Diversification is not just something for mortgage brokers to consider - non-banks and mortgage managers also need to start thinking of other ways to shore up revenue
The credit crisis has been a sharp wake-up call to all lenders, but there is no arguing that the higher cost of funds has hit the non-bank sector hardest. When you add higher interest rates and falling consumer confidence to the mix, it is an increasingly challenging environment.
There has been industry consolidation as well as closures, and it appears that there are more tremors to come. Only recently, Bluestone Group was cut off from its final source of funding, while there is talk that another non-bank lender will soon be shutting up shop.
With experts forecasting at least another twelve months of pain, non-banks and mortgage managers are increasingly looking at ways they can diversify to remain profitable.
Battling the banks
Seeing an opportunity to capitalise on the weakness of the non-bank sector, banks have taken advantage of the situation by offering attractive deals to jittery consumers who would prefer to take out a loan with a more known quantity.
Banks are writing loans at much smaller margins and the non-banks are finding it difficult to compete.
According to recent figures, the banks have increased their market share to more than 90%.
"Borrowers and brokers alike became nervous about the non-bank sector's ability to support them both short and long-term, and the banks capitalised on this with virtually a free hand," says Brian Jones of Homeloans Ltd.
Mortgage origination volumes are now down by 20% and by over 50% in the non-bank sector.
"This ranks with the worst setbacks in history and has threatened to tip our otherwise healthy economy into recession," Jones says. "The ability to re-group and take market share back just hasn't presented itself in any sustainable way as yet. Funding and credit markets are yet to fully stabilise and if anything mortgage products are still being cut back in a de-risking process."
Homeloans Ltd says that while its business volumes were building nicely up until this time last year it has not been immune to the slowdown in the mortgage sector and particularly the non-bank sector.
Weathering the storm
It has had to make do with lower sales, a restricted product set and adjusting its resources and cost base accordingly, according to Jones
"We've had to basically weather the storm....and there's still a bit of rain about. Fortunately we had diverse funding lines and bore no shock from sudden evaporation of supply," he says.
Homeloans Ltd was forced to cull both sales and operational staff, but Jones says the company is finding this tighter model to be more efficient, and predicts that when markets return, that it will continue to operate on a leaner basis.
While there have been no drastic changes to the business model of Australian First Mortgage, director of sales and marketing Iain Forbes says the company has been promoting commercial and leasing finance on top of its traditional home loan base.
However, Forbes says the main game has been about enhancing AFM's product suite in an attempt to woo those home buyers who are thinking of getting into bed with the banks. He points to AFM's new full-doc 'alternative option' residential loan which has a competitive interest rate of 8.77%.
"The credit crisis has honestly had a very serious effect on our business, a severe impact, but we haven't panicked, we haven't gone out and done anything stupid. We continue to do what we do, but we all have to work a lot harder," Forbes says.
A greater focus on the company's selling strategy has been another method used by AFM to protect itself from market conditions.
Forbes says the company has not cut commissions, but rather increased its personal interaction with brokers by attending professional development days and sponsoring aggregators.
Non-bank lenders have had no choice but to diversify, according to Challenger general manager of consumer lending, Steve Weston.
"Mortgage managers are now sending business towards the banks. The key reason is their interest rates are cheaper. Banks are writing loans at ridiculously smaller margins. The non-banks don't have the depth of pockets to do that," Weston says.
But there is a view that the 'divide and conquer' approach of the big banks is unsustainable.
"There will be a point where the banks will say 'this is crazy, we need to make profits from home loans'. At that time the non-banks will be back in the game. The non-banks will revert back to their own products," Weston says.
Something old, something new
With a potentially treacherous path to navigate over the coming months, non-bank lenders and mortgage managers are keen not to have all their eggs in the one basket and are looking to diversify into other areas.
Firstfolio recently announced that it was introducing an insurance and financial component to the business with the aim of increasing non-mortgage-generated income from 5% to 10-15% of total revenue.
Facing smaller volumes, many mortgage managers are also expanding their incomes by introducing a mortgage broking component to their businesses.
This is no surprise to FirstMac managing director Kim Cannon, who says several mortgage managers are struggling in the wake of the credit crisis.
"What you are seeing at the moment is hundreds and hundreds of mortgage managers scratching their heads asking: 'How am I going to survive?' They have some serious problems. There is a perfect opportunity to get into the customer servicing side of things because of this," Cannon recently told Australian Broker.
Mortgage manager Austral Mortgage Corporation is branching out into the broking arena in an attempt to secure those customers who are more inclined to take out a bank-originated loan.
"We need to be in a position that if a person who is enquiring expresses a preference to go with a bank, that we could still write the business instead of losing it," managing director Vicky Edema told The Australian Financial Review.
In turn, non-bank lenders are seeing the predicament faced by some mortgage managers as an opportunity to enter the third-party servicing market.
FirstMac handles both loan and borrower servicing, and says that it can help these businesses to reduce their operating costs.
"What [mortgage managers] can do is either maintain their infrastructure and back office and try and service their customers or outsource it to someone like me who has the critical mass, because of our size and our experience," Cannon says.
A lesson learnt
Swept up in an era of optimistic spending and boundless consumer confidence, those companies whose core business was low-doc, no-deposit loans soon realised that such a business model was no longer sustainable and certainly not affordable.
"I personally don't think the industry will revert back to the days of 2005, 2006. Those days have gone...some of the deals on low-docs - 105% LVRs - will never come back. I never supported that type of lending, it was a recipe for disaster," says Iain Forbes of Australian First Mortgage.
Others agree that the future of the mortgage industry will be forever changed by the credit crunch, and that important lessons have been learnt.
As a public company, Jones says Homeloans Ltd was obliged, effectively, to price the environment into its balance sheet and reduce the value of its net assets.
"But at the same time our underlying trading result was much stronger. We are well capitalised to withstand the unprecedented malaise and keep a watchful eye on both market consolidation and improvement. We do feel, however, that the market is changing forever and yesterday's strategy may have some different form in the future," Jones says.
