera 28 Choosing freedom with Liberty


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News Brokers navigate new disclosures Mortgage and finance brokers are coping with the newly introduced disclosure regime under the NCCP regulations, after it finally came into force after extended delays on 1 October . Originally due to begin on 1 January, the implementation was pushed back repeatedly due to continued negotiation between industry representatives and Treasury. Until 1 October, brokers were only required to disclose details of their external dispute resolution scheme, and use Finance Broking Contracts that specified any fees paid by a borrower. Kiran Saldanha of The Finance Professionals said the disclosure changes had been “causing a lot of concern” among brokers who were “in a spin” over the changes. Saldanha said the main worry in regard to his own business was that “all the information

we have is coming from third parties” including aggregators and solicitors. “Everyone is interpreting this in the best way they can. The amount of time we have as brokers to focus on these things doesn’t allow us to really go in depth with it,” he said. “Even on the legal side, each solicitor has their own opinion.” Saldanha said he had made a decision to rely on the systems his aggregator Connective had put in place to manage disclosure. “I’ve done that for two reasons. One, they have more time to get on top of these things, and two, because they also have credit reps, so they have to do a good job of it.” Saldanha said the biggest impact in the way he does business would come in the area of casual advice, where brokers will now have to produce pages of documentation and have them signed when previously a phone call may have

sufficed. He said brokers would bear this cost, and wouldn’t “earn a dollar” for meeting the requirements. Kiran Saldanha “At the point of time that you understand you’ll be working for the client, you have to provide them with a quote, prior to giving any further information,” Saldanha said. “Many people are meeting clients in different environments, and they’re asking us should they fix their rate or a simple conversation like that, and that’s probably the first time that you know you’re going to be working for the client,” he said. Saldanha said the reliance on documentation in these circumstances flies in the face of human nature, where if someone asks you are question you provide an answer.

FHBs see higher debt, lower stress First homebuyers show lower levels of stress than other mortgage holders, in spite of carrying more debt. Mortgage insurer Genworth has indicated that first homebuyers remain confident in their ability to service debts. The company’s Streets Ahead Homebuyer Confidence report has shown only 15% of mortgage holders who purchased a home within the last year expect to have difficulty making repayments. The proportion compares to 25% of total borrowers who say they are experiencing mortgage stress. The result comes in spite of figures revealing that 40% of first homebuyers spend at least half their monthly income servicing debt. While first homebuyers had higher levels of debt than other homeowners, the Genworth report indicated 58% of first homebuyers

said they anticipated meeting all their repayments with ease. Genworth CEO Ellie Comerford said actual first homebuyer repayment performance mirrors the confidence shown in the survey. “The first homebuyer segment is our lifeblood, and it’s … performing very well. That segment performs better than any other segment of our portfolio,” she commented. Among those experiencing mortgage stress, the report revealed the primary driver behind the stress was increases in the cost of living. Seventy-two per cent of households facing mortgage stress tipped rising living costs as their key concern, up from 61% in 2010. Interest rates also proved a factor, in spite of the RBA having left the cash rate on hold since November last year. The report indicated 54% of stressed households said interest rate hikes played a factor in their

financial struggles, up from 51% in the March index. The index has also pointed to higher levels of overall household debt. The proportion of households saying other debt obligations are causing them mortgage stress rose from 22% in March to 26% in September. The result was also reflected in the proportion of homeowners devoting more than 50% of their monthly income to debt, with 32% now spending more than half their income to pay debt, up from 28% in March. Comerford said existing debts not only caused stress for mortgage holders, but proved a barrier for many looking to enter the housing market. “Existing debt is a hurdle for some potential homebuyers. Almost two-thirds have some form of outstanding debt, mainly from paying for education or weddings, plus general living costs.”

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Australian Broker is the most-often read industry publication, according to independent research carried out by the Ehrenberg-Bass Institute for Marketing Science at the University of South Australia in December 2008. The research also found that brokers rate Australian Broker as the best for both news content and feature articles, followed by sister publication MPA. Overall, on all categories, Australian Broker ranks top followed by MPA. The results were based on a sample of 405 respondents who were the subject of telephone interviews.

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Brokers still using banned terminology An NCCP amendment has dictated that brokers cannot describe themselves as ‘independent’ in advertising their services to clients, but many brokers have yet to adhere to the regulation. The amendment restricts the use of the terms ‘independent’, ‘impartial’, ‘unbiased’ or any other words with similar connotations. The amendment dictates that licensees cannot use the words unless they do not receive any commissions not rebated in full to the borrower, do not receive any other gifts or benefits from lenders, are not subject to any restraint in product offerings and are Jon Denovan not subject to any

conflicts of interest. The amendment affirms previous regulatory requirements on these terms, which were enforced most notably by ASIC on Mortgage Choice in 2004. MFAA CEO Phil Naylor commented that this restriction has been an MFAA guideline for some time. “There is nothing new in the NCCP rules. MFAA, after discussions with ASIC introduced the … guidelines about seven years ago,” Naylor said. Among the guidelines introduced by the MFAA were restrictions on advertising independent, impartial or unbiased advice, promising the “best deal”, using the term “guaranteed”, advertising free services if the consumer incurs any costs or sacrifices any benefit or

making subjective statements. However, in spite of the MFAA guidelines, an online search by AB revealed more than a dozen broker businesses – including MPA Top 100 Brokers – using the terms in their marketing copy. “If that is the case I am surprised,” Naylor said. “What the MFAA has in its code is already the law. ASIC [and the] ACCC did prosecute or warn a number of brokers in around 2003 [or] 2004 for the use of such terms.” Naylor warned that brokers using the terms were breaching the MFAA’s code. “We have taken action against – or usually warned – members on many occasions in early years,” he said. Gadens Lawyers senior partner Jon Denovan echoed the warning,

saying the word did not accurately describe the role of most brokers. “To be independent you would have to have no upfront and no trail from the lender,” he stated. However, Denovan predicted the industry will find a way to adapt. “I think the industry will find a way around it somehow. We’ll find another word, like ‘we’re on your side’ or, as Aussie said, ‘we’ll save you’. It kind of says the same thing as ‘independent’,” he said. Denovan indicated brokers who are still using any of the terms will have to rethink their marketing strategy. “They probably should never have used those terms as they’re very high standards to live up to, and very hard to prove in a court if you receive different commissions from different lenders.”

LJ Hooker clinches AFG partnership LJ Hooker Finance has sealed an aggregation deal with Australian Finance Group which will enable current AFG brokers to join the fast-growing LJ Hooker brand. Sitting alongside its existing arrangement with PLAN Australia, the AFG deal will see brokers aggregating with AFG able to join LJ Hooker without having to change aggregators. LJ Hooker’s white label products will also be distributed via AFG and PLAN lender panels. The deal comes as LJ Hooker Finance targets growth in broker numbers alongside its real estate business, with plans to increase

headcount from 120 to 170 in the short to medium term. LJ Hooker Finance general manager Peter Bromley said that since the agreement was finalised, AFG has already assisted in setting up new franchises in NSW and Queensland. “We have a fairly active recruitment campaign going at the moment, and we have had a lot of enquiries, and what we’ve found is that brokers who already have a good relationship with AFG or PLAN, getting them to move across from them to us was an extra step that wasn’t needed,” he said. “We need to focus on the things we do well. What we do well is

training, marketing and providing a home loan range with competitive products that helps us service our real estate network,” he said. Bromley said that with 500 real estate offices across the country, demand from LJ Hooker agents for assistance with finance was increasing due to the group’s competitive product suite. He added that AFG provided reach into states where PLAN Australia may not have as strong a presence. AFG’s director of sales and operations, Mark Hewitt, said that being selected as a preferred partner by LJ Hooker was a reflection on its own service

offering, and that it would help achieve the growth goals. PLAN Australia CEO Trevor Scott said the Peter Bromley aggregator’s partnership with LJ Hooker Finance has seen both businesses enjoy solid growth over a long term. “As consumers embrace the move to a licensed industry, we expect increased consumer support of mortgage broking will deliver strong growth to recognised brands such as LJ Hooker Finance,” Scott said.


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FBAA promises more than ‘a piss up’ The FBAA has announced the line-up for its inaugural conference, with president Peter White promising the event will be more than “a piss up”. The FBAA will hold its first conference at the Sydney Convention and Exhibition Centre on 15–17 February 2012. The association’s president, Peter White, has told Australian Broker the conference will include speakers such as Yellow Brick Road executive chairman Mark Bouris, Advantedge general manager of broker platforms Steve Weston and ASIC senior executive leader for deposit takers, insurance and credit providers Greg Kirk, as well as representatives from Treasury and the Financial Ombudsman Service. White said the conference’s opening ceremony would be

“something to behold”, and promised strong content for the conference as a whole. “This isn’t just, ‘Come to the conference for a piss up’. It’s content that will help them compete and help the practical day-to-day functions of their business. The exhibition hall isn’t just lenders and mortgage insurers. It’s things we touch and feel in our day-to-day business. People will get discounts and benefits by coming to this which will help them practically in their day-to-day business.” White said conference speakers would represent both the mortgage and finance industry, and the business world at large. He said the speakers would look to challenge brokers to “get up and do something”, and to manage their businesses and stress levels.

“It’s all about looking after the people in this business. We need to look after our health both mentally and physically,” he said. The conference will focus on the practical, White said. He said this would be reflected both in the content of the daily sessions, and in the types of exhibitors on display. “The whole thrust of the conference is to invigorate a market that has probably gone a little flat with the GFC. The conference is composed of top-end businessmen who have built their businesses from scratch, who have gone through the GFC and dealt with regulatory compliance and have still been successful,” he said. White said the conference was open to both FBAA members and non-members, and promised that pricing would “capture everyone

Peter White

who wants to come”. “People say some of these conferences are just too damned expensive. It has to be priced right. It’s not a profiteering exercise, and it’s all about value and benefit to the industry,” White said.

Banks warned not to lower lending standards Banks must resist the urge to relax lending standards in a low credit growth environment, the RBA has warned. In its Financial Stability Review the central bank has pointed to slowing demand for household and business credit. The RBA stated that bank lending to households increased 4.9% over the six months to July, down from 7.4% for the six months to January. The Reserve Bank predicted that this trend was “unlikely to change in the near term”. Further reinforcing this trend was data from the RBA on household financial positions. The Reserve Bank indicated that

household saving rates had continued to rise over the year, while the debt-to-income ratio declined slightly, from a peak of 158% in mid-2010 to 154% in the June quarter of 2011. “After trending up since the mid-2000s, the household saving rate rose further over the past year, reaching 10.5% of disposable income in the June quarter. It is now at levels similar to those last seen in the mid-1980s,” the Reserve Bank indicated. Meanwhile, credit growth continued to taper off. The RBA said credit growth had declined 4.5% in annualised terms over the six months to July. The Bank

reported that the value of mortgage lending had fallen 7% since late 2010. “While mortgage refinancing activity has picked up since early 2011, surveys suggest that this is mainly due to households

switching to cheaper loans – amid increased competition in the mortgage market – and consolidating debt, rather than taking out larger loans,” the RBA stated. With slower credit growth on the cards for banks, the RBA has urged financial institutions to adapt without lowering lending standards or “imprudently expanding into new products or markets”. Adapting to this environment, the RBA said, would mean lowering profit expectations. The report has warned ADI shareholders to “revise their expectations” regarding profits.


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Don’t confuse low-docs with ‘lie-docs’ There has been no significant change in the ability of brokers to write genuine low-docs under NCCP, which has only stamped out more dubious forms of lending. Select Finance director Bruce Gibbons, who holds accreditations with almost 80 lenders, said the NCCP has become the new scapegoat for all things hindering brokers earning an income. “This is just like the Privacy Act, which became the excuse in the 90s for institutions not providing timely information back to enquirers,” Gibbons told Australian Broker. “Yet the NCCP has nothing within its legislation that restricts or prohibits low-doc lending. What it did stamp out, was no-doc, lie-doc and sceptical doc.” Gibbons said the basic responsibilities and obligations of brokers have not changed – only

the threat of “fines and prison”. “There are still a myriad of lenders – mainstream, nonbank and the likes of superannuation funds – that are still actively lending low-doc type applications, and the demand has not eased. What has happened is the larger lenders have tightened up their criteria.” Gibbons said there is now a more pressing requirement for elements such as operating account bank statements, MYOB, BAS returns, interims and accountants sign-off. “There are no more ‘short-cuts’. If the borrower can’t produce any of this, it maybe should be then [considered] a ‘sceptical-doc’ application,” he said. Because the important obligations have not changed under NCCP, the legislation should not deter low-doc lending, Gibbons argued.

“Brokers just need to make complete and proper enquiries – as they should always have been doing – from the financial information available at the time, and submit the deal to a lender where it matches,” he said. “If the information is lacking, vague, ambiguous, evasive, dubious or unconvincing, then the loan should not be written,” he said.

Gibbons said basic obligations that have always been the responsibility of a broker include not ‘setting up’ the client, not committing the client to debt they cannot afford, making reasonable enquiries as to the person’s ability to meet repayments, not making false declarations to mislead and deceive, and the requirement for a commercial benefit.

No death for low-docs: MKM Capital The NCCP has not killed off the non-conforming low-doc industry, or demand from applicants wanting non-conforming low-doc loans, according to MKM Capital. MKM Capital operations and marketing manager Michael Watson said the next 12 months represents a “huge opportunity” for brokers writing non-conforming loans. “While a lot of brokers have stopped writing nonconforming loans, this has not necessarily coincided with a commensurate decrease in volumes,” Watson said. “There are less brokers there and less re-entering the space. Subsequently, brokers who jump in now are getting a type of ‘first-mover’ advantage, notwithstanding the market has been around for a long while,” he said.

CBA lure leads to Connect referral spike A personal loan campaign conducted by the Commonwealth Bank during August and September has resulted in a 68% uplift in broker referrals via its Connect program.

Kathy Cummings

The campaign, which offered 1% off personal loan interest rates through all channels during August as well as double the referral success fee for brokers until the end of September, resulted in a 68% increase in referrals in August compared with the average number of referrals the bank managed in each of the preceding six-month periods. Measured across all products in the bank’s Connect referral program, the number of referrals through the broker channel rose 13.5% in August, and actual product sales by 25.8%. The special commission offer offered brokers $64 for every successful referral, a 100% increase on the normal $32 benefit for broker introducers. CBA executive general manager of third party, Kathy Cummings, said that the increased focus on

the personal loans product created a strong awareness for the product and the Connect referral process. “The campaign created a high level of interest which is what we were after,” Cummings said. “It helped brokers to become more familiar with the Connect referral process which will make it easier for them to cross-sell other non-home loan products in the future. It also opened the doors for them to build a relationship with their local Commonwealth Bank branch manager which will encourage them to make more referrals in the future,” she said. Cummings said moving forward, all brokers will be seeking new streams of revenue and crossselling other banking products through Connect could help their income. “By cross-selling four products with the home loan they can replace the earnings of the

first year trail.” Cummings said a broker’s diversification appetite depends on their business model. “Some are diversifying into commercial lending, financial planning, insurances and car loans. They can do this by either becoming an expert in all fields or by employing experts in their own companies,” she said. “Through Connect we offer them the best of both worlds. They can refer their customers to the bank where we have specialist in all banking products at their disposal. This means they do not bear the cost of in-house specialists and they do not need to dedicate time to becoming an expert in all products,” she said. The Commonwealth Bank’s Connect referral model launched in 2004 allows brokers to refer customers to the bank for sales of specific non-home loan products.


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One Big Switch ropes … and brokers are set to benefit in non-banks … A controversial group buying campaign conducted by a consumer group will not undermine brokers, one of its announced non-bank participants has claimed. Consumer group CHOICE has announced its controversial One Big Switch campaign is now ready to offer mortgage discounts to its 40,000 participants. CHOICE director of campaigns and communications Christopher Zinn said smaller and medium-sized lenders “are keen to compete”. Australian Broker confirmed non-bank lenders Resimac, Firstmac and Mortgage Ezy will be involved in the campaign. Resimac associate director of product and marketing Frank Knez said the campaign would serve to raise the profile of non-bank lenders. “From our perspective we thought it was a great opportunity to increase our business and to deliver competition back to the mortgage market,” Knez commented. The campaign has been roundly criticised by brokers and the MFAA, with CHOICE receiving a $250 finder’s fee for each successful mortgage application, and One Big Switch drawing a 0.5% upfront commission. CHOICE has previously been highly critical of commissions offered to mortgage brokers. In spite of the scepticism surrounding the campaign, Knez said he did not believe it would undermine brokers. “Banks have such large control of new business we think we can attract this new business without

Frank Knez

competing with brokers. We think it will assist the non-bank sector in hopefully delivering more volumes,” he remarked. Consumers who signed up for the campaign will now receive discounts off the participating lenders’ lowest advertised rates, meaning the campaign’s participants would have access to discounts not available to lenders’ existing customers. However, Knez said he did not expect backlash from existing customers over the offer. “The offer is based on the group buying power of One Big Switch. One would have to expect by the amount of interest they’ve generated that their members would get a better price, and I think consumers will understand that. I think a consumer who took out a loan offered by a Resimac mortgage manager would have a very sharp-priced loan anyway at a much lower rate than the major banks,” he commented.

Brokers are set to see benefit from the much-maligned CHOICE loan switching campaign. While brokers and the MFAA have criticised consumer group CHOICE’s involvement in the One Big Switch campaign, saying it undermines the group’s independence, Mortgage Ezy CEO Garry Driscoll has revealed to Australian Broker that any leads the company receives from its involvement in the campaign will be passed onto Mortgage Ezy’s preferred brokers. “What we’re doing is passing on the leads to our established brokers. We don’t have a retail presence, we’ve never had a retail presence and that was one of the conditions of our involvement,” Driscoll said. Brokers are to be handed the leads from One Big Switch, and will then write loans for Mortgage Ezy. However, should a client’s profile not fit the lender, Driscoll said brokers are welcome to take the lead and the loan to a different lender. “If it doesn’t fit with us they can submit it wherever they like, and if they get a better rate, great,” he said. Customers will also benefit from the structure, Driscoll said. “It provides the customer with the best quality service levels because they’re being serviced by experienced professional brokers.” Mortgage Ezy’s involvement of brokers in the campaign comes after CHOICE CEO Nick Stace told the Australian Financial Review the group planned to set up a financial advice business in direct competition with financial

planners and mortgage brokers, and called the quality of financial advice in Australia “crap”. However, Driscoll said brokers will now see benefits from a campaign of which they had been wary. “It will benefit the brokers who have been supportive of Mortgage Ezy and the non-bank sector in general. We only deal with brokers, and that was the only way we were prepared to do it,” he said.

BrokerNews on One Big Switch • August 5 CHOICE defends independence CHOICE’s Nick Stace defended the consumer group’s involvement in One Big Switch, saying finder’s fees received by CHOICE would merely cover the campaign’s costs, and any additional revenue would be used for future campaigns • August 17 ASIC examining consumer drive ASIC reportedly made inquiries into CHOICE’s involvement in the campaign, and examined whether the group and One Big Switch were bound by NCCP regulations or required an ACL • September 16 Consumer group blasts brokers CHOICE CEO Nick Stace accused brokers and financial planners of offering poor financial advice, and said the group was considering launching its own financial advice service. Stace called the level of advice being offered in Australia “crap”.

AFG warns against ‘laughable’ One Big Switch Mortgage industry aggregator AFG has come out in support of the broker proposition, issuing a warning to consumers over the offer being provided by One Big Switch. Following widespread criticism from the broking industry over the group buying exercise masterminded by consumer group CHOICE, AFG’s general manager of sales and operations Mark Hewitt said the problem is it had failed to attract major lenders to its panel. “The proposition would be laughable if they weren’t putting people’s property on the line,” Hewitt said. Hewitt also questioned “sweeping pronouncements” being made by

representatives of the organisation – as reported in the Australian Financial Review – about financial advice in Australia being “crap”, when they are not prepared to provide financial advice themselves. “The disclaimers on the emails that they’re sending out makes it clear that their so-called ‘members’ are on their own when it comes to deciding whether or not a mortgage deal is right for them,” Hewitt said. Providing the best deals in the market is what aggregators and brokers do every day, Hewitt said. “In the past 12 months AFG has refinanced $9.3bn of mortgages – and we are only one of several major

broker groups,” he said. Resimac, Firstmac, Mortgage Ezy and Mortgage Port have been revealed to be the first lenders cooperating with One Big Switch on its consumer buying campaign. However, AFG has called on One Big Switch to reveal its full lending panel to the 40,000 borrowers who have registered interest in the campaign, according to its website. “Existing brokers already provide a fast, easy, one stop shop service to their customers, with access to a panel of over 800 products,” Hewitt said. “Instead of keeping consumers on tenterhooks, it’s time One Big Switch said who’s on their panel.”

Mark Hewitt


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Boomers taking debt into retirement

Greg McAweeney

New research shows 20% of Australian Baby Boomers are headed toward retirement without having paid off their mortgages. RaboDirect’s 2011 National Savings and Debt Barometer has revealed one in five Boomers still have a significant amount to pay on their mortgage, while nearly 25% did not save last year or do not have any savings. More than 25% of Baby Boomers said they would have to dip into their super fund to pay off their mortgage. RaboDirect general manager Greg McAweeney said the

generation tends to have a dour outlook on the economy, matched by their own financial situation. “Boomers feel economically worse off and more concerned about their future than their Generation Y counterparts, and it seems they have some good reasons to be worried. In many cases, Boomers’ view of the Australian economy matches their own financial situation, and that is pretty grim,” he commented. Only one-third of Baby Boomers said they were optimistic about their economic prospects in the coming year. Nearly 50% said they were financially worse off than last year. The result compares to 42% of Gen X respondents and only 31% of Gen Y respondents who indicated they were worse off. Boomers also proved the most likely generation to expect the economy to worsen in the year ahead. Sixty-one per cent tipped the economy to weaken over the next 12 months, compared to 56% of Gen X respondents and 43% of Gen Y respondents.

McAweeney said the results proved that more needed to be done to encourage savings and to urge Australians to deleverage debt. “There is no time to waste. As the first of the Boomers head into retirement, some of the big issues are coming home hard and likely to affect us all,” he commented.

In spite of the dire results, Baby Boomers proved the most confident in dealing with their finances. Boomers were more likely to know their current interest rate, and indicated they found dealing with finances less stressful than the other generations.

How generations view their financial situation 16% 11% 9%

I am a lot worse off than a year ago I am a little worse off than a year ago

22%

28% 32% 28%

No change

22% 23%

I am a little better off than a year ago

2% 3%

I am a lot better off than a year ago

0% Source: RaboDirect

32% 31%

20%

Gen X Gen Y

31%

9%

10%

Baby Boomers

30%

40%


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News Fixed interest rates spike, but ongoing discounts king

Rates headed nowhere fast amid global uncertainty

Demand for fixed rate home loans has seen a significant rise according to some of the nation’s largest brokers, though ongoing discount rates are favoured. New Mortgage Choice data has shown fixed rate demand jumped to 17.25% of all September approvals for the company, up from 13.78% in August. This comes after Australian Finance Group reported a dramatic rise in fixed rate home loans as a proportion of all mortgage loans written, from 9.4% in August to 16.6% in September. AFG said fixed rates were the most popular they have been since April 2008, when they made up 18.4% of the group’s volumes. Though fixed rate discounting has seen the products spike in popularity, ongoing discount variable rates account for nearly half the market, according to Mortgage Choice. “The real growth story at the moment is ongoing discount rates. In September 2011, this product as a proportion of all Mortgage Choice’s new home loan approvals rose for the 10th successive

The Reserve Bank has pointed to economic turbulence in Europe and the US and deteriorating credit demand and asset prices as reasons for leaving rates untouched in October. At its October board meeting, the RBA concluded that the current 4.75% cash rate “remained appropriate” for the 11th consecutive month, conceding that households and businesses remained cautious as the impact on Australia of soft economic conditions in Europe and the US continued to be assessed. The Bank pointed to the falling Australian dollar and increasingly discounted mortgage rates as signs of an easing of economic conditions, but said demand for credit remained soft and asset prices had continued to decline. The RBA decision largely vindicated the expectations of economists. A Bloomberg poll of 22 economists indicated all economists surveyed expected the Bank to leave the official cash rate untouched at its October Board meeting. An AAP survey of 15 economists showed similar results, with economists unanimously tipping the RBA to remain in a holding pattern. Rates seem likely to stay on hold for the immediate future as well, with only two of the 15 economists polled by the AAP signalling a rate move by the end of the year.

month, to a high of 45%,” spokesperson Kristy Sheppard said. She expects ongoing discounts to continue to grow in popularity, particularly as the possibility of RBA rate cuts grows. “More consumers are willing to ride the variable rate rollercoaster, especially if they feel they’ve snagged a bargain,” she said. AFG general manager of sales and operations Mark Hewitt said September saw very aggressive competition and that first homebuyers had shown a comeback. “The combination of more realistic property prices, attractive financing options, and lack of confidence in the share market seems to be coaxing first homebuyers and investors back into some markets,” Hewitt said. AFG figures showed a return of first homebuyers in NSW, WA and Queensland during September. The national figure of 15.7% of first homebuyers is in line with the long-term average, but in NSW first homebuyers accounted for 18.9% of the market, while in WA this figure was 17.4%, and in Queensland it was 15.8%.

Fixed rate cutting spree continues The spree of fixed rate cutting continued in September, with lenders dropping rates to more than 1.5% below the benchmark variable rate. Second tier ING Direct was one lender to announce a new round of reductions to its fixed rate product suite, bringing its four and five-year rates to 6.59% and 6.69%, respectively, while its three-year rate was cut to 6.29%. Executive director of delivery Lisa Claes said the current fixed rate reductions have been driven by a drop in long-term funding rates relative to short-term rates, and the current level of discounting was uncommon. “Historically customers would need to pay a premium for a fixed loan. Currently that is not the case. We haven’t seen such a difference between the variable rate and long-term fixed rates for some time,” she said.

One of the economists polled predicted a rate hike, while the other predicted rates to head downwards. The most bearish of the major banks, Westpac, sided with the majority of economists in predicting the RBA to remain steady in October. However, the bank’s chief economist Bill Evans has reiterated Westpac’s stance that the next rate move will be downwards. He said though the RBA seems unconvinced of the need for a rate cut, the series of rapid fire reductions in 2008 shows the Board’s stance can change quickly to accommodate economic shocks. “We are not despairing yet about our December call despite there only being two more meetings before our December target date. We take some heart though from how quickly the Reserve Bank can change its stance. Indeed RBA thinking has moved quite rapidly in our direction,” he commented.

Interest rate cut wouldn’t spur refis Most homeowners would not refinance their mortgage, even if interest rates fell, a new survey has suggested. A Mortgage Choice poll has found only 36% of homeowners would be spurred towards refinancing by a fall in interest rates. Forty-one per cent of homeowners said they would not switch, as they were content with their current interest rate setting, while 9% said they were in a fixed rate facility and did not want to pay break fees and 14% said they “can’t be bothered” exploring

refinancing options. The poll has also revealed more than a quarter of homeowners remain unaware of the aggressive home loan competition between lenders. Of the 74% who said they were aware, 45% said this competition could encourage them to switch their mortgage or lender by the end of 2011. The 45% of homeowners who indicated they were encouraged to switch lenders due to the competitive home loan environment still proved unlikely to do so anytime soon. Only 6% said they planned to refinance by

the end of 2011, while 30% said they would do so “sometime in the future”. Of the remainder, 5% said they had refinanced in the past year and 4% indicated they had refinanced more than a year ago. Mortgage Choice spokesperson Kristy Sheppard said it was not surprising that 26% of homeowners were unaware of the competitive home loan environment “moving in their favour”, but said the result was nonetheless “disappointing”. “Unfortunately, a large proportion of property owners have

no idea they could possibly save money or change to a more suitable home loan by taking advantage of special offers and/or re-negotiating their mortgage situation. There are plenty of switching incentives and rate discounts on offer at the moment, and lenders’ retention departments are operating in full swing,” she said. The survey also found an increased trend of saving among homeowners, with 60% indicating they were creating a bigger savings buffer to account for “unforeseen circumstances”.


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INDUSTRY NEWS IN BRIEF Loan Ave offers Ferrari fun South Australian mortgage manager Loan Avenue is offering brokers the chance to win a drive of four Ferraris, promising that they will be able to ‘return home and gloat’. For loan submissions on or after 1 October, and settled prior to 15 January 2012, brokers will go in the draw to win a trip to Sydney where they will be treated to a drive of four Ferraris. The package will include return airfares to the home city of the introducer, accommodation in a 4.5 star hotel and all meals. “Return invigorated yet slightly weakened by the thought of returning to reality. Return home to gloat!” the offer reads. Loan Ave sales and marketing manager Michelle Collins said the move was in response to competition. “With competition fierce at the moment, why not give brokers an opportunity to knock off something from their bucket list?” she said. Think Tank courts SMEs Commercial lender Think Tank Property Finance has released a one-year capped interest rate promotion open to borrowers on retail, industrial and office properties. The capped rate loan promotion offers borrowers up to 75% LVR on all full-doc loans above $250,000, with interest rates starting from 7.75%. General manager Peter Kearns said the product allowed borrowers to benefit from the certainty of a capped rate while still allowing them full flexibility on their loan, including using part of the loan as a line of credit. “With our fast approval turnaround times and absence of major bank bureaucracy, we offer a genuine and important commercial lending alternative in the SME market,” he added. Pepper proves 48-hour guarantee Pepper has only been forced to deliver on its $150 cash turnaround guarantee for brokers once in the past 12 months, the lender has stated. Speaking with AB, a Pepper spokesperson said the underwriting team was currently within the 48-hour turnaround time as promised for new applications when they receive all the information required from a broker. Where Pepper has not received all information that is required, the lender is in contact with the broker within 48 hours of receipt of application. Pepper guarantees a decision within 48 hours on all new applications. Over the past 12 months, the spokesperson said that the $150 guarantee had only been paid once. AFM delivers on BDMs Australian First Mortgage has delivered on promises to appoint additional business development support in NSW and WA. Following the recent appointment of Clint Hawthorne as national head of sales for the business, AFM has appointed Wayne Robertson as a business manager for NSW, and Courtney Isard as a business manager in WA. Robertson was previously state manager for NSW/ACT at Refund

Home Loans, and has held previous roles at NAB as a mobile banking manager and Heritage Building Society as a business development manager. Meanwhile, Isard has left a role as a lending mortgage manager at the Commonwealth Bank, having developed her career at CBA through the customer service division. AFM director Iain Forbes said the group would consider further appointments in Victoria and SA. Since Hawthorne’s appointment, new business submissions in both residential and commercial have increased, according to the group. Liberty cuts commercial rates Non-bank lender Liberty Financial has announced reductions to its commercial low-doc rates. For low-doc loans up to $1m, rates will now start from 9.45%, a discount of more than 1%. Liberty general manager of commercial finance Suresh Pillai said the decision was part of Liberty’s continuous review of its products to find ways “to better support small business and increase competition in the market”. “We recently reduced our commercial rates for our SuperCredit loan, and we’ve got other changes scheduled for later this year,” Pillai said. Liberty Financial’s commercial low-docs require a one-page income declaration provided by a qualified accountant, rather than financials, BAS or bank statements. Home building leaps forward New home building has posted a significant rise for August, driven almost entirely by construction in NSW. Total seasonally adjusted building approvals increased 11.4% for August, following on a 1.8% rise in July, the ABS has indicated. The rise was spurred on by a 31% increase in the “other dwellings” segment of the market. Detached housing, however, continued to lag, seeing a 0.4% decline for the month. The sizeable uptick on dwelling approvals is largely due to a rise in NSW, HIA economist Andrew Harvey said. “Total NSW approvals leapt from 2,606 in July to 3,785 in August, a remarkable monthly increase of 45.2%. This means NSW accounts for 1,179, or 83.3%, of the 1,416 total increase.” Home sales see rise The HIA-JELD-WEN New Home Sales Report has shown new home sales rose 1.1% in August. However, the increase follows an 8% decline in July and an 8.7% fall in June. HIA chief economist Harley Dale said potential homebuyers remain wary in an uncertain economic climate. “There is unwillingness on the part of households to commit given the uncertain domestic and global economic conditions, and that is understandable. That’s where interest rate cuts and fiscal stimulus can play an important role in boosting new housing supply in a very competitive market, which in turn would have a positive multiplier effect in bolstering the wider domestic economy,” Dale said.


14 www.brokernews.com.au

News Equity positive as buyers Households adjusting reap capital gains as arrears fall A study of properties over the past five years has found 45% of Australian homeowners have seen their property double in value since 2006. The RP Data equities report has revealed that capital city home values increased an average of 30% over the five years to July 2011. While housing has trended downwards since its peak in October 2010, values have fallen only 2.7% thus far. The news may not be as good for homebuyers who purchased homes more recently. The report has revealed 2.7% of homes are currently in negative equity, largely representing homes purchased after 2007. Northern Queensland and south-eastern WA have seen the most value erosion, with 10% of homes in the area now worth less than their original purchase price. Across capital cities, Darwin and Brisbane saw the largest proportion of homes in negative equity, at 4.8% and 4.1% respectively. Canberra at 1% and Melbourne at 1.4% showed the lowest proportion of negative equity properties.

RP Data indicated that, despite recent market declines, Australians still held a strong equity position. “Almost 60% of homeowners nationwide have a current home value which is at least 50% higher than the price at which they purchased the property,” the report stated. Were house prices to continue to fall, RP Data said homeowners who have purchased since 2008 would find themselves in the most precarious position. A 10% fall in national property values would see nearly 10% of homes enter negative equity, and recent purchasers would be most likely to find themselves in this unfavourable position. “These homeowners will typically have paid down less of their debt so falling asset values would be of greater concern. “On the other hand, the lower level of equity for these buyers would indicate they are less likely to have leveraged up on reinvestments, so as long as they are diligent in paying back their mortgage they should be OK,” the report said.

National equity positions

Mortgage arrears have declined slightly as households have begun to see benefits from a long period of stable rates. The Fitch Ratings Quarterly Australian Mortgage Performance Report has indicated Australians are managing their mortgage payments better, with delinquencies decreasing 10 bps to 1.69%. The ratings agency said a drop in 30–89 day arrears drove the result, while 90-plus day delinquencies climbed slightly to 0.66% from 0.65% in the previous quarter. However, Fitch said the marginal increase for 90-day plus delinquencies was in line with expectations. Fitch said the RBA’s decision to leave the cash rate on hold since its November hike last year has seen arrears stabilise over the quarter after climbing to a record high in the first quarter of 2011. “As interest rates have remained stable, this stabilisation of arrears is expected to continue into quarter three 2011,” the Fitch report said. The ratings agency also commented that households had shown recovery from natural disasters and increased seasonal spending. However, in spite of

National equity positions

45.1%

0.79% 14.7%

16.2%

0.71%

14.1% 6.2%

Negative Equity

optimism over the state of arrears, Fitch expressed concern that household living costs have increased beyond the level of inflation over the past year. “Fitch continues to believe that the increasing cost of living, together with potentially higher levels of mortgage rates, is a major threat to the performance of the mortgage market in the long-term,” the report said. Low-doc borrowers, meanwhile, faced increasing difficulty meeting mortgage payments. The report indicated that 90-day plus arrears among low-doc mortgages climbed to 2.72%, the highest level ever. While non-conforming low-doc loans saw a 1.05% decline in 30-day plus arrears to 15.83%, Fitch said this was largely due to settlements of loans in arrears by more than 90 days. Low-doc prime RMBS pools overall saw arrears three times that of full-doc pools. The ratings agency predicted that low-doc borrowers would continue to struggle. “Fitch Ratings continues to believe that more vulnerable borrowers are more likely to be affected by eventual monetary policy decisions,” the report said.

0-10%

10-25%

25-50%

50-100%

3.7% 100% plus

Source: RP Data

30-59 days delinquent

Q1 2011

0.34% 0.31%

Q2 2011

0.65% 0.66%

60-89 days delinquent

90+ days delinquent

Source: Fitch Ratings

FHB shortfall valued at $11bn The last 12 months has seen an $11bn decline in first homebuyer activity, it has been claimed. Research from Damien Smith RateCity has indicated a significant reduction of first-time buyers entering the market, with around 40,000 fewer financing a dwelling in the 12 months to July 2011 than in the 12 months to July 2010. RateCity CEO Damian Smith claimed last year’s RBA cash rate

hike had led to fewer first homebuyers entering the market, but that flatlining house prices and modest rises in income would have offset the rate rise. “Average variable interest rates have increased by 33 bps and the gap between the Reserve Bank’s cash rate and the benchmark basic variable rate has widened by 8 bps since July 2010. However, average household income has increased by almost $3,600 since July 2010, which means that repayments make up about the same percentage of income compared to last year,” he said.

In spite of the rise in incomes and stalling in house prices, first homebuyers have remained hesitant to enter the market. However, Smith spruiked the opportunity the slow mortgage market had created for potential first homebuyers, pointing to falling fixed rates, and claiming lenders were increasingly willing to negotiate on variable rates. He pointed to “exceptionally low” fixed rates currently on offer, and said available fixed rates were now as much as 1.5% below the benchmark variable rate. These fixed rate reductions have also

seen a spike in demand, it has been claimed. Loan Market COO Dean Rushton has claimed enquiries from customers have more than doubled for the products. “At the start of the year, enquiry for fixed rate products was virtually non-existent but now fixed rate interest represents around 30% of Loan Market’s total enquiries,” he said. Rushton commented that new rounds of fixed rate reductions were appearing on a seemingly weekly basis, and predicted that further reductions were ahead.


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WORLD

Banks pushing standards envelope Canada’s Office of the Superintendent of Financial Institutions (OSFI) – the equivalent of Australia’s APRA – has warned the nation’s Big Six banks, which include RBC and BMO, to ensure their lending standards do not deteriorate in competition for volume. In news that mirrors warnings reportedly delivered by Australia’s prudential regulator to the Big Four, OFSI has said it is stepping up its monitoring of bank portfolios, amid concerns the

dominant banks were under “tremendous pressure” to loosen their lending standards. Brokers have told Canadian Mortgage Professional magazine of their concerns that competitive rate wars are forcing banks to undercut the broking channel at the branch level in order to retain and grow their clientele as the housing market slows. OFSI is moving to make sure that lenders are not ignoring their own lending guidelines to maintain volumes amid smaller margins, with profits remaining on target. Brokers have claimed that banks are accepting deals at prime rates that they would have rejected in the past.

FHBs told to go North

Mortgage products proliferate

First homebuyers in the UK have been urged to look to the North of the country as a means of getting on the property ladder. In a market were first homebuyers are struggling with affordability, the lender has said that there is almost a decade difference in average first homebuyer ages depending on the location of the purchase. Speaking with UK publication Mortgage Strategy, Halifax housing economist Nitesh Patel said there are several areas in the country where the average age of first-time buyers is three to four years below the national average of 29 years. “Most of these areas are in northern England where house prices are typically lower both in absolute terms and in relation to earnings, helping to limit the size of the deposit needed. In contrast, in London and many areas of the South-East the time needed to save up for a deposit can be lengthy, making homebuyers several years older.” The youngest first-time buyers are in Selby, North Yorkshire, where the average age is 25, while the oldest first-time buyers are in Harrow, Barnet and Ealing in London and Three Rivers in the East of England, where the average is 34.

Irish mortgage arrears hits 9%

More mortgage borrowers found themselves in financial distress in July of this year, with The Irish Times reporting that the level of arrears rose to a new peak of almost 9%. Based on Moody’s analysis, the report found that 90-day arrears had increased from 7.62% in April, up to 8.78% in July, which the paper labelled as a further sharp deterioration on June. Arrears of

Over 500 new mortgage products were introduced into the UK intermediary mortgage market in just the month of September according to Mortgage Introducer, taking total number of mortgage products listed on its market leading sourcing system to a 41-month high of 14,361. Analysis conducted by Mortgage Brain and reported in the UK-based publication showed a 96% uplift in overall product availability compared to the same time last year in the UK, and a 38% increase compared to six months ago. Variable rate products performed the best over the past 12 months, witnessing a 126% increase since the same time last year, growing to a total of 2,224 products. Meanwhile, fixed rate products saw a 3% increase of 251 new products, with this popular product type now accounting for 8,524 of all available products in the market. CEO of Mortgage Brain, Mark Lofthouse, told Mortgage Introducer the signs were positive for brokers. “The past few years have been incredibly challenging for the UK mortgage market, and for mortgage brokers in particular; however, the data from our product analysis over the last few months has been extremely positive and this continues to be the case.”

360 days or more also rose to 2.86% in July, up from 2.38%. According to Moody’s, more borrowers were being pushed into arrears due to rising unemployment in the country, with the rate estimated to rise to 14.5% this year. The Irish Times reports there are about 777,000 residential mortgages amounting to €115bn in debt in Ireland. The rate of mortgages being repaid has fallen among the Moody’s pool, with the rate of redemptions falling to 4.08% in July from 4.53% a year earlier.


16 www.brokernews.com.au

News


18 www.brokernews.com.au

News As credit growth slows, Manning said banks may become more focused on profitability from each client, impacting the volumes they seek to originate through third party channels. “In a low growth environment, it’s not simply a case of throwing funding out there and getting yourself some margin. It’s being a lot more tactical around a limited amount of funding being deployed in a useful way, and also trying to increase the profitability of each relationship through more products. Typically, the brokeroriginated product is a single product relationship, whereas banks will be looking for three, four, or five products per customer,” he said.

However, North argued consumer demand still favours mortgage brokers, with the perception brokers offer a wider variety of choices and simplify the process of securing a home loan. “Certainly the research we have has continued to show consumers relate strongly to the broker proposition, particularly as it’s currently being exercised. Consumers get the proposition, so there’s definitely room for growth from the consumer demand standpoint,” North said. The third party channel also has the benefit of being an increasingly economical platform for banks. “With changes in the commission structures and some of the changes in the technology structures, it’s pretty much a line ball for the

banks. They’re pretty agnostic about whether they originate loans through the third party channel or the proprietary network,” he said. Manning said banks were now seeing as much financial benefit from third party channels as they were expenditure on maintaining their broker networks. “We think that relationship has finally balanced in terms of the banks providing funding for the broker network, but brokers providing a cheaper distribution network for banks,” he explained. In the long run, though, North said the future of broker market share may depend on how tightly banks want to control their network of clients, and the kind of profit per client they expect. “It comes down not to an economic

question, but more about what is the right relationship alignment between a lender and the customer, and that is the thing that will work itself out in the long-term,” he said.

Scott Manning

Homeloans launches flexible credit product

Reverse mortgage legislation welcomed amid scepticism

Homeloans has launched a new product, dubbed Accelerate, which it says will help brokers cater to a variety of credit profiles. The Accelerate loan is available in full or low-doc, accepts minor credit defaults greater than 12 months, ignores the number of previous credit enquiries for a client, and accepts self-employed borrowers. The loan also offers extended loan terms, no LMI up to 90% LVR, allows cash out and business use of funds and has no limits on debt consolidation. Homeloans general manager of third party distribution Tony Carn said the product will allow brokers to cater to unique client needs. “Brokers often discover that the profile of their client’s application fails to meet the policy requirements of the lender. This may involve multiple credit enquiries, previous credit defaults, arrears or a whole range of contributing factors,” Carn commented. Carn commented that the Accelerate product provided a

SEQUAL has praised the government initiative to regulate the reverse mortgage market, but not all the regulations have been welcomed. Assistant Treasurer Bill Shorten has introduced a bill into Parliament enshrining in law many elements of SEQUAL’s code of conduct. The legislation includes a no negative equity guarantee, and clarifies disclosure requirements for brokers and lenders. “I am pleased to say this approach is supported by industry and will result in consumers making more informed and empowered choices in balancing their current and future needs,” Shorten told Parliament. SEQUAL chief executive Kevin Conlon praised the legislation, and commended the government on its industry consultation process. “This has been a very good example of effective consultation between government and industry which has resulted in meaningful outcomes for consumers,” he said. Conlon commented that the result would protect consumers while ensuring that the reverse mortgage industry is not overregulated. However, not all industry participants are satisfied with the changes. Gadens Lawyers has expressed concern over some of the new regulations. In particular, Gadens showed scepticism over aspects of the regulations dealing with defaults. The current legislation dictates that borrowers cannot be faced with default for leaving the property vacant. Gadens claimed

solution for such clients. He said the product would complement the lender’s existing suite of prime home loans, and enable it to cater to a wider variety of clients. “Traditionally, lenders offer a simple product suite with a single credit policy sitting behind it which enables a lender to say either yes or no to an application. At Homeloans, we are empowered to find the most suitable and competitive solution to cater to a far broader range of applicants,” he said. Carn remarked that Homeloans had piloted the loan over the past month, and received positive feedback from brokers. “We have even received applications from brokers with an expectation that the loan would be assessed as an Accelerate home loan. It has been a wonderfully satisfying experience to alternately be able to provide an approval on one of our traditional products,” he said. The Accelerate loan is available for amounts up to $1.5m.

Accelerate product features • credit and minor credit defaults accepted if greater than 12 months (paid or unpaid) • cash out and business use of funds acceptable • number of previous credit enquiries ignored • no limit on debt consolidation • low-coc refinancing • self-employed with 12-month ABN registration available • self-employed with 6-month GST registration available • extended loan terms available • no credit scoring • no LMI up to 90% • loans up to $1.5m Source: Homeloans

such a move could see lenders stuck with significantly devalued properties. “An empty property could lose value quickly. This should be limited so that default only occurs if the property is left vacant without the lender’s approval for more than 60 days,” the law firm stated. Another stipulation of the bill mandates that default cannot occur because the borrower enters rate arrears. Gadens has suggested this be changed to allow default to occur if rates are more than 12 months in arrears. The law firm also criticised aspects of the legislation stating that a borrower can terminate a reverse mortgage at any time by paying the current market value of the mortgaged property. Gadens said such a regulation could be misused by borrowers. “This makes reverse mortgages much riskier for lenders as borrowers could ‘play the market’ and repay when values are low,” the firm stated.

Kevin Conlon


20

www.brokernews.com.au

Analysis

Bracing for battle Channel conflict threatens commission cuts In a low credit growth environment, brokers have urged banks to increase commissions in order to encourage higher volumes. But is the deathknell for commissions being sounded?

A

leading financial services consultant has claimed banks will increasingly try to shut out brokers as the mortgage market becomes more competitive, ramping up direct channels and eroding commissions. Amid an intensely competitive home loan environment, banks have made aggressive discounting moves in an attempt to woo customers. With very little margin left for discounting, some industry figures – such as Mortgage Choice CEO Michael Russell – have claimed banks could see higher volumes through an increase in broker commissions. However, leading financial services consultant Max Franchitto of MGF Consulting Group does not see this happening. Rather, he believes banks will employ the strategy of increasing their focus on direct channels at the expense of the broker network. In such an environment, brokers waiting for an upward move on commissions may find themselves sorely disappointed. “It’s an assumption filled with fallacies. Unless everyone agrees to raise commissions to exactly the same level, the moment I have a bit of disparity in commissions the seed of doubt is planted. If he’s getting more commission, how do I know that the advice is unbiased?” According to Franchitto, it is doubtful banks will consider the strategy of increasing commissions, because it still has questions of viability in the current market. “Will it encourage greater productivity? Probably not. It certainly won’t encourage loyalty,” he said. Instead, brokers have been warned that they will see increasing channel conflict, as banks pit their direct channels against brokers in a bid to control distribution. “Channel conflict is something we have to be aware of and manage on a day-to-day basis. Why am I going to pay top dollar to a distribution channel if I have the option of picking up clients in a direct fashion?” Franchitto said. There’s little doubt discounted mortgage rates are eating into bank margins. JPMorgan recently advised clients in a letter that bank discounting of standard variable rates ran the risk of eroding profitability. JPMorgan’s Scott Manning reportedly told investors that 0.9% discounts were “uneconomic” if sold through mortgage brokers. With this level of discounting, direct sales will become increasingly economically attractive to banks. And in this environment, the growth of channel conflict is undeniable, Franchitto claims. “I think industry players that are playing down channel conflict are doing it because they don’t want to give life to an enigma that’s already happening,” he said. If channel conflict grows, banks could begin to ‘cherry pick’ the best clients for themselves, seeking to ramp up distribution through branches and mobile lenders. “I think owning the channel is now becoming a much more viable proposition, and if you look at some of the credit unions they have already moved in that fashion,” Franchitto said. “Mathematics doesn’t lie. Mathematics is not a subjective science. Why exclusively pay somebody when you can go direct?”

An inevitable erosion?

Max Franchitto

In fact, the erosion of commissions may be a veritable inevitability as banks focus on owning their client relationships. Franchitto argues that the money banks pour into their third party networks will eventually be diverted to ramping up their direct offerings. “Within two years, banks will transition towards using whatever channel is more cost effective. Using the third party channel, you have to spend lots of dollars to keep people’s attention on your product. Think about the overheads a bank has to service brokers,” he said. If these pressures come to pass, trail commissions may also be slated for the scrap heap. Franchitto points to the financial planning industry, saying industry regulations meant financial planners could no longer collect trail commissions ad infinitum, but had to allow clients to opt back in every 24 months. Mortgage brokers would see trail commissions vanish if similar measures were implemented, as opting a client back into a broking contract is unviable.

A ray of hope

Not all is gloom and doom for the future of the third party channel. Franchitto contends that mortgage brokers could survive, and even thrive, as the model of the industry evolves. However, in order to survive, Franchitto argues brokers will have to ensure their businesses evolve into a ‘one-stop shop’ model offering holistic financial services – rather than just mortgages. He said small brokers focusing purely on mortgage sales would face difficulty remaining viable, and would have to consolidate with larger players, or exit the industry. “The single mortgage broker sitting in an office selling Mum and Dad mortgages – that model has a use-by date. The bigger groups trying to offer a menu of financial services will eventually survive,” he said. This evolution may be a necessity if the industry is to have a chance at competing with the major banks, and winning the battle that may ensue between direct and third party channels. Franchitto predicted brokers who embrace the model will be well-placed to thrive in a competitive environment, regardless of commissions. “The one-stop shop has been the holy grail of financial services,” he commented.


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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 7.20 Headline: Clawback extensions an unfair punishment (Cover) What we reported: What’s happened since: Prior to the government’s unilateral ban on exit fees and deferred establishment fees, Bendigo and Adelaide general manager of third party mortgages Damian Percy said clawback regimes were unfairly punishing brokers when borrowers should wear the costs of their decision to change lenders. “Fundamentally, borrowers leave a bank because of changed circumstances or a perception of better value elsewhere, so … it is the borrower who makes the call, it is the borrower that makes the judgment,” Percy said at the time.

Regulation no longer allows lenders to let borrowers wear the cost of switching loans. As a result, Bendigo and Adelaide has introduced a clawback structure, while Percy has contended the second tier remains philosophically opposed to clawback regimes. The bank’s structure allows aggregators to choose between a variety of upfront and trail commission structures, some with and some without clawbacks. Percy said the bank had conducted extensive consultation with its broker network prior to introducing the structure.

Headline: RBA slams bank rate rise case (page 6) What we reported:

What’s happened since:

In its September 2010 Financial Stability Review report, the Reserve Bank tried to erode the case for out-of-cycle rate moves by Australian banks. The central bank said major lenders had recouped their higher funding costs over the past two years – the primary reason that is being cited by these banks as a case for any rate hikes. The RBA said banks had managed to mitigate their higher costs through their rising net interest margins on loans.

Many banks hiked rates by nearly double the Reserve Bank’s November move. The increases set off a flurry of public outrage, leading to the federal government’s banking inquiry and eventual banking reforms. In more recent days, easing funding pressures and global economic instability has seen rates moving south again. Banks are now being admonished by economic analysts for discounting rates and putting margins in danger.

Headline: Firstfolio snaps up Club Financial Services (page 10) What we reported: What’s happened since: Firstfolio last year snapped up non-bank finance brokerage Club Financial Services in a $15.7m takeover, also taking on the company’s $2.8bn loan book. The deal followed a 24-month acquisition drive by Firstfolio which saw it acquire Apple Home Loans, LeaseChoice, First Chartered Capital, Loan Services Australia, Xplore Capital and eChoice. The CFS acquisition also provided Firstfolio with access to an additional wholesale funding facility with Advantedge – worth $1bn – to go along with the company’s existing ING Direct and Adelaide Bank arrangements.

Firstfolio has continued its acquisition strategy, taking a controlling stake in Calibre Financial Services, a non-bank lender with a welldeveloped securitisation structure and existing line of warehouse funding. Firstfolio CEO Mark Forsyth said the move would give the company a securitisation platform that would allow it to supplement its existing products. The company’s executive director Mark Flack confirmed that the funding would also allow Firstfolio to focus on “niche prime products” as well as to branch out into areas beyond residential lending, such as equipment finance.

Headline: Commission move could dent trail books by 35% (page 16) What we reported: What’s happened since: St.George’s move last year to abolish year-one trails was lamented by mortgage brokers, who claimed it could put a 35% dent in the valuation of their trail books. Oxygen Home Loans general manager James Green said the changes meant St.George was paying a lower commission than its parent company, Westpac. While several MPA Top 100 Brokers told Australian Broker they would base all decisions on the most appropriate lender for the individual client, they commented that commissions could come into play when measuring up similar lenders with similar products.

St.George’s commission changes were short-lived, with the bank this year resurrecting year-one trail. However, the bank’s changes saw it scale back its conversion incentives from a maximum of 70 bps upfront to a new maximum of 65 bps. St.George also lowered its trails from a maximum of 25 bps from year five onwards to 15 bps for the life of the loan. St.George’s then-general manager Steven Heavey told Australian Broker the bank had not taken a hit in third party volumes as a result of removing trail in year one, but was reviving year-one trail following broker feedback on its importance.


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Comment VIEWPOINT

Brokers have beaten banks and credit unions hands down when it comes to their engagement with customers – so what are brokers doing so right?

Justin Doobov

Darryl Benn

Mark Haron

Intelligent Finance

The Mortgage Planner Group

Connective

Why are brokers rated higher than monoline lenders for customer engagement? Bank staff are generally measured not just on the home loans that they write, but also on personal loans, bank accounts opened, insurance – all these other measures. They can’t be an expert in one area, so they end up being transactional based. However, most brokers are focused around the home loan, therefore their understanding of the product is a lot better. When they engage the client they have a lot better and deeper understanding of all the loan products as opposed to just being a jack-of-all-trades. Can brokers win clients from banks and credit unions? Right now over 40% of loans are written through brokers. I’d say in the next two or three years over 50% of loans will be written through the broker channel. And we’ve found that quite often we have taken clients who have had many years of private banking relationships with some of the major lenders, and they have actually come on board and seen us as the centre of influence and seen us as their private banker.

How do brokers differ from banks and other lenders? The focus of the mortgage broker is to create and build a relationship with the client. They’re focused on the long-term. So it’s not just about writing the loan, it’s about creating a rapport and a long-term relationship with the client. I think the industry as a whole needs to focus more on making the public aware that we really do have something different to offer than going direct to a lender. What should a broker do to win further market share? If we can develop a range of services to maintain a relationship with a client after a loan settles, that will be good for the industry. If you can develop programs to be able to help your clients reduce the amount of interest they pay on their loan, well, this is where the benefit is a win-win. So you continue to have a close relationship with the client and provide other services, and they actually get the benefit of managing their loan.  To view the full story, go to www.brokernews.com.au/tv

Turning Japanese? Is Australia facing its own ‘lost decade’? Industry consultant and futurist Kym Dalton maps the possibilities ahead, and what it may mean for mortgage brokers The decade of the 1990s has been called the ‘lost decade’ in Japan – the bursting of a credit-fuelled bubble in stocks and real estate led to massive declines in values and a protracted period of little or no economic growth. Over 20 years later, asset values are still generally well below what they were at their peak.

We’ve all heard from the left and the right of the debate about whether there’s a property bubble here in Australia. Maybe however, it’s worth contemplating what is more likely – a period where nothing much at all happens here – if we have our own ‘lost decade’ A decade where economic growth flatlines, income growth stalls and property values plateau. What would it mean for the real estate finance industry and for mortgage brokers? At the lender level, these factors would likely see a levelling off of credit growth, which could lead to relaxation in lending standards to ‘stimulate demand’ (unlikely), product and price discounting bordering on gimmickry to encourage

Why are brokers rated higher than monoline lenders for customer engagement? A monoline lender generally has to sell their products to the customer, and not so much force those products on them but really reinforce why those products are better or superior, and sometimes they need to undermine their competitors to do it. As a broker you don’t need to do that. You have generally got that whole product suite in front of you. Has compliance helped with customer engagement? Compliance under NCCP really did just make sure we were asking more and varied questions, and that questioning process is giving customers the perception – which is real – that brokers have a better understanding of what they need and a better understanding of the products. Are brokers better at winning business? Sometimes consumers may seem a little bit shy about wanting to proceed, but you’ve got to keep working on them; there are signals there that are saying yes, I do really want to do this, can we get on with it? And brokers are much better at delivering on that intention, and helping customers to get their business done than what it would seem the monoline lenders are.

refinances (likely) and a focus on driving costs out of the mortgage value chain (highly likely). This last point is likely to involve experimentation with alternative technologies and critical examination of the economics of the third party channel. At the individual level, such a period of low or no growth would likely cause a ‘negative wealth effect’ and the development of what I’ve termed ‘neuroticonomics’; where worry about the future is front of mind and when a lack of house price appreciation causes individuals to pull back from using equity to finance current consumption and to focus on building equity via mortgage repayment. It’s then likely that the average lives of mortgages would lengthen and people would be less likely to ‘trade up’ and increase the size of their debt if there’s minimal income growth. It could be that renovation and improvement loans could represent more palatable debt and they could increase in popularity. It’s possible that downsizing Boomers may need to become more like shapeshifters – due to a combination of factors including their expectations of sale prices not being met or the fact that adult children refuse to exit the nest – the true multi-generational household

could appear (or re-appear). Investors would really need to take a long look at what they’ve been hard-wired to believe. A decade with little or no prospect of capital gain changes the whole dynamic of aggressive negative gearing and should refocus investors on rental yields – but with a period of stasis, would there be the prospect for rental growth? Investment property may migrate to a long-hold, low growth, passive asset. Any positives? Individuals are likely to be much more focused and attuned to their personal financial circumstances. Individuals will need increased mentoring and potential monitoring when it comes to their finances. So don’t get the vapours – whilst transactional activity may level off in a low growth environment, brokers should look to developing a business model that allows deeper and longer relationships with customers beyond the settlement of the loan. Remember – the future isn’t what it used to be. Kym Dalton www.futurology.com.au Kym Dalton is a principal of mortgage consultancy SAKS Consulting


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FORUM ASIC warned brokers to take care when terming themselves ‘advisers’ under NCCP, though the MFAA was confident in its designation (ASIC tells brokers to beware ‘adviser’ title, 21/09/2011) Firstly a mortgage broker is also an ‘adviser’. If you look at the dictionary, ‘broker’ also refers to ‘adviser’. A mortgage broker should in fact give some proper advice to his/her clients and hence nothing should be wrong if the ‘broker’ is called as an ‘adviser’. Robert on 21 Sep 2011 12:16 PM A good broker will give clients ‘credit advice’ by considering their credit needs and making recommendations to meet those needs appropriately. Some also hold an AFSL and will provide ‘financial advice’ to some clients. Anyone already doing this competently will be educating the client about the distinction and that they are two separate hats to be worn. In a nutshell, brokers holding an ACL or credit rep status should be able to operate as ‘advisors’ as long as they’re giving advice they’re qualified to give. petert71 on 21 Sep 2011 12:36 PM Storm in a teacup. ASIC are saying that they would have to be very careful to ensure that they were not holding themselves out to be an adviser in a way that implies they are able to advise on financial products such as investment products (shares and MISs) or insurance. So as long as you don’t purport to be offering financial advice on these ‘products’ then there is absolutely nothing wrong with you calling yourself an advisor. Paul Eldridge – CEO Intellitrain on 21 Sep 2011 01:43 PM Oh God, this is sooo easy. Anyone who flogs/sells mortgages should simply be a ‘Credit Representative’. Why? Because the term ‘Broker’ implies impartiality, and let’s be honest, like so called Financial Planners (an oxymoron if ever there was one) brokers are NOT impartial; they sell a narrow set of mortgage products usually from one to three preferred lenders, so ‘brokering’ simply doesn’t exist. Show me a mortgage broker writing loans from all the lenders and I’ll show you a broker who’s not building any relationships with any lender. Like most arguments (and wars) the first casualty in this whole debate has been honesty. WhistleBlower on 29 Sep 2011 10:52 AM

Our other comments were all about One Big Switch, which continued to confuse with a hot and cold approach to brokers (Big Switch as Choice leads passed to brokers, 29/09/11) Many years ago our company was asked by consumer group

Choice to help a client. The reason why our company was chosen was because we were fee-for-service, accessing the entire mortgage industry, and received no commissions. Our business model has since changed to commission-based and it seems Choice’s business model has also. Unless Choice are accessing the entire industry of mortgage providers they are simply channelling consumers to a handful via another company and taking a fee for doing so. Shame on you Choice. Hint – I’d consider dropping the ‘independent’ from my marketing before someone challenges it. As for the One Big Switch (AKA Big Bank Switch Campaign), the mortgage industry is trying to improve the standing of mortgage brokers. Where does a company simply referring people to a ‘bank’ for a commission fit in? No advice and no support. Easy. Perhaps this should have been called the ‘One Big Con Campaign’. timmich on 08 Aug 2011 03:13 PM ASIC has stated that brokers cannot claim to be independent because they accept fees. Seems to me that on that basis alone, Choice can no longer claim to be independent. David on 29 Sep 2011 10:54 AM Poorly planned campaign by Choice. By their accounts they have a ‘potential’ 40,000 clients; that would require every mortgage broker in Australia to service that demand in a timely manner. This will backfire on Choice and any broker or lender involved in the campaign. Diomedes on 29 Sep 2011 10:48 AM I thought the whole idea of this campaign was to have a bulk amount of people with some sort of bargaining power to get a better rate. What good does flicking the leads to different brokers do? Just another lead generation exercise and only specific brokers will benefit. Mark on 29 Sep 2011 11:09 AM

Poll: Are you confident in your documented disclosures following the 1 October deadline? The beginning of the disclosure regime under NCCP was 1 October, after which brokers must disclose a number of things in documentation. We asked readers if they were ready for the change.

Yes 42%

No 28%

Not sure 28%

Source: Australian BrokerNews Poll date: 22/09 – 6/10/2011  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

Use Facebook, and become your own fan I Facebook is changing the way businesses interact with customers, and it’s about time brokers became their own fans by utilising the social network, argues Byron Gray

n July 2011, Facebook reached the milestone of 750 million active users, half of whom log in and interact on Facebook for an average of 55 minutes every day. In Australia alone, there are over 9 million active users, 7 million of who are 29 or older – which may surprise many people given the perception that Facebook is primarily the domain of teenagers. So as a broker, how can you use Facebook to grow your business? Firstly, it’s important to understand that Facebook, similar to LinkedIn, provides for both Personal Profiles and now also Business Profiles, known as Facebook Pages, and the creation of your Facebook Page is the foundation for growing your business using Facebook.

How to create your Facebook Page

Creating a Facebook Page is free and takes less than 15 minutes to set up. Simply login to Facebook using your personal account and then go to: http://www.facebook. com/pages/create.php and follow the instructions. Your page will consist on a number of key elements, many of which are similar to your personal profile such as the Wall, Info, Posts and Profile Picture, so be sure to complete these in full – view your Facebook Page almost like a website because it too can be found by Google. There are a significant number of applications that you can incorporate into your Page which will provide additional functionality such as Competitions, Polls and Events, however before launching head-on into these it’s best to master the use of the fundamental elements such as Posts. I recommend that if you have a Twitter account and Blog that you have these set up to automatically feed to and from your Facebook Page as this will multiply your efforts across all key social media platforms. Plus, ensure to add Social Sharing to your website enabling your website visitors to directly interact and post to Facebook.

Facebook fans

Byron Gray

To gain visibility of your Page you need to build up a number of Fans – Fans are in many ways similar to Friends within your personal account. A person, or another Facebook Page, becomes a Fan by ‘Liking’ your Page. Fans are similar to ‘Followers’ on Twitter, ‘Subscribers’ to your newsletter or in a broader sense ‘viewers’ of a TV show – they’re your audience and ideally a mix of current and potential clients. A key objective of your Facebook strategy should be to grow the number of Fans or ‘Likes’ that your Page gains over time. Ideally, if you have a database of 500 subscribers to your newsletter, then a good goal will be to convert between 30% and 50% of them into Fans. Fans are vital to the success of your Page for a number of reasons, however the key reason is due to the way in which Facebook Newsfeeds operate and have the ability to make your Posts go ‘viral’. If you’re an existing Facebook user you’ll be familiar with the Newsfeed – a stream of updates from your Friends, Comments they’ve made, Places they’ve been and importantly Pages they’ve Liked. When you post information on your Page this will automatically show in the Newsfeeds of all of your Fans. Better still, if your Fans either ‘Like’ your post or ‘Comment’ on the post then this will show in the Newsfeeds of all of their friends.

Say for example you have 100 Fans of your Page. You post information about a special “Free Home Loan Health Check” you’re offering ONLY to your Facebook Fans. This post will then show up in the Newsfeeds of all your Fans. If 50 of your Fans ‘Like’ this post it will become visible in the Newsfeeds of their friends. If each of your Fans have 100 friends, your Post will be seen by up to 5,000 people. Clearly the objective here is to not only engage with your current Fans, but to also encourage their Friends to become Fans of your Page. IMPORTANT: Once you have 25 Fans you can claim your Vanity URL, which in essence gives you the ability to create a customised address such as ours which is www.facebook.com/intellitrain.

Engage your fans

It’s important to provide your Fans with interesting and engaging content otherwise they’ll simply ignore your posts in their feeds, ‘Unlike’ you or worse still – become disengaged with you and your business. Here’s a few suggestions for content: • Provide a steady stream of updates: don’t post five times in the first day then do nothing for another month – post consistently, 2–4 times a week as a minimum • Provide links to interesting content from third parties – eg, a news article on preparing to sell your house • Comment on topical issues in the media • Pose questions and seek feedback • Run a competition (be sure to check Facebook’s competition guidelines)

Grow your fan base

In addition to providing good quality content on your Page which has the potential to be fed into the Newsfeeds of your Fans’ friends, there’s a number of ways to gain new Fans: include a link in your email signature; add a link to your business cards; add a prominent ‘call to action’ on your website, ideally to ‘Like’ your Facebook Page and become a Fan; place a link to your Page on your personal profile; include a link in your Twitter and LinkedIn profiles; add a link in all of your marketing materials; run a Facebook ad campaign.

Summary

Facebook Pages are becoming as important today as company websites were a few years ago, and the best part is that once you’ve created your Page you can keep it fresh and generating new business by only spending a few minutes a day. Byron Gray is GM of Intellitrain, a specialist training company for the finance and mortgage broking industry


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Market Talk

Stamping out stamp duty unlikely The housing industry is consistent in its cry for an end to stamp duties, but the economic and political realities mean it’s unlikely to happen, writes Adam Smith

Ashton De Silva

A political hot potato

The question of stamp duty removal may ultimately be a moot point, with both federal and state governments unwilling to touch it. “Economically there is justification to scrap stamp duty,” De Silva said. “Politically, I can’t see it happening. Essentially we have a Federal Government that has a majority by one seat. They’re not going to risk doing anything too major. We have the majority of state governments in a similar situation. I think at this point there’s too much risk.” The same problem applies to the revenue sources touted as potential replacements for stamp duty. Both land taxes and a hike in the GST could potentially make up the shortfall states would see from stamp duty removal, but neither have much chance of gaining political traction. “Changes to the GST rely on a consensus across states, territories and the Federal Government which, needless to say, is unlikely,” De Silva explained. “A change in land tax might seem more probable as it is a state and territory administered tax; however, there is a significant political cost here, thus also making any changes unlikely.” Lobby group Australians for Affordable Housing has suggested the removal of negative gearing concessions and an increase in capital gains taxes on housing transactions, but this could have a significant negative impact, while only marginally increasing affordability. “Survey evidence suggests that between 30% and 50% of landlords negatively gear. Thus the removal of negative gearing will only partially remove the speculative behaviour,” De Silva said. The removal of negative gearing could also greatly impact low to middle income earners, with more than 50% of negatively geared investors earning between $6,000 and $80,000 a year. Negative gearing may also be another issue governments don’t want to touch, according to De Silva. “The theory of economics would say, yes, it’s a good idea, but practically I can’t see it happening in the near future.”

T

he Federal Government’s Tax Forum saw the housing industry align, calling for an end to stamp duties as a way to combat diminishing affordability. The Housing Industry Association, Master Builders and the REIA all lobbied for the removal of the taxes, supporting statements from Treasury head Martin Parkinson that abolishing stamp duty would improve worker mobility and increase efficiency. However, is this measure the watershed it is made out to be? One industry analyst believes removing stamp duty would have little impact for potential homebuyers. RMIT University senior lecturer of economics, finance and marketing Ashton De Silva believes abolishing stamp duty would be unlikely to save buyers any money, but would instead see vendors adjust their expectations upwards. “When a person or a household goes to buy a house, they do the sums and say, ‘We can afford to spend $400,000’. They know that $20,000 of that is going to the government and they have $380,000 left over to spend on the house. Because there is a shortage of housing, people are naturally pushed up to their maximum borrowing limit,” he said. Removing this hypothetical $20,000 would merely have the effect of vendors charging and buyers paying more. De Silva said the only people to benefit would be downsizing vendors. Ultimately, De Silva believes stamp duty has little material impact on the issue of housing affordability. “The main reason we have an affordability problem is because there is a housing shortage. Reasons commonly cited include a shortage of land, planning controls and industry capacity constraints. Reduction in stamp duty is unlikely to have any effect on these supply-side factors,” he said.

A shaky outlook

Ultimately, the uncertain economic outlook means major changes like the removal of stamp duty may be ill-timed at the moment, according to De Silva. With a poor global outlook, the shock dealt to the economy by such a major tax overhaul could further dampen economic activity. “Economically speaking, the future looks fairly grey. In theory, it’s a good idea, but given the practicalities, I would be very reticent. I don’t think the time is right,” he said.

NUMBER CRUNCHING Levels of mortgage stress according to Aussie households

Factors causing mortgage stress

3% 38%

A little A lot

17%

17%

24%

26%

ig we Few at io r p er ns ay ho u fo rs rs w am or e ked w Un / em ork pl oy Ne m w en jo t b wi th les sp ay

ris

lo

to bl eb

rd he Ot

te

re s

tr

st In

er

co Source: RaboDirect

gh

20%*

The proportion of Baby Boomers facing retirement with an unpaid mortgage *

Hi

At a glance…

at

of

e

liv

Source: Mortgage Choice

es

ing

72%

Unsure

15%

54%

None

44%

Source: Genworth


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Toolkit

The fight against fraud Brokers are on the front line in the battle to detect mortgage fraud. Andrea Cornish asked Genworth’s Paul Caputo how to go in armed

W

ith NCCP now in force, brokers have been warned that fraudulent transactions may come back to haunt them. Experts say it is no longer just the lender’s responsibility to catch out potential client fraud, and that brokers need to care about the ‘red flags’. So how can brokers conduct reasonable enquiries? We asked Genworth chief risk officer Paul Caputo for his advice.

Is mortgage fraud on the increase?

We do get a pretty good sense of what’s occurring, and from a portfolio perspective I wouldn’t say that we’re seeing an increase in the level of fraud in Australia. Hard fraud is obviously defrauding the lender with either over-inflated valuations and/or payment to a third party, with no real intention to actually keep the mortgage in place. Soft fraud is a little harder to detect – where a person might forget to include a credit card, or might forget that they’ve got three children rather than two – but they have the good intention of: a) wanting the home; and: b) wanting to meet the repayments on that. But no, I don’t think we’re actually seeing an increase in the level of fraud. There’s no doubt the level of fraud often comes to the fore in a soft market; when you’ve got very strong home price appreciation you can hide fraud because quite frankly you can’t see it – property prices actually go up 10% or 15%, when you sell it doesn’t really make a loss, so everyone seems to be happy and moves on. So there’s no doubt that in a soft market like we’ll see in the next 12 months, we’ll probably see more fraud coming through.

Are fraudsters becoming more sophisticated?

Fraud is always evolving and where potential loopholes exist fraudsters will try and exploit that. So as credit providers in the industry identify potential loopholes, other loopholes do get created. Are they becoming more sophisticated? Probably over the last five or six years, but I don’t think necessarily over the last two or three years. It will be interesting to see as Internet loans become more popular if that will translate into different or more sophisticated potential fraud.

What kind of responsibility do brokers have when it comes to detecting fraud?

Now that brokers are enshrined as an agent of the lender through NCCP, clearly we see that the broker has to be the first line of defence in identifying fraud.

But does the NCCP increase the responsibility of brokers in respect to fraud?

I don’t believe so in the sense that NCCP really wasn’t designed in respect to fraud. However, having said that, I do believe that a lot of the measures implemented by lenders following NCCP will also make it harder for fraud to get through. For example, a lot of the lenders have tightened their requirements around validation of income, making sure you have all the original documentation – all of that will help improve the quality of the underwriting and hopefully identify fraud as it comes through.

What can brokers do to do a better job of detecting fraud?

Fundamentally it comes down to knowing your customer. Know your customer, know their needs and actually scrutinise the documentation that is provided. Some of the fraud that we see is very sophisticated and, quite frankly, would be impossible for the broker to identify, but the vast majority that we see could be detected through common sense and actually going through the documentation. Whether it is things like looking through the bank statements, looking for things like the spelling of ‘credit’, which we see is often spelt wrong – obvious things that should raise alarm bells. Even looking through payslips and questioning ‘should a shop assistant really be earning $150,000 a year?’. Also, looking through their bank account details. Often you’ll have salary going in but no expenses going out, so brokers need to ask how are they surviving, if all their salary is going into one account but they’re not taking any money out? Some of it becomes a little more sophisticated, like identity fraud. With passports, the key thing is looking at the passport number and what is coded on the bottom, but I wouldn’t expect brokers to make those checks.

Should brokers detect fraud, what’s the best course of action?

Of course they shouldn’t submit the application. In many ways, if they have a key relationship with their lender, they should notify the lender of the potential for fraud, so they can actually send that information through to an industry group and people can identify that there is a particular concern with this deal. It’s a hard one, because you only suspect it. It’s not as if you can raise it too highly because you may not necessarily be correct in this case. It does put them in a difficult position.

Paul Caputo

SCENARIO CENTRE Cash out for divorce settlement: MKM Capital Financing divorce settlements can be a lucrative area. One third of Australian marriages end in divorce. Typically, one or both borrowers have not made home loan payments for months. Solicitors often advise clients to stop making payments while a settlement is being negotiated. Credit cards fall into arrears as the warring parties bicker about who should pay, or accrue debts out of spite. When the war is over, both parties are left credit impaired and one needs to buy the other out of the property. This is where a skilled broker can help. It is not unusual for an applicant to have 12 months in home loan arrears or $50,000 in credit card debt. However, provided the applicant can show servicing capacity and provide evidence of the divorce from their solicitor, MKM will view these applications favourably. The requirement to write a suitable loan under the NCCP can be easily met.

?

Once your client has six months’ payment history with a non-conformer they can usually be refinanced into a more mainstream loan. This could be either a first or second tier lender, depending on the level of paid defaults. Given the work involved in packaging a nonconforming application it is recommended that the broker charge the client a mandated fee in addition to the commission paid by the lender. To ensure payment, it is prudent to check the lender will allow this fee to be deducted from loan proceeds at settlement. So how do you find prospective clients with messy divorce settlements? A suburban lawyer who will refer you business to do their clients a favour would be a good port of call. Michael Watson, operation and marketing manager, MKM Capital

 Do you want your loan scenarios published? Contact the editor on ben.abbott@keymedia.com.au


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Caught on camera Liberty Financial’s national roadshow lived up to its reputation again this year, with guests including magic act ‘Soul Mystique’, a Las Vegas hypnotist, and the true star: John ‘Letterman’ Mohnacheff. It was all about the theme – ‘Choose freedom, choose Liberty’

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Image 1 Image 2 Image 3

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Image 4

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Image 5 Image 6 Image 7 Image 8 Image 9

Liberty’s Ann Gallagher welcomes the guests

Image 10

Glenn Williams, Robbie De Bari, Patsy Williams, David Clooning and Laurence Adleman John ‘Letterman’ Mohnacheff from Liberty Financial

Image 11

13

14

Belinda Lemos, Fernando Lemos, Paul Wheadon and Robbie De Bari Kon Shivas, Lisa Montgomery and Paul Liccione David Leotta, Lisa Maxwell and Kurt Stuart Ryan Murko, Vera Marcheson, Kristine Pobi and Carl Jabour Con Konxanthis with Peter Kasevitis Joel Wylde, Wade Hooper and Peter Borg Tania Ferraro from PCL Finance meets the mime Mark Burton and Paul Harden with Jim Kiaris

Image 12

Liberty Financial’s James Boyle

Image 13

‘Soul Mystique’ entertains the crowd

Image 14

Liberty shows off its ‘Choose freedom, choose Liberty’ slogan


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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

“I got your deposit right here!”

Bling

R

un out of redraw? No more equity to suck out of your house to finance cash shortfalls? No problem. Insider recently discovered a creative new financing solution put forward by a Bulgarian bank for customers looking for a loan. An enterprising bank in the Eastern European country is offering loans for jewellery. Customers in need of finance can merely stop by the bank with their bling, have it quickly assayed and walk away, cash in hand. The borrower can then reclaim their precious metals when the loan is paid off. This is hardly a new idea, of course, but most establishments offering this kind of arrangement are honest enough to call themselves pawn shops instead of banks. At the very least, it’s comforting to know that Bulgarian hip-hop artists should never have a problem getting a

is the new gold

loan. Still, it doesn’t seem that big a leap from this to just returning to the barter system. Instead of raising a deposit for a first home, maybe Insider could just bring the bank the best of his crops and livestock, or offer his services as a blacksmith in return for a discounted variable rate.

These guys look like the Wet Bandits

No one wants to be booted out of their home, so it’s understandable that homeowners facing foreclosure would be a bit angry. It’s also understandable that they would feel a certain level of animosity toward the banks taking control of their former home, and would want to exact some kind of revenge. Well, Insider recently came across the story of a Seattle man who sent a pretty clear message to the banks by booby-trapping his foreclosed

home. The frustrated homeowner rigged a fire extinguisher to spray anyone coming through his front gate. Inside the house, his efforts moved from delightfully mischievous to disturbingly maniacal, as he constructed a fake bomb out of empty propane cylinders. Insider can only imagine the people taking possession of the house confronted with these devices, wondering for a moment if they had foreclosed on the kid from Home Alone. Amazingly, it’s fairly commonplace for foreclosed homeowners to wreak havoc before leaving their former houses. In a separate incident, a California homeowner did $250,000 of damage to his $1.7m home before clearing out. In fact, 13.9% of all foreclosed properties in the US. are intentionally damaged by the homeowner to the extent that the property no longer qualifies for a traditional mortgage. Petty, but satisfying.

Investing in faith

Well Insider has heard of customers – and brokers – choosing their lender based on price (yes, a few basis points can make all the difference), service (it would be good if some banks did in fact live in our world!) or product (all current commoditisation aside). But one aspect he had never considered, until now, was faith. It seems that in the US, there are those customers who only want to give their business to those who share their faith, or incorporate religious precepts into their lending practices – so-called ‘faith-based’ lenders or brokers. Such lenders, according to those in the know, often use religious messages in their marketing – such as Bible verses or personal testimonies on websites – promise “a free ticket to heaven” if a borrower accepts a loan, or might even offer to pray for their mortgage. While Insider often raises his hands to the heavens and asks “Why?” when things go wrong, he’s not sure he would ask for divine guidance

when going through the nitty gritty of a mortgage contract. After all, there is much more to a mortgage than a wish and a prayer (be sure not to tell those leveraged up FHBs who are shelling out 50% of their after-tax income on their property). There are those warning against faith-based lenders, saying just because a lender shares a customer’s religious beliefs doesn’t mean he or she can give you a better deal. And here Insider was hoping for some chance to influence the securitisation markets! But there is this – supposedly, faithbased brokers are likely to be more honest than their counterparts. If they can operate with more integrity than the average US broker, that’s a good start!

Bikers, meet brokers

What do the Hells Angels and a San Francisco mortgage broker have in common? Well, a newly unsealed US federal grand jury indictment, for one. Insider has come across a case in which a mortgage broker has been charged with conspiring to arrange more than $10m in fraudulent home loans for clients who included two leaders of the Hells Angels. The motorcycle club leaders and their broker (who it seems provided exceptional service) are alleged to have defrauded banks by falsifying loan applications for real estate in the San Francisco area. The broker reportedly used his finance nous to misrepresent borrower incomes, bank balances and employment histories, as well as their intention to live at the properties. Because, it is alleged some of the properties were not used for residences, but instead for marijuana growing (perhaps another thing both parties had in common?). The case harked back to reports closer to home that Insider had read some time ago, where Sydney’s Hells Angels chief had been charged over a $150m mortgage fraud racket. Insider only hopes in the US case, the broker’s biker buddies can set him up with some help inside prison.


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Australian Broker magazine Issue 8.20  

The no. 1 news magazine for Australian brokers.

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