Mortgage Minefield

The Australian mortgage industry has undergone unprecedented change in recent times, with falling volumes and broker commission reductions creating far reaching ramifications for the industry.

Commission cuts by lenders to brokers in retrospect may be viewed positively, as the brokers who do survive will have adapted by cutting costs – matching a change in costs with a change in revenue streams and effectively building a more robust and sustainable business model.

The Australian Mortgage Report, released this month by CoreData, includes interviews with some leading mortgage market participants on the topic, ‘A year in review 2008 / the year ahead’.

Extracts from interviews with Mortgage Choice’s Paul Lahiff, Wizard’s Chris Canty, Loan Market’s John Kolenda and the MFAA’s Phil Naylor can be read below.

Paul Lahiff, managing director for Mortgage Choice, a listed broker, identified some key trends in the broker operating environment looking back on 2008.

During 2008 brokers realised the operating environment for them had become much harder, which took some time for many to accept, but it eventually became apparent that there was a fundamental need for businesses to diversify revenue streams in order to supplement their income.

There was another realisation. Over the past year, a growing number of broker customers wanted an expanded range of products, and if you are not providing them, there is a reason for the customer to talk to someone else, leaving the broker open to the potential of losing the residential mortgage sale as well .

Lahiff then identifies how brokers can take advantage in the year ahead, 2009.

They (brokers) are cutting costs in areas that are not related to revenue, so they are really looking at their own businesses; for example, where they could have carried a couple of loan writers, but there is no longer the business to justify the expense.

Brokers are looking to maximise their commission bases, and you do have an ability to lift that if you are submitting electronically, or if you are putting good quality submissions in, and if you are able to show the lending organisation high loan conversion numbers .

Chris Canty, managing director for Wizard Home Loans, identified the trend that mortgage growth nirvana would continue unabated, was unrealistic.

The industry paradigm was double digit system growth year on year, and house prices will continue to increase, which is the thinking that caused the global industry to collapse.

Brokers need to change and evolve, and those that can’t or won’t, will most likely fall by the wayside.

You could halve the size of the industry without reducing capacity, as there was a long tail of people in the industry which weren’t doing very much volume, primarily because mortgage broking was not the main revenue stream for their businesses .

Canty identifies opportunities in 2009 for brokers, including the evolution of services offered to the client.

The current broking model based on choice and price will evolve to more of an advice-based model, offering a broader range of services.

With the commission cuts, the economics have fundamentally changed, and so there is the driver there for brokers to look more broadly at their customer relationship.

The model of only offering home loans, and nothing else that the customer might require, has very much passed its peak .

John Kolenda, executive director for the Loan Market Group, a mortgage aggregator, identifies time in the market as the best broker defence to handle the changing financial environment.

Long established brokers were, and still are, better placed to meet the challenges of the current market as they have built the foundations of a good business.

It is important that they continue to review their own costs in order to maintain incomes, and don’t fall into a sense of false security by living off the trail they have built over the years.

As prudent business owners, they should look at strategies that allow them to keep building their business, along with taking advantage of the broader value initiatives offered through their aggregator .

Kolenda identifies the major aggregator opportunities in 2009.

Two areas of opportunity for aggregators are in the generation of new business leads for brokers, and maximising the new lender commission KPI structures.

Aggregators have a responsibility to provide more support to their brokers.

Given that the margins are now also driven by performance measures such as submission quality, online lodgment and conversion, there has to be a greater level of teamwork and monitoring to ensure targets are met.

There has to be a focus on new avenues to generate new business as clearly one of the key strategies to combat reduced margins is to write more business .

Phil Naylor, chief executive officer for the Mortgage & Finance Association of Australia (MFAA), expects member numbers to fall, but by not at the significant ten per cent levels projected by the industry body.

Our membership reached a peak of around 13,800 in March 2008, and has since slowed. By July 2008 the membership base had reduced to 13,200.

We had projected during financial year 2009 that our membership would decrease by ten per cent, but as at December 2008 the membership base was actually slightly higher than July at 13,300 .

A complete version of The Australian Mortgage Report is available from CoreData.