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Credit shortfall to impact non-banks
POST APPROVED PP255003/06906$4.95 ISSUE 7.08
May 2010
Opportunitymayexistfornon-banks
RBA not far away from target rate
Home lending falls
Credit reporting
Given the expectation that the economy is going forward, the RBA says the historically low interest rates are no longer necessary
ABS statistics reveal that home lending continued to fall in February, highlighting concerns that the housing market is facing an undersupply issue
Brokers will be impacted by changes to credit reporting. Principal of We Fix Credit John Dickinson looks at the changes and what they mean for the industry
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Is there a silver lining to the cloud of predictions that the major banks will be forced to cut back on their funding of mortgages in the coming years? For brokers and non-bank lenders, the answer may well be yes.
The bi-annual Fujitsu/JP Morgan report predicted that
demand for home lending may outstrip supply as the major banks ration credit after rapid market share and balance sheet increases in the past couple of years.
JP Morgan banking analyst Scott Manning said that it was likely that banks would be content with the size of their current housing portfolio and turn their attention to optimising profitability rather than chase further market share gains.
“While demand for credit is unlikely to abate, the major banks will look to achieve the best possible returns on the increasingly scarce wholesale funding they are able to secure,” Manning said.
Thus, non-bank lenders can regain their place of prominence. They have always been a broker’s best friend – having no other distribution network to rely on has meant that brokers will always come first in their eyes.
The predictions that major banks will reign in home lending come at the same time that RBA assistant governor Guy Debelle is forecasting an economic climate that would encourage the re-emergence of non-bank lenders.
“I suspect that sector will start to pick up as the economy improves,” Debelle told the Senate Economics Reference Committee public hearing on the access of small business to finance. “I think we’d see increased competition, in large part because the economy is growing pretty well and has some pretty good opportunities.”
If the economy continues to grow as the RBA expects, Debelle said that there was a chance that lending criteria would ease – allowing more people the chance of homeownership.
Manning expects the banks to restrict their home lending to the high-end, high-profit borrowers who have low LVRs and strong credit histories. If so, it could in fact help brokers, who have an obligation to provide clients with a range of home loan options.
Scott Manning
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Mortgage managers provide the most 5-star loans
Mortgage managers have taken home the lion’s share of the home loan products, being given a 5-star rating by financial services research company CANSTAR CANNEX.
Of the 130 products to receive the company’s top rating, 115 are provided by lenders other than the Big Four banks.
“Mortgage managers provide the vast majority of 5-star home loans, followed by the credit unions,” financial analyst Mitchell Watson said. “Even though the major banks make up only 12% of 5-star loans offered, they hold over 90% of the home loan market.”
This is a hangover from the global financial crisis when borrowers perceived the big banks to be safer and bypassed a lot of equal or higher quality products in the process, CANSTAR said.
“It will be interesting to monitor any shift in borrower behaviour as more high quality loans make inroads into the home loan market,” Watson said.
Many lenders are requiring a pre-existing relationship and consistent savings history as pre-requisites for maximum LVR products.
However, Watson said that there are as many options available to borrowers as ever before – boosting the broker value proposition.
“It’s ironic that lenders are now asking for a bigger deposit, yet the range of home loans on offer has never been better,” Watson said. “Even though competition may have reduced because of various mergers and acquisitions in financial circles, from a product sense competition is thriving in the home loan market and our results reflect this.”
The days when a potential homeowner could walk into a mortgage broker’s office and secure a mortgage with little to no money down have long gone as lenders insist borrowers shoulder their share of the risk by contributing more upfront.
Now, the lenders who have not withdrawn their 100% LVR products have reduced the amount borrowers can access. However, just three years ago, 270 home loans offered full 100% borrowing, according to the company’s research.
“That lending pool has completely dried up and
borrowers are now, on average, required to have a minimum deposit of 8% to get a home loan,” Watson said.
“Before the financial world went mad, you could borrow the full 100% of a home loan, including costs such as stamp duty and fees.”
One lender was even offering 100% plus costs and HECS debt thrown in as well, Watson said.
“The trade off between lowering the bar to allow borrowers to get a foot in the door of their own home and responsible lending to keep them there has always been a juggling act for the banks,” Watson said. “The provision of some sort of deposit certainly adds to the affordability problem but it will definitely lead to better outcomes for borrowers in the long run.”
In issue 7.7 of Australian Broker the article “Fighting Fit – a lesson for brokers” was printed with a quotation error.
AB would like to make the following adjustment:
The quote attributed to former Kings Cross police officer and author of Dirty Work, Glen McNamara, should read:
“Self-defence courses, and particularly martial arts based self-defence courses, are effective in reducing the effects of a physical attack. They teach confidence, but not over-confidence,” he says.
“Good self-defence courses teach not only how to fight but how to identify danger and stay away from it. Most importantly they teach control.”
AB regrets this error.
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RBA deputy governor Guy Debelle told a senate inquiry into lending in the SME space that the central bank’s cash rate is close to where it ought to be after being at historic lows during the depths of the financial crisis.
“We are deciding that the situation where we needed historically low interest rates is no longer necessary,” Debelle said. “So we’re moving back to something around about average
RBA not far away from target rate
assessment of a weaker economy than what subsequently turned out to be the case,” Debelle said. “There probably needed to be some repricing of that [risk].”
Because of the pessimistic opinion most commentators and lenders had of the economy, risk assessment was likely extremely conservative, Debelle said.
“That’s one of the reasons why we think that, given things have turned out to be better than most people, including ourselves, expected, and that we anticipate things to continue to improve going forward, you would expect to see some reassessment in the other direction of those risk premia that banks have set on their lending,” Debelle said.
He also envisaged the lending criteria for small businesses would be wound back as banks got back to the business of competing with each other for lending.
“I think the banks will start to compete more aggressively for those opportunities and potentially pull back on some of that tightening in lending standards as has clearly happened
levels, which is not far away from where we are at the moment, given our expectation for where the economy is going forward.”
In comments that may brighten the mood of commercial brokers, Debelle said that he expected the discrepancy between rates charged to small businesses and those charged to mortgagees to lessen as lenders reprice risk.
“I think the banks decided to set risk margins based on an
Changes to the commission structures paid to brokers by the major banks added more than 10% of the profitability growth on home loans according to a recent report.
Contrary to popular belief, the additional spread in interest rates between the cash rate and standard variable mortgage rates only added a negligible amount to home loan profitability for the major banks, the JP Morgan/Fujitsu report showed.
Increased loan duration was the single largest contributor to bank profitability, accounting for almost 60% of the profitability growth in the first half of 2010.
“The most significant driver of improved profitability was longer loan durations,” JP Morgan
Commission changes add 10% to bank profitability banking analyst Scott Manning said. “The absence of funding alternatives has seen overall retention rates within mortgage portfolios rise, which has a meaningful impact on profitability as customer revenues are not offset by capture costs, origination processing, and exit costs.”
Of more importance to brokers is the 12% of profitability that was created by decreasing commissions paid to the third party. However, Manning said that banks would likely be looking to increase efficiency with the third party rather than take another look at reducing commissions.
“There have been different strategies from different majors in regards to brokers,” Manning said.
“Some majors have been embracing brokers more proactively than others.”
The report showed that brokers supplied about 40% of home loans – up from a low of around 35% a year ago but down from a high of 45% in 2007.
“Although volumes have again rebounded and stabilised through 2009 at about 40%, we believe that the market power has slipped from brokers,” the report said. “Despite this, we believe the current focus is on improving the efficiency of the broker relationship to enhance the effectiveness of processing volumes, as opposed to revisiting the commission structure.” The banks that have most aggressively
expanded into the housing market have also been the ones most reliant on mortgage brokers to achieve that.
As of March 2010, Westpac relied on brokers to originate about 45% of their home loans.
“However, we recognise that much of this is largely attributable to the acquisition of RAMS, as well as the merger with St.George (who historically had high broker usage rates),” the report said. “ANZ continues its high broker usage rate to compensate for its underweight branch presence, while NAB’s loss of housing market share is reflective of its significantly lower rate of broker usage, at almost half that of the other major banks.”
over the last couple of years,” Debelle said.
During the committee hearing, Victoria’s Liberal senator Julian McGauran grilled Debelle on the need to be raising rates in the current environment, calling into question the wisdom of the RBA’s rate rises during the last election.
“They continued to increase those interest rates through the early part of 2008 on the basis that they judged inflation was taking off. It turned out to be a very, very bad judgment,” McGauran said. “Here you go – here you go again. What’s the rush? Five interest rate rises over the last seven months on the grounds you think inflation again needs to be stifled.”
He asked the RBA assistant governor if the central bank was looking at the real economy and if it had learnt its lesson.
“We’re looking at interest rates which are probably a little bit below average for an economy growing at a trend rate,” Debelle answered. “In 2007/08, that rising inflation actually did eventuate. Inflation peaked at about 5%.”
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When it seemed as if every day brought news of another non-bank lender closing its doors, even the slickest of snakeskin salesmen would not be able to convince a homebuyer to take out a loan with anyone but the major banks. Those days are well and truly over as near-record high refinancing in March allowed second-tier lenders to double their market share over the past 12 months.
According to figures released by AFG, mortgage refinancing hit a high of 37.2% of all mortgages arranged in March, with increasing numbers of property owners turning away from the major bank groups to arrange new finance with second-tier lenders. The last time it reached the 37% level was in December 2008.
AFG data also showed that lending by the major bank groups fell to just 82% during March, with the non-majors accounting for 18%
of all new loans. This is an increase of 100% on the 9% market share of the non-major lenders in March 2009.
It confirms the trend identified in ABS data released in February showing that bank lending fell to 88.1% of all loans in the last quarter of 2009 – down from a high point of 92.5% during the credit crunch conditions in the first quarter of the year.
“Borrowers are making the psychological transition to a post-GFC world,” Mark Hewitt, AFG general manager of sales & operations, said. “They are once again regarding other lenders as providing reliable and attractive alternatives to the majors.”
Non-bank lender FirstMac has benefited from the trend of borrowers to focus on refinancing and seeking capped rates. FirstMac chief financial officer James Austin said the lender had observed similar uptrends in refinance activity, with an increasing number of applications from borrowers moving away from the four major banks.
“The capped interest rate product provides borrowers with greater security during this rising interest rate environment whilst still providing the benefits of a cheaper floating interest rate in the short term,” Austin said. Borrowers taking up FirstMac’s FightBack II capped home loan have their variable rate of 6.69% capped at a maximum of 7.49% for two years.
Hewitt said that Australia’s largest mortgage broker was also seeing some innovation return to mortgage products and pricing.
Non-majors double market share
ANZ has lifted its LVR to 95% for its existing customers who have a strong credit history in an attempt to claw back some of the market share it lost to CBA and Westpac last year.
“We have a strong risk profile in our mortgage portfolio, having chosen to sit out much of the first homebuyers’ market in 2009,” a spokesperson told Australian Broker.
ANZ was the first Australian bank to tighten credit policies in response to the global financial crisis, and has maintained the most conservative position on LVRs for the past 16 months.
However, the lender is satisfied that improved economic conditions are here to stay and is looking at increasing its share of Australia’s home loan market.
“With the improved economic outlook, we have taken a decision to allow mortgage lending up to 95% LVR for some existing customers where they have a strong credit history,” the ANZ spokesperson said. “All
applications that are above 90% LVR will require a full valuation.”
LMI is included in the 95% LVR cap and the ANZ spokesperson said the bank is conscious of loan serviceability in an environment of rising interest rates. The bank uses an interest sensitivity buffer and has also recently raised its default living expenses in the credit assessment process.
ANZ has the lowest mortgage market share of any of the major banks with just 12.5% (compared with CBA’s 25.9%, Westpac’s 24.1% and NAB’s 13.2%).
The bank’s main focus has been on expanding its Asian operations and it recently acquired some of the Royal Bank of Scotland’s non-mortgage related Asian assets.
However, the move to increase the LVR even as its competitors are making it more difficult to qualify for a home loan shows the lender’s determination to increase its share of Australian home loans and become more of a force in the mortgage market.
ANZ lifts LVR to 95%
James Austin
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Forty per cent considering property purchaseIn more good news to the
non-bank sector, the survey also suggested the Big Four banks can expect intensified competition in attracting new borrowers as interest rates rise.
Among survey respondents, 37% of first homebuyers intended to explore lenders for the best deal and 18% would use a non-bank lender or mortgage broker, with only 22% intending to use their existing Big Four bank.
Among existing homeowners, only 20% said they would use their existing Big Four lender, while a quarter intend to shop around for a better rate and 12% plan to have a mortgage broker do the legwork.
Firstfolio executive director and eChoice spokesperson, Mark Flack, said rising rates made it more likely homebuyers would look to second-tier banks or non-bank lenders to get the best possible mortgage deal.
“The charmed run the banking majors have enjoyed over the past 18 months, when the global downturn effectively closed out non-bank lenders and regional banks, may be coming to an end,”
Brokers may need to segment customersASIC regulations under the National Consumer Credit Protection Act may mean that brokers have to segment their customers into different categories in order to determine what level of due diligence is necessary to meet the new standards.
The guidance that ASIC has provided puts the onus on brokers and lenders to make sure that they are not providing loans that are “unsuitable”. JP Morgan banking analyst Scott Manning said that
the amount of investigation into a client’s capacity to repay a loan will depend on whether or not they are sophisticated users of financial products.
“The essence of the regulation is that lenders and brokers need to be aware of the type of product and the type of customer they are dealing with,” Manning wrote in a recent report.
“If the loan is being sold to potential borrowers with a less sophisticated understanding of the
product, then an even greater degree of rigor is required.”
He said that both bankers and brokers will have to decide whether to apply a regime which assumes all home loans are being borrowed by people who have limited expertise and understanding, which will increase the depth of analysis and data gathering required as part of the assessment, or whether they will tailor the processes for different products and different customer segments.
Brokers that choose to go down the second route will need to be aware of several things, Manning explained. “In this scenario, there needs to be careful definition of
appropriate segmentation, and appropriate control processes in place,” he said in the report.
“Both options will lead to potentially more complex client interviews, extended assessment processes, and higher costs.”
Manning said that most lenders that JP Morgan had spoken to were of the opinion that their existing systems and processes will support the requirements.
However, most brokers currently do not segment their databases to the same degree as lenders and therefore may be forced to treat all clients as being less sophisticated or else develop a means to segment their client base.
Flack said. “The Big Four should not expect default new business from their current customers or existing borrowers as they finance a new property purchase.”
Flack said that mortgage brokers will have a bigger role to play in this environment – helping borrowers source the cheapest loan. “Certainly the volume of inquiries coming through our platform is increasing,” he said.
Of the 1,000 survey respondents who said they were actively considering buying property in the next year, 38% were first homebuyers, 32% were investors, and 31% were existing homeowners wanting to upgrade or relocate.
When asked why they were now considering buying, 57% of would-be first homebuyers cited low interest rates or other conditions allowing them to consider buying, while 40% said rent was becoming too expensive. Only 21% said the opportunity for a good deal or low price had attracted them into the market.
“However, we know the RBA is on a path to increase rates by up
to 2% higher. Our survey suggests an increase of this magnitude will affect demand, with consequences for clearance rates and sale prices in the short term,” Flack said.
According to the survey, property investors are more relaxed about rate rises.
Two out of five Australians are actively considering purchasing property within the next 12 months, drawn by still-low interest rates and, in the case of first homebuyers, a desire to avoid paying high rents, according to research conducted by eChoice.
Despite the optimism, the survey confirmed rising interest rates would act as a speed bump with almost half of first homebuyers and 57% of existing homeowners saying they will reconsider their intentions if rates increase by another 1.75%.
Survey findings:• 24% of first homebuyers said
rising interest rates were their biggest concern in purchasing a property, compared to 17% who feared losing their job
• 21% of potential first homebuyers would reconsider their interest if mortgage rates increased by 0.75%
• When asked why they were considering buying a new house, 49% of existing homeowners said they wanted to upgrade to a bigger or smarter house or a better location, while 35% needed to relocate for personal or professional reasons. Only 8% were looking to capitalise on the value of their existing house
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Query on how to best manage licensing
There appears to be no clear consensus on the best way to handle the incoming regulation on an aggregator level, with some groups opting to provide brokers with the ability to become
an authorised credit representative and others declining to take the exposure that comes with having brokers operate under their licence. Frank Pratore, general manager of
WA-based boutique financial services group Ballast, said the company has decided that anyone who wants to hold a direct agreement with the financial services group will need to hold an Australian Credit Licence.
“Unlike other aggregators, we’re saying that in order to hold a direct agreement, you must hold an ACL,” he said.
“It doesn’t preclude, I suppose, anyone with an ACL from taking on credit reps under them but we are not going to have the direct exposure.”
This is markedly different from the approach that CSC Home Loans is taking. The mortgage manager is hoping to capitalise on the incoming regulation by recruiting brokers who are not looking to become self-licensed.
CSC is promising that the fee it charges to collect commissions and provide the credit representative licensing will provide significant savings for its loan writers. The fee will also include the professional
indemnity cover. “We’re really looking forward to the evolution of the mortgage professional advice industry in Australia,” CSC principal Neil Brett said. “Realistically, I don’t think anyone will recognise the industry in five years’ time, either from a commission, fee for service, documentation and compliance prospective.”
Because Ballast is based in WA, it has already dealt with licensing – in fact, Pratore believes that the new regulations are weaker than those currently in place in his state.
“In effect, because the Eastern Seaboard doesn’t have any formal licensing regime, they are slightly watering down the WA proposition in order to accommodate the whole of Australia,” Pratore said. “I think WA will fare very, very well – it will be business as usual for us. This is one of the times that being based out of WA and being a boutique player in the marketplace is a strength for us.”
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Superwoman Group has entered into an agreement to buy the Members First Group (MFG) of companies. Those companies include Members First Broker Network, Members First Financial Services and Members First Wealth.
“The acquisition will enable SPG (Superwoman Group) to combine its resources with MFG to reach out to a wider audience with specific product offerings through more varied distribution channels,” company secretary Michael Cogan said in a note to the ASX. “The growth strategy for the company combines a generic approach, through direct marketing to SPG’s existing database, as well as plans to expand via acquisition.”
MFG is primarily an aggregator with 112 independent
mortgage advisors across the country and boasts a combined mortgage portfolio of $1.8bn. The aggregator has outsourced its IT and commission payments systems to PLAN, with whom it has a sub-aggregation membership agreement.
Superwoman Group has been developing itself into a diversified financial services business and is preparing to launch a unique value proposition – products and services specifically tailored to the needs of women.
“The pace of growth will be dependent on the economic environment and availability of funding,” SPG chairman John Walker said.
Walker and MFG chief executive officer Nicholas Psyhogios said that the two companies share the same commitment to customer service and that their combined distribution would be significant.
“There are fantastic synergies between both groups,” Psyhogios said. “Our Members First advisors will be able to offer financial planning and mortgage advice to clients who attend seminars and conferences. The combined distribution potential of SPG and Members First is simply enormous.”
In a note to the ASX, Cogan hinted that more acquisitions were on the way.
“The growth strategy for the company combines a generic approach, through direct marketing to SPG’s existing database, as well as plans to expand via acquisition,” he wrote.
The acquisition still has a couple of hurdles to go through before it becomes official, and is subject on the continuation of employment of key senior management of MFG.
Superwoman to buy Members First
First homebuyer activity is expected to drop 40% from 2009 levels to 110,000 as a result of the removal of the First Home Owner Grant Boost.
Research commissioned by QBE LMI and conducted by BIS Shrapnel found that 180,000 people bought homes for the first time in 2009. While this number is set to plummet this year, QBE LMI CEO Ian Graham said last year’s number was artificially inflated as buyers that would have bought this year moved their purchase forward.
“This is the first quarter following the withdrawal of the First Home Owner Grant Boost Scheme as well as a number of interest rate increases that first homebuyers have had to deal with – not surprisingly this has had a short-term impact on demand,” Graham said. “This was expected, given that many first homebuyers brought forward their intentions to purchase in 2009.”
However, the expected demand from first-time buyers is still significantly stronger (27%) than what eventuated when the government removed the First Home Owner Boost Scheme in 2002. In fact, the 110,000 new
entrants to the property market represent just a 15% fall on what BIS expects is the underlying demand for first homebuyer loans of around 135,000 per year.
Graham said that the fundamentals were different this time around and that strong population growth of people in the 25–39 age bracket would continue to underpin demand.
“The solid growth in this age group will result in a bigger pool of first homebuyers in the market which will support demand in the future,” Graham said. “Interestingly, the research also confirms first homebuyers are adjusting their expectations by turning to established or smaller dwellings, such as townhouses and apartments. This reflects pressure on affordability following the expiration of the FHOGBS and higher interest rates on mortgages.”
Among other factors, expectations of rental increases will also be a factor in driving first homebuyer demand, Graham said. “The move from renting to paying off a mortgage will continue to be an attractive option and as a result will encourage many first homebuyers to enter the market in the year ahead.”
First homebuyers to drop 40% with removal of boost
110,000 new entrants to the property market expected in 2010, down from 180,000 in 2009
However, strong fundamentals expected to continue to drive first homebuyers’ market
First homebuyers will be looking to purchase smaller properties
Key points
Ian Graham
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In New York, dozens of brokerages have shut up shop after increased regulation, bad publicity and rising costs have prevented them from being run profitably.
While it is unlikely that industry regulation will have such a large impact on Australian brokers, smaller firms may find it hard to deal with the extra burden and costs associated with the new rules.
If those Australian broker groups decide that the burden is too heavy they may follow in the footsteps of their US counterparts and end up either joining other larger firms, switching over to work directly at banks, or leaving the business entirely.
Ronald Michnik, owner of New York brokerage Independent Funding Service said there’s a disincentive to remain in business. “A lot of good people have left the mortgage industry completely,” he said.
Brokers in Australia do not have to carry the weight of the sub-prime crisis on their
US brokers close after regulation shoulders like their counterparts in the US do. Therefore, the main reason that brokers may need to close is if the costs of regulation make their business unprofitable or just not worthwhile.
With a number of aggregators and broking groups offering brokers the ability to become Authorised Credit Representatives for a monthly fee, brokers will have to determine for themselves whether the fee is worth paying – taking into account the time and cost of obtaining a licence.
Aussie chief executive officer Stephen Porges said that broker groups with less than 500 people would struggle to carry the costs associated with regulation leading to consolidation in the industry “the likes of which have never been seen.”
Porges said he thought there was not enough time for the smaller groups to gather together effectively, so it would likely be larger groups that look to acquire their smaller competitors.
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Home lending falls Home lending for both new and existing dwellings continued to fall in February 2010, according to statistics released by the ABS.
“While the fall in the number of housing finance approvals of 1.5% in February was less dramatic than the 7.9% fall in January, the momentum of slowing finance approvals (down almost 21% since October 2009) is a concern for the undersupply issue facing the housing market,” ANZ economist David Cannington said.
Housing Industry Association chief economist Harley Dale said that the February update for housing finance was very weak and highlighted the risk that the recovery in residential construction activity could begin waning by as early as the middle of this year.
“There remains no evidence that the volume of upgrade owner-occupiers and investors entering the new home sector is proving sufficient to offset the removal of stimulus to first-time buyers,” Dale said. “Interest rates should be left on hold.”
He said that the prospects for a second stage new home building recovery from 2010/11 are diminishing amidst rising interest rates, lack of available credit, persistently high supply side barriers to new housing related to land and labour supply, regulation and taxation, and planning delays.
Cannington agreed, saying that although construction loan approval numbers increased marginally (up 0.4% in the month) in February they were still down 12.5% since October.
“This suggests a bleak outlook for housing supply with momentum in building approvals slowing and expectations of further monetary policy tightening into 2010,” he said.
“This will continue to leave the Australian housing market well short of the supply necessary to keep up with what is still very strong demand – entrenching the supply shortage of domestic housing.”
Loans for the purchase of a new dwelling were effectively flat in February while loans for established dwellings dropped by 2.8% to the lowest level since September 2008.
“First homebuyer owner-occupier loans are, not surprisingly, continuing to decline. At the same time, however, non-first homebuyer owner-occupier loans are losing momentum rapidly and loans for new residential investment are still languishing at near eight-year lows,” said Dale.
Harley Dale
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Homeowners still looking to upgrade
Nominations are now open for the Australian Mortgage Awards 2010, where the opportunity has arrived to reward and recognise those brokers who have contributed positively and made their mark in the mortgage industry this year.
The Australian Mortgage Awards (AMAs) are the largest awards event for mortgage
Homeowners who have plenty of equity in their properties are still looking to upgrade to a more expensive home despite rising interest rates.
Loan Market chief operating officer Dean Rushton said that since the start of the year the company had received a 38% increase in enquiries from owner-occupiers wanting to upgrade their properties. “Around 60% of our customers are
professionals, regularly bringing together the industry’s finest to celebrate their outstanding achievements at this annual event.
Recognition will provide a huge boost to business and inevitably enhances the winner’s profile in the industry, as many past recipients of AMA Awards have discovered.
“To be recognised as Australian Broker of the Year was a real win, considering we were up against much larger broker groups and from a regional location. It justifies all the hard work and long hours I and our team put in, in what was a very trying year in the mortgage industry,” says Joshua Egan, Broker of the
Nominations kick off for Australian Mortgage Awards 2010 Year AMA 2009 winner. “I certainly recommend other brokers enter the Awards. Our business received lots of press coverage and it gave credibility to the business and my work.”
Online nominations close on 30 June so make sure you include your vote for this year’s award winners!
Median house prices (January)Adelaide $395,000 Brisbane $460,000 Canberra $545,000 Darwin.. $515,000 Hobart $342,000 Melbourne $489,900 Perth $490,000 Sydney.. $572,000
Source: RP Data
considering selling in order to then upgrade to a bigger or better property,” Rushton said.
“They mostly have a high level of equity in their existing home – sometimes as much as 75% – and are wishing to upgrade into the next price bracket.”
Rushton said the Reserve Bank of Australia’s (RBA) tightening of the cash rate has been unfortunate, as increasingly there were mixed signals around business and consumer confidence.
But Rushton said interest rates were still below traditional average levels and the previous four rate increases had not had an overly adverse impact on the residential property market.
“The reality is that rates are still reasonable in a historical sense and mortgage holders understand that the RBA only reduced the interest rates significantly last year in response to the global financial crisis,” he said.
“The market conditions for homebuyers at the moment are still very favourable.”
St.George has appointed Shane Davis as head of partners, where he will be responsible for liaising with aggregator groups.
“I’ve been involved in the broking business since taking on a BDM role with Westpac in 1998,” Davis said, adding that it was early days for the bank’s broker relationships. “In those days we’d get excited by $10m settlement-months by brokers.”
Davis moved over to St.George in 2002 where he managed BDM teams and mobile lenders before securing his latest role.
Steven Heavey, general manager for St.George Intermediary Distribution, said this newly-created role would ensure St.George maintained a close relationship with its aggregator partners.
St George appoint head of partners
Shane Davis
19www.brokernews.com.au
Stargate Group has partnered with RP Data to provide brokers with the company’s point of sale valuation solutions. “The inclusion of RP Data’s Automated Valuations will give our users the added sales tools needed to close more deals and manage their customers’ expectations better than ever before,” Stargate CEO Brett Spencer said. “Being able to give their customers an on-the-spot property valuation will speed up the loan application process and provide borrowers with a better broker experience.” Stargate boasts that its SymmetryCRM platform is the only mortgage broker IT platform to offer automated valuations from Australia’s largest property and analytics information business.
US mortgage broker, Mark Kellogg, faces a maximum of 106 years in prison and a US$6.6m fine after pleading guilty to 103 mortgage fraud-related charges. The 39-year-old broker from Cleveland, Ohio used his position as a broker to help a collaborator, Beverly Cody, buy 78 houses with US$5.8m of fraudulent loans. Kellogg was accused of almost single-handedly devastating the Slavic Village neighbourhood in Cleveland. The county prosecutor said the case was unique in the US in that some of the counts in the indictment were related to the harming of other residents in the neighbourhood who lost money when they sold their homes. Kellogg will find out his fate on May 29, when he will be sentenced.
Moody’s rating agency has said that the Australian RMBS market is strong enough to withstand the Reserve Bank’s tightening policies and that there is little chance of a surge in delinquencies or downgrades. Moody senior analyst Arthur Karabatsos said most borrowers should be able to absorb higher rates, adding that most borrowers have already shown they can cope with their mortgage payments as rates tick up to normal levels. “The neutral setting is believed to be around 5%, if official interest rates rise a further 0.75 percentage points to this level, delinquencies in the Australian RMBS sector are unlikely to significantly increase,” Karabatsos said. If the RBA brings the cash rate to 5% by the end of the year, it would still be 2.25% below its level in March 2008.
The Housing Industry Association (HIA) has voiced concerns over the pace of interest rate rises after a new report showed residential building work slumped 2.5% in the December quarter. NSW suffered the most with a drop of 5.3%, followed by South Australia on 4.8% and Victoria on 3.3%. Both houses and units saw declines in construction. House building was down 1.1% to $6.2bn and unit building down 5.8% to $2.6bn. HIA chief economist Harley Dale warned of the shaky prospects for a post-stimulus housing recovery. “Recent updates have highlighted falling new home lending, sluggish housing credit growth, and a loss of momentum in building approvals and new home sales,” he said. “That’s not good news for a sustainable new home building recovery and highlights the need for a cautious approach to interest rates.”
In an eerie reminder of what pre-empted the GFC, US authorities have charged Wall Street behemoth Goldman Sachs and one of its vice presidents for defrauding investors in its sub-prime RMBS issues. The Securities and Exchange Commission has claimed that the investment bank allowed a client that was betting against the mortgage market to influence what mortgages to include in the portfolio and yet told investors that the securities were selected by an independent third party. “The product was new and complex but the deception and conflicts are old and simple,” said SEC director Robert Khuzami. Goldman Sachs’ client, Paulson & Co, was allegedly allowed to take short positions against mortgage securities based on a belief that the securities would fail.
INDUSTRY NEWS IN BRIEF
US broker pleads guilty to 103 charges
Ratings agency says rising rates no barrier to RMBS market
HIA warns Reserve Bank on interest rates
Stargate to offer easy valuations to brokers
Goldman Sachs charged with RMBS fraud
20
Newswww.brokernews.com.au
Mortgage manager promises to pay brokers’ ACL fee
obtain an Australian Credit Licence (ACL).
There is, however, just one catch. Brokers need to be actively sending loans to Nationwide Lending and meet a minimum benchmark of two loans per month in order to receive the reimbursement.
Chief executive officer Glen Jones said the company valued its quality accredited brokers, and was more than happy to assist them with the upcoming ACL fee.
“It’s just smart business to look after our accredited brokers who support Nationwide Lending and settle a minimum of two loans per month,” he said.
Acquisitive ASX-listed mortgage and financial services group, Firstfolio has agreed to purchase selected key assets of Sydney-based LeaseChoice – a leading specialist in business equipment finance and leasing solutions – for $2.4m.
The deal will immediately diversify Firstfolio’s earnings and adds LeaseChoice to its recent string of acquisitions which include Xplore Capital, Loan Services Australia and First Chartered Capital.
In its latest deal, Firstfolio will acquire the LeaseChoice business name, website, origination systems and associated trademarks. Firstfolio will also have access to wholesale funding arrangements
previously arranged by LeaseChoice.
The acquisition is expected to be earnings accretive in the first 12 months, contributing up to $750,000 to Firstfolio’s group EBITDA in that period. Initial income will come from fees received on new transactions.
The LeaseChoice deal will enable Firstfolio to rapidly deploy a new suite of financial products with strong reach into SME and corporate markets through its existing distribution network, centred on the eastern seaboard.
“Diversification of product and client portfolio has been a major goal for Firstfolio, and we have always been opportunistic in adding new
Firstfolio agrees to acquire LeaseChoice for $2.4m financial service components that could benefit from our existing distribution platform,” Firstfolio chief executive officer Mark Forsyth said.
He added that the company had also put a priority on expanding into adjacent segments, particularly the SME market.
“As a leading provider of asset finance to sole traders, successful SMEs and larger companies, LeaseChoice fits this bill perfectly,” Forsyth said.
The LeaseChoice’s origination team will join Firstfolio, and LeaseChoice founder Kirk Tsihlis will focus on introducing or enhancing existing wholesale funding arrangements on an exclusive basis in Australia.
Exactly how many of the approximately 250 accredited brokers that Nationwide has on its books would qualify for the deal is uncertain.
However, the company’s strategic business manager, Craig Pickering recommended that brokers hold their own individual ACL, rather than becoming a credit representative under an aggregator or group licence.
“If they do not obtain their ACL now, brokers will have very little control over their futures and will be in no position to negotiate future terms or commissions,” he said. Registration to apply for an ACL opened at the start of April with all brokers who are looking
Glen Jones
to obtain a licence compelled to register as the first step under the National Consumer Credit Protection Act.
ASIC, who will be running the licensing scheme, advises that brokers ought to register by 18 June to ensure their application is processed by the time regulation kicks in on 1 July. From that time onwards, only registered credit participants can engage in credit activities.
Advantedge, which is offering its brokers the ability to become credit representatives, recommends that all brokers register for the licence even if they will eventually operate under their aggregator’s ACL.
After registering for a licence, brokers will have six months in order to obtain a licence or become Authorised Credit Representatives under their aggregator to continue practising in 2011.
Nationwide Lending, an Adelaide-based mortgage manager, has pledged to reimburse its accredited brokers the annual licensing fee owed to ASIC to
Mark Forsyth
21www.brokernews.com.au
Integration causes some teething pains for LoankitLoankit’s transition from being a sub-aggregator to an aggregation arm of an ASX-listed company has provided more than a few headaches for CEO Kym Rampal but those are fading away as the company’s official launch date nears.
“Obviously this was never going to be easy,” Rampal said, adding that some of the challenges faced in Loankit’s integration with new owner Mortgage Choice were somewhat of a surprise.
“Because we came from a sub-aggregation background into the aggregation world, we had to establish lender relationships that were separate from the Mortgage Choice lender relationships,” he said. “That took a lot more time than I had originally anticipated.”
One of the reasons for the delay, Rampal said, was because it was not a simple matter of signing agreements with the lenders but also involved transferring commissions from its previous aggregator partners.
“That became a matter of a tripartite agreement between the aggregators, the lenders and ourselves so that took quite a bit of time,” Rampal said. “Thankfully all that is well and truly behind us.”
Other than those unexpected delays, Rampal said there was a steep learning curve for both Mortgage Choice employees, who had to learn Loankit systems, and Loankit employees, who had to learn Mortgage Choice reporting standards.
At the end of the day, however, Rampal said that those who matter the most were affected the least. “I’m very glad to say that none of this has impacted the brokers in the services that we offered them and the support that we offered them,” he said.
When Mortgage Choice bought Loankit, the company had 50 broking groups signed up. Since that time, that number has grown to about 65 with plans for more to come once the new model is revealed.
The two companies will be maintained and run as completely separate entities recognising the fact that they attract different types of brokers. Mortgage Choice franchisees are usually quite new to the broking industry when compared to Loankit’s target audience, Rampal said.
“Loankit caters to independent, well-established brokers who don’t require a large number of support services from their aggregator,” Rampal said. “Even though we do provide brokers with them, brokers use them as they require rather than having to pay for the services altogether.”
Wholesale lender Resimac has reached a distribution agreement for the receivables finance services of Coface Finance Australia, a subsidiary of the Coface group global provider of trade credit management services.
Under the agreement, Resimac will distribute the product through its services business Capel Court Financial Services.
“[The agreement] offers our third party intermediaries the opportunity to diversify and grow their revenue through auxiliary product offerings,” Resimac COO Allan Savins said.
Norman Beetge, general manager of Coface Finance Australia said the new relationship would benefit from the domestic distribution capability of Resimac and the global product reach of Coface, while Christian Vollbehr, general and country manager of Coface in Australia, said this was a crucial time to promote receivables finance services as companies seek alternative solutions to traditional lending following the GFC.
The move comes just a couple of months after the non-bank lender launched its new retail brand, Hemisphere Financial Solutions, which has promised rates that will compete with the major banks.
Frank Knez, associate director, product and marketing at Hemisphere, said that Resimac’s move into retail undoubtedly proved the resilience of the non-banking sector.
“Until now, there has been a perception that non-bank lenders have not been able to offer competitive rates,” he said. “Hemisphere plans to change that by offering some of the most competitive interest rates in Australia, giving customers a true independent alternative in home loan borrowing.”
Resimac moves into receivables finance
Allan Savins
22
Columnwww.brokernews.com.au
Clear.the.decks.–.this.naval,.but.not.novel,.analogy..is.the.call.of.many.business.leaders.at.present...The.current.marketplace.provides.a.timely.and.substantial.opportunity.to.remove.barriers.and.filters..as.the.first.steps.towards.improving.productivity,.efficiency.and.effectiveness.
The.analogy.does.not.extend.to.a.diving.submarine.or.to.businesses.which.are.or.are.about.to.go.underwater.
Remove the barriersSignificantly,.detailed.reviews.of.and.refinements.to.the.internal.aspects.of.businesses.typically.accord.immediate.and.appreciable.savings..Competitiveness.improves,.profit.margins.increase.and.importantly,.strategic.flexibility.broadens.
The.marketing.message.is.simple:“It.is.one.thing.to.know.the.competitor..It.is.best.to.first.know.thy.self.”Far.too.many.public.and.private.sector.entities,.
large.and.small,.throughout.the.world.and.in.Australia.in.particular,.suffer.the.adverse.consequences.of.territorialism.and.silos.
Prospects.for.leveraged.increases.in.revenue,.customer.satisfaction,.loyalty,.repeat.and.referral.business.fall.between.the.cracks.or.are.repelled.by.imaginary,.perceptual.and.internally.self-imposed.walls.
A.change.of.focus,.attitude.and.underlying.culture.affects.a.change.to.prospects..In.the.words.of.Alvin.Toffler,.the.first.international.futurologist.and.author.of.generational.shifting.book,.Future Shock.(1970):.“Old.information.looked.at.through.new.perspectives.creates.new.information”.
Greater.and.more.collegiate.internal.endeavours,.complemented.by.select.and.discrete.external.strategic.alliances.facilitate.the.establishment.and.maintenance.of.additional.revenue.and.profit.streams.
Delineations.of.clients.and.end.users,.or.customers.and.consumers,.provide.for.a.better.understanding.of.the.marketplace,.of.needs,.wants.and.aspirations,.as.well.as.the.bases.for.value.and.competitive.advantage.
Ships,.yachts.and.motor.boats.perform.best.when.barnacles.and.flotsam.are.removed.and.hull.lines.are.sleek..A.redesign.of.the.physical.and.operational.architecture.of.an.entity.offers.the.same.outcomes.
What you can controlAmong.the.consequences.of.creeping.globalism.are.more.complex.commercial,.industrial,.financial.and.political.infrastructures..The.capacity.to.control.and.influence.many.marketplace.variables.are.limited.
URQUHART
However,.changes.to.the.internal.aspects.of.an..entity.are.within.the.remit.of.owners,.managers.and.team.members.
Take,.for.example,.the.ongoing.enhancements.and.refinements.of.the.supply.chains.of.supermarkets.in.particular.and.retailers.in.general..Banks,.too,.have.the.essentials.in.hand.for.sustainable.growth.and.increasing.economic.strength.
Conversely,.many.major.mining.exporters.suffer.the.adverse.economic.consequences.of.obsolete.and.inadequate.rail,.freight.and.port.facilities.
Therefore,.emphasis.should.be.given.to.refining.and,.in.some.instances,.redefining.operational.philosophies.and.procedures..The.primary.intent.will.be.to.improve.efficiencies,.lower.costs.and.increase.marketplace.impact.with.existing.or.less.resources.
Horizontal organisationA.seamless.organisational.structure.is.a.virtue..It.provides.advantages.for.external.and.internal.customers..In.the.latter.instance.team.members.develop.a.perspective.and.sensitivity.to.the.contributions,.needs,.values.and.drives.of.those.who.contribute.to.a.single,.integrated.set.of.endeavours.
Territorialism.and.self.interest.are.redressed..A.whole.new.orientation.is.developed,.which.transcends.operational.parameters.and.limitations..The.underlying.driving.force.which.emerges.is.to.satisfy.client.and.customer.needs.and.expectations..The.sense.of.team,.crew.if.you.will,.and.the.value.of.others.is.promoted.
Anyone.who.has.visited.and.inspected.rural.areas.in.which.decaying.silos,.often.with.no.ceilings.or.roofs,.are.located,.will.recall.the.limited.vision.possible.as.one’s.view.turns.to.the.sky.
Silos.in.organisations.create.similar.scenarios..Horizontal.perspectives.broaden.one’s.mind,.perspectives.and.scope.
The.current.marketplace.rewards.those.business.owners.and.managers.who.exhibit.and.maintain.true.leadership.attributes.of.leading.values.rather.than.people.
An.integral.part.of.the.implementation.of.the.strategic.initiatives.detailed.in.this.text.is.the.respect.leaders.accord.team.members.by.detailed.explanations.of.what.is.required.and.the.probable.consequences.
Great.skippers.of.high.performance.yachts.and.boats.respect.and.adhere.to.the.need.to.inform,.involve.and.recognise.crew.members.
So,.go.ahead..Clear.the.decks..God.bless.for.clear.sailing..
GET YOUR BUSINESS SHIPSHAPE Marketing Focus managing director Barry Urquhart has a look at how brokers can focus their strategy in order to survive stormy waters or thrive in calm seas
24 www.brokernews.com.au
Feature
What was the last book you read?
It’s.called.The Accidental Billionaires.by.Ben.Mezrich..It’s.a.brilliant.first.person.account.of.the.creation.of.Facebook.in.a.small.Harvard.dorm.room.and.the.ensuing.relationship.breakdown.between.Mark.Zuckerberg.and.everyone.else.involved.in.the.creation.of.Facebook...
If you did not live in Australia, where would you like to live?I.love.Melbourne,.its.such.a.beautiful.place.to.live,.but.if.forced.to.choose.somewhere.else,.it.would.be.either.Orlando,.Florida.or.Hong.Kong..Orlando.is.the.home.of.some.of.the.greatest.theme.parks.(Disney.World,.Universal.Studios,.Sea.World,.etc),.and.is.the.place.where.an.adult.can.act.like.a.kid.again..Hong.Kong.is.such.a.cosmopolitan.city.that.never.sleeps,.has.great.shopping,.sensational.food.and.is.a.stepping.stone.to.all.of.Asia.
If you could sit down to lunch with anyone you like, who would it be?I.could.be.very.clichéd.and.pick.an.actor,.author,.sportsperson,.politician,.etc,.but.the.person.I.would.most.love.to.sit.down.to.lunch.with.would.be.my.wife.Jennifer..It’s.something.that.I.haven’t.done.in.such.a.long.time.as.something.else.always.takes.precedence,.be.it.work,.the.kids.or.other.issues.
What was the first job you ever had?The.first.job.I.ever.had.was.as.a.10-year-old.working.for.my.father.during.school.holidays..It.was.the.early.1980s.and.I.was.paid.$10.a.day.for.doing.the.shredding.and.filing..Working.at.such.a.young.age.showed.me.the.value.of.money.and.taught.me.how.to.deal.with.people..I’ll.never.forget.the.satisfaction.of.being.able.to.buy.the.latest.toys.and.games.with.that.money..I’m.now.running.the.family.business.and.I.still.get.the.same.level.of.satisfaction.today.as.I.did.when.I.was.10-years-old...
What do you do to unwind?My.wife.says.I.never.unwind.and.I.think.that’s.true.to.some.extent,.but.when.I.do.unwind.it’s.because.I’m.spending.time.with.my.two.beautiful.daughters.(Chloe.aged.5.and.Tiffany.aged.2).who.think.that.I’m.the.best.thing.since.sliced.bread..Kids.have.a.way.of.making.you.forget.about.all.the.other.stresses.in.your.life.and.you.tend.to.get.wrapped.up.in.the.joy.of.the.moment..I.recently.spent.a.day.in.Sydney.with.my.oldest.daughter.and.it.was.probably.the.most.relaxing.day.I’ve.had.in.over.10.years..
What’s the most extravagant gift you ever bought yourself?I.haven’t.bought.it.yet..But.when.I.do,.it’s.going.to.have.four.wheels.and.be.very,.very.fast.
What CD is currently playing in your car stereo?It’s.a.very.eclectic.mix..I’ve.got.Black.Eyed.Peas.(Monkey.Business),.Kings.of.Leon.(Only.by.the.Night),.Linkin.Park.(New.Divide),.Pink.(Funhouse),.Wolfmother.(Wolfmother).and.Eminem.(Curtain.Call)..I.also.have.a.Wiggles.CD.in.the.glove.box.for.the.kids,.but.it’s.not.something.that.I.would.readily.own.up.to.
If you could give anyone starting out in business one piece of advice, what would it be?The.best.piece.of.advice.I.was.ever.given.was.by.my.father.when.he.taught.me.a.lesson.about.persistence.and.the.strength.of.that.single.thought..There’s.a.great.quote.from.US.President.Calvin.Coolidge.that.epitomises.the.value.of.persistence.that.states:.“Nothing.in.this.world.can.take.the.place.of.persistence..Talent.will.not;.nothing.is.more.common.than.unsuccessful.people.with.talent..Genius.will.not;.unrewarded.genius.is.almost.a.proverb..Education.will.not;.the.world.is.full.of.educated.derelicts..Persistence.and.determination.alone.are.omnipotent..The.slogan.‘press.on’.has.solved.and.always.will.solve.the.problems.of.the.human.race.”
If I was not working in the mortgage industry, I would like to be…?I.would.have.been.an.architect..I.did.graphic.design.at.school,.but.when.it.came.to.crunch.time,.I.knew.that.the.best.way.forward.was.to.focus.on.a.business.degree.
Where was the last place you went on holiday?Each.year,.I.try.to.take.one.holiday.in.Australia.and.one.holiday.overseas...My.Aussie.holiday.is.always.with.the.family.and.last.year.I.spent.a.week.in.Surfers.Paradise.just.relaxing.by.the.pool.and.trying.to.relax..My.overseas.sojourn.was.to.Hong.Kong.with.Jennifer.and.Chloe,.which.was.great.fun.as.I.got.to.relive.my.childhood.Disney.experiences.through.Chloe.as.she.discovered.the.joys.of.Disneyland.for.the.first.time.
Brett SpencerCEO, Stargate Group
OFF THE CUFF
26
Columnwww.brokernews.com.au
As.the.reality.of.a.regulated.mortgage.broking.industry.creeps.ever.closer,.many.brokers.are.questioning.what..it.will.mean.for.them.
A.number.of.industry.and.non-industry.commentators.have.weighed.in.on.the.benefits.of.regulation,.quite.correctly.quoting.consumer.protection,.improved.professional.credibility.and.minimum.qualification.standards.as.vital.to.the.sustainability.of.the.industry,..and.long.overdue.
However,.what.does.this.mean.to.the.many.brokers.in.the.market.who.have.always.operated.in.a.professional.manner,.have.continually.sought.to.upgrade.their.qualifications.and.have.always.put.their.customers’.best.interests.first?.Shouldn’t.the.industry.be.looking.for.a.broader.solution.than.regulation.alone?.Isn’t.it.time.for.the.industry.to.move.forward.towards.an.outcome.that.provides.its.participants.with.a.value.proposition.that,.by.its.very.structure,.will.underpin.the.professionalism.and.consumer.acceptance.that.the.industry.and.those.who.are.moving.to.regulate..it.are.seeking.to.achieve?
Many.long-term.participants.in.the.industry.have.spent.years.building.up.valuable.revenue.streams.from.their.mortgage.broking.businesses..However,.it.is.common.for.those.successful.companies.and.individuals.to.question.how.and.when.they.can.exit.their.business.and.receive.a.return.that.is.commensurate.with.the.many.years.of.hard.work.they.have.invested..
The.industry.has.largely.let.this.question.go.unanswered.–.happy.to.allow.this.hardworking.group.continue.increasing.the.broker.share.of.the.national.mortgage.market.and.generating.revenue.for.a.declining.number.of.mortgage.product.manufacturers.and.distributors..
With.no.real.certainty.of.the.value.they.could.achieve.out.of.their.business,.or.how.to.influence.its.value,.a.growing.number.of.brokers.are.choosing.to.direct.their.cash.flow.towards.investments.that.offer.more.certainty.around.their.return,.rather.than.re-investing.in.their.business.
It.seems.a.strange.paradox.that.an.industry.that.is.so.involved.in.helping.consumers.secure.their.most.valuable.assets.has.so.little.focus.on.achieving.value.for.its.participants..In.fact,.the.industry.is.quite.rightly.being.regulated.to.ensure.consumers.receive.the.best.possible.advice.when.making.their.most.important.value.decision,.however,.it.is.still.notably.lacking.any.value.advice.for.the.brokers.providing.that.service.
So.how.do.we.link.regulation.and.industry.value,.and.what.actually.drives.value.in.the.broking.industry?
Traditionally,.brokers.would.apply.a.multiple.to.their.annual.trail.revenue.to.find.the.business.value.–.in.the.past.this.multiple.has.been.as.high.as.three.times,.but.is.now.rarely.quoted.at.more.than.1.5.times..However,.
CLOUSTON
this.simplistic.calculation.does.nothing.to.reward.quality.operators.for.the.amount.of.time.and.money.they.invest.in.their.systems,.customers.and.business.relationships..
At.the.top.end.of.the.mortgage.industry,.businesses.are.valued.on.a.far.more.sophisticated.basis,.using.earnings.multiples.and.projected.cash.flows.as.a.basis.for.determining.the.market.value.of.an.active.business.asset..
The.challenge.is.now.to.bridge.the.gap.between.the.simplistic.trail.multiple.valuation.and.the.more.sophisticated.active.business.valuation.models..
The.ability.of.a.broker.to.provide.documented.evidence.that.shows.exactly.how.they.produce.their.revenue,.and.how.that.can.be.repeated.over.and.over.again,.to.a.potential.purchaser.will.have.a.direct.correlation.to.the.value.of.their.business.
When.valuing.a.business,.a.potential.purchaser.will.apply.value.to.a.number.of.key.areas:•. Customer.data.needs.to.be.current,.relevant.and.usable.
and.it.needs.to.record.a.history.of.contact.that.includes.the.business.that.resulted.from.it.
•. The.business.needs.to.be.able.to.display.efficiency.and.ease.of.operation.via.historical.performance.data..As.a.minimum.this.should.include.monthly.lodgment.data,.conversion.rate.trends,.average.commission.rates.received.per.annum,.earnings.per.customer.and.average.number.of.days.from.lodgment.to.settlement.
•. Proof.of.ongoing.cash.flow.from.trail.portfolios.is.essential.and.requires.the.business.to.readily.evidence.the.runoff.rate.of.its.mortgage.portfolio.and.the.average.net.trail.commission.it.received.on.the.total.portfolio..
•. Portfolio.segmentation.can.also.be.a.valuable.tool.in.determining.future.cash.flow.value..Investment.customers.tend.to.hold.property.longer,.pay.interest.only.on.their.loans.and.have.an.accumulation.mindset.that.equates.to.higher.repeat.business.rates.The.challenge.for.brokers,.and.the.industry.as.a.whole,.
is.to.shift.the.current.mindset.from.a.view.of.compliance.to.protect.the.right.to.do.business,.to.one.of.important.data.collection.and.management.that.will.greatly.enhance.the.value.of.broker.businesses..
To.complete.the.valuation.cycle,.lenders.need.to.understand.their.responsibility.to.provide.brokers.with.access.to.customer.information.and.portfolio.performance.data,.allowing.brokers.to.manage.and.prove.their.performance.over.the.life.of.their.businesses..
Mortgage.brokers.also.need.to.change.their.perspectives..They.must.stop.thinking.of.themselves.solely.as.brokers.and.adopt.the.mindset.of.a.professional.business.manager..A.professional.business.manager.will.focus.on.revenue.streams,.structures.and.processes.that.secure.and.enhance.value..
When valuing a
business, a potential purchaser will apply value to a number of key areas.
DRIVING VALUE IN A POST-REGULATION WORLD National Finance Club MD Andrew Clouston looks at what brokers can do to increase their value proposition after 1 July
September 24, 2010The Westin Hotel, Sydney
www.australianmortgageawards.com.auOnline nominations now open
“To be recognised as Australian Broker of the Year was a real win considering we were up against much larger broker groups and from a regional location. It justifies all the hard work and long hours myself and our team put in, in what was a very trying year in the mortgage industry…..I certainly recommend other brokers enter the awards. Our business received lots of press coverage and gave credibility to the business and my work.”
JOSHUA EGAN WINNER: AUSTRALIAN BROKER OF THE YEAR AMA09
Organised byOfficial publicationsOfficial event partner Award sponsors
28 www.brokernews.com.au
Feature
With credit providers becoming ever more selective on whom they want as clients, the introduction of a more consistent and predictable credit reporting system is becoming a high priority for many
mortgage professionals. The good news is that help is on the way… well maybe.
Before we can attempt to fix the problem, we need to have an understanding of what’s wrong. I hear a lot of people talking negatively about Veda Advantage and how they have a lot to answer for, so let’s start there. I’m not saying that there isn’t room for some improvement within Veda, however, let’s not forget that they are essentially a warehouse for other people’s data. The truth is they have little control over the accuracy of the information entered by credit providers and although they do have a data accuracy division, it is for the most part reactionary and only able to respond to issues after the data has been entered, or to put it another way, after the damage has been done.
There still seems to be a great deal of confusion by credit providers of their obligations to creditors when
Changes to credit reporting A breath of fresh air or a storm on the horizon?
making a listing, by this I’m referring to compliance with certain passages of legislation such as Section 80 of the Consumer Credit Code or offering relief under Section 66. This misunderstanding often leads to inappropriate or unlawful listings being made against consumers. There also seems to be little consequence to the credit provider if a wrongful listing is entered, even if real loss to the consumer has occurred.
One must remember that Veda is owned by Merrill Lynch which is a profit-driven organisation. There is a strong argument to support that our credit reporting industry should be under government control, after all, in the case of Veda and Dunn & Bradstreet, it’s difficult to remain impartial when profits are the primary motivation.
I feel this is a genuine opportunity for the credit reporting agencies to lead the way and adopt a focused education program to their subscribers on the necessary steps required to make a listing and the potential ramifications to a consumer should this process not be followed. Such a program would result in less mistakes being made and therefore fewer consumers being wrongfully affected. Of course, the full weight of this responsibility does not lay solely on the credit reporting agencies, and support would also need to be shown from the relevant government bodies.
Keeping scoreLet’s take a look at the banks’ credit scoring systems and why they have become so restrictive. There is no mistaking that this is partly brought about by the GFC – the fact is the credit markets have contracted
Brokers will be impacted by changes that are coming to credit reporting. Principal of We Fix Credit John Dickinson looks at the changes and what they will mean for the industry
John Dickinson
Our current Credit Reporting System is plagued with problems and is less than perfect. The Australian Law Reform Commission (ALRC) in August 2008 made a total of 295 recommendations to be adopted in our Credit Reporting System. One suggestion being a comprehensive credit reporting system was finally adopted by the government in October.
The adaptation of a comprehensive credit reporting system that will soon go into place has five substantive changes which affect credit reporting in Australia:• Identifying if an application for credit is accepted or declined, together
with identifying the type of loan applied for• Identifying the amount of an account limit• Identifying the date the account commenced• Identifying the date the account closed• Identifying a payment performance history (subject to, and conditional
upon strict compliance with responsible lending provisions)Change was necessary and long overdue. In early 2003, the
Consumers Federation of Australia highlighted significant failures in the pre-comprehensive system. Of particular interest and worth noting are the following identified failures:
• Reports are inaccurate• There is no effective way to remedy existing inaccuracies • Access to the credit reporting system is not sufficiently controlled • There is a lack of regulatory oversight • There is a distinct non-compliance with the Information Privacy Principals
The issues identified by the Consumers Federation of Australia as being problematic are inherent in the pre-comprehensive system, and as such will infect the expanded system. The challenge faced by regulators and the custodians of our system are wide and varied. Of primary concern should be an evolved system which circumvents previous failures.
Until fundamental and systematic change occurs, credit reporting in Australia continues to short change the consumer. Such change is broader than the newly adopted system; it must embrace an understanding that consumer rights cannot be subrogated to those of credit providers or credit reporters.
Comprehensive credit reporting allows lenders and trade creditors to consider a larger volume of information when determining an application for credit. Albeit, this concept is valid and should be encouraged as it protects the integrity of the lending system. However, at what cost?
The changing landscape of the Australian credit reporting system
Joe Trimarchi is a principal at the law firm Joseph Trimarchi and Associates that specialises in Australian credit reporting law. He can be contacted on: [email protected]
29www.brokernews.com.au
significantly and the cost of funds has increased. Although – let’s be honest – the banks still seem to be doing quite nicely thank you very much, so how much of this is a genuine response to the current markets and how much is simply a money grab is up for debate.
I have heard people saying they think rejecting a borrower because of a small historic credit issue is the bank’s way of culling applications. I’m not saying this is the case but when one looks at the amount of applicants currently submitted to the banks each week, it doesn’t sound all that far fetched.
The bottom line is that the banks and mortgage insurers are run by numbers and statistics and they have all the evidence they need to show that a client that has defaulted in the past is more likely to default again. Of course, no credit scoring system is able to work out what listing is right and what listing is wrong, so given we know that a very large number of negative listings on credit reports are not lawful there are many clients suffering inappropriately.
Is this the banks’ fault? No, and really we shouldn’t expect them to somehow know the difference. I don’t expect to see any real relaxing of credit policy from the banks for some time so like it or not, it is what it is, at least for now.
The other issue is the very nature of the credit reporting system in Australia. We are one of the few countries in the world to still carry a negative reporting system which means that only enquiries and negative items are listed. Because of this, a credit report can become a very slanted document and not necessarily a true reflection of an applicant’s current position or credit worthiness.
In most other countries such as the US and Europe, a positive reporting system is used which means positive outcomes are noted as well as negative ones. By positive I mean a credit facility that has been taken up, serviced on time and retired without incident. This is potentially a good thing as a credit provider may form a different view of an applicant that has one small blemish but a number of positive listings rather than just being able to view the negative item alone.
The government is aware the current system is far from perfect and is in need of some fixing: the first step is to try and bring our system in line with most of the world and adopt a positive reporting platform.
At what cost?In 2011, the government is proposing a number of changes to the laws surrounding credit reporting that will coincide with the responsible lending legislation, also due in 2011. The list of proposed changes is extensive, however, I’ll cover a few of the proposals that could be of particular interest to you as a mortgage professional: • Stopping the client merry-go-round.
One proposed change is to try and stop the consumer ‘merry-go-round’ by placing the onus to resolve a
dispute on whoever the consumer complains to first. At the moment, consumers tend to get passed from pillar to post when trying to resolve a credit issue, often ending in many months of frustration with no resolution. This proposal has the potential to at least elevate some of this frustration for the consumer, which can only be a good thing. • An external dispute resolution scheme. Other than the applicable ombudsman, consumers currently have very few avenues when making a complaint with regard to credit reporting. It is proposed that an external dispute resolution scheme (EDR) is introduced and credit providers will have to be a member of it before they will be entitled to list information on a credit file. How effective the EDR will be remains to be seen, however, this may go a long way in credit providers making sure the listing they are intending to make is correct and the required procedures under such acts as Section 80 have been complied with. This will also mean that should a credit provider not be able to substantiate a disputed listing, they will have to refer the dispute to the EDR scheme. • More information to be included in a credit report.At present a listing only contains very limited information such as the creditor’s name, the amount, date applied, etc. Under the new legislation it is proposed to include items such as the type of facility (such as credit cards, personal loan, etc) the date the account was opened, the credit limit and date the account was closed. I feel this is also positive as it may help alleviate some of the issues surrounding multiple enquiries as a potential credit provider will have additional information to be able to determine what listings are relevant. • Items such as utility payments being made availableto credit providers as a separate item. That’s right; the proposal is to allow credit providers access to payment histories such as utility bills, etc. Even though this information will help support a more positive reporting environment, I’m concerned by how this would work from a practical standpoint and whether it has the potential to disadvantage the consumer even further. If we accept that in the current market lenders are
using negative listings as a means of culling applications what would the outcome be if a client had a perfect credit report but some inconsistent utility payments? Could this be yet another reason to reject the application? It would all depend on the attitude of the lender at the time, however, in the current market this possibility does not sound far fetched.
Of course, there’s nothing set in stone yet, however, there is no doubt there are big changes on the way. We can only hope that the regulatory bodies such as ASIC seek the necessary advice from industry professionals to help ensure what is decided on is truly a step forward and of real benefit to the consumer.
We are one of the
few countries in the world to still carry a negative reporting system
30 www.brokernews.com.au
Feature
One year onWhatadifference12monthscanmake…ormaybenot.Australian Brokerreflectsonthestoriesthatmadeheadlinesinthemagazineoneyearago
Headline: “Nodelay:Brokersmustregisterby1Jan”(coverpage)
What we reported:Brokers will have to register with ASIC between 1 November 2009 and 31 December 2009 and will then have six months to apply for an Australian Credit Licence according to the proposed new National Consumer Credit Protection Bill. WA brokers, along with ADIs, will be streamlined into the new licensing regime and will not have to “provide detailed material to ASIC” to obtain their licences. New brokers entering the industry from 1 January 2010 will have to obtain a licence before being able to suggest credit to consumers. The legislation will create two clear groups of credit participants – credit providers such as banks and credit unions, and credit service providers, which will include mortgage brokers. Prior to release of the exposure draft, minister for Superannuation and Corporate Law, Nick Sherry, said national regulation bills were on track to be introduced into parliament by mid-2009, but revealed that the passage of the legislation will be delayed until September 2009 to allow the states to pass their relevant referral legislation.
What has happened since? As they say, better late than never. One year on and Australian Broker is still telling mortgage industry participants that they will need to register with ASIC in order to obtain an ACL. However, the dates have now been set in stone and, considering some industry participants have been waiting almost a decade for nationwide regulation, an extra few months to dot the i’s and cross the t’s is hardly something to complain about. The biggest thing that has happened regarding the licensing regime in the past 12 months is the possibility of brokers becoming authorised
credit representatives under their aggregator. Several broking groups have said they will provide this possibility for their members but whether it proves popular amongst the country’s brokers, is something that remains to be seen.
Headline: “CBAdeniesplanstocutcommissions”(page4)
What we reported:The CBA’s executive general manager of third party banking, Kathy Cummings, has stated publicly and on record that the bank has no plans to cut broker commissions after rumours began surfacing on Broker News. One reader claimed that a “CBA insider” had leaked information of the lender’s plans to slash broker commissions to 0.4% upfront and zero trail at the end of June. Cummings rejected the claims, saying there were no plans to change broker remuneration at that time. Brokers on the website waded into CBA’s defence with one saying: “The CBA recently bought 30% of the most high profile mortgage broking businesses in the country – Aussie. They also bought 100% of Bankwest, which is largely a broker business when it comes to mortgages. If the CBA is planning on squeezing us further, why would they have made those purchases?”
What has happened since? In this case, the rumour mill turned out to be well and truly wrong and the logic of those defending the CBA turned out to be correct. Despite repeated warnings by pessimistic brokers and some industry groups, broker remuneration has remained stable since the original adjustment. However, these rumours persist in the industry and this column does not expect them to go away any time soon. It seems that since brokers first started
Issue: AustralianBroker issue 6.8
introducing loans to banks, they have been wary that their commission structure will be eroded. However, the recent Fujitsu/JP Morgan report suggested that banks were more likely to concentrate on improving the efficiency of the third party channel rather than take another look at commissions. This is the same report that correctly predicted the commission cuts the first time round.
Headline: “Topcommercialbrokerhammersbanksonrates”(page6)
What we reported:Banks have come under fire from Australia’s top commercial broker over their failure to pass on RBA rate cuts to their business clients. Mark Turnbull, named MPA’s Top Commercial broker for the last two years running (this year it was Danny Masri), said clients were still paying interest rates around 8% to 9% despite the official cash rate falling to just 3% in April. “The banks have increased their profit per client by not passing on a lot of the rate cuts,” he said. “It’s flat out wrong.”
What has happened since? Now that the RBA has started raising rates again, it seems that the federal government is waking up to the fact that small businesses have been hit hard by the GFC. This month, the Senate held an inquiry into the lending practices of the banks in regards to small businesses. The lenders defended their position, saying that they had to reprice risk in the economic environment, which made it more likely that small businesses would default on their loans. The RBA, represented by assistant governor Guy Debelle, said that he expected rates for SMEs to come back in line with more historically normal pricing given the continued improvement in the Australian and global economies.
Mark Turnbull
Kathy Cummings
Nick Sherry
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AGGREGATOR / WHOLESALE BROKERChoice Aggregation1300 135 389www.choiceaggregationservices.com.aupage 19 Mortgage House Aggregation Services1300 664 [email protected] 16 & 17 PLAN Australia1300 78 78 [email protected] page 5
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DEBTOR FINANCECashflow Finance Australia1300 788 945www.cashflowfinance.com.aupage 20 Oxford Funding Pty Ltd1800 850 [email protected] page 21
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SHORT TERM LENDERCrown & Gleeson1800 735 626www.crownandgleeson.com.aupage 2
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WHOLESALEAdvantedge Financial Services Pty Ltd03 8616 1600www.advantedge.com.au page 11 Resimac 1300 764 447 www.resimac.com.au [email protected] page 23
