Adelaide Bank's Damien Percy on being a viable alternative in the current investor climate.
Adelaide Bank's general manager of third party mortgages Damian Percy, talks to MPA about whether mortgage managers provide a viable alternative for investor financing under APRA's constraints.
We also previously talked to two wholesale lenders with very different backgrounds: Advantedge, which is backed by NAB and non-bank lender Firstmac. After years of looking back at the GFC and its negative effects on mortgage managers, these three lenders are now looking ahead, in particular at the opportunities regulatory changes present to mortgage managers.
MPA: Is white-label lending – rather than mortgage managers – the future of the wholesale lender business model?
Damian Percy, Adelaide Bank: To be perfectly candid, I’m not sure what we currently call ‘white-label lending’ is wholesale lending. What really has taken off over recent times has been labelled ‘broker propositions’; credit policy, products, pricing and service are pretty well identical across brands. Everybody is just reselling the same stuff at the same price.
Now, there’s nothing wrong with that, but I think it runs the risk of absolute commodification. Once everyone has the same home brand product, what’s the value of a home brand product? To quote Syndrome from The Incredibles, “When everyone’s super, no one will be.”
The key to genuinely wholesale offerings has always been the opportunity for the distributor/ managers to create distinct value propositions at various price points. True wholesaling should deliver greater diversity to the market rather than more of the same. It can and will exist alongside badged broker offerings, and both will continue to evolve over time.
MPA: Can mortgage managers provide a viable alternative for investor financing now that APRA is constraining bank lending?
DP: Mortgage managers have traditionally been a service-based, solution-driven proposition, providing access to multiple funding lines through one process. As APRA nudges, encourages, suggests and fires the odd shot over the bow of various banks, that proposition will, I think, add even more value for borrowers and brokers as navigating funder responses becomes more complex.
MPA: Does the cost of funds remain a significant competitive disadvantage for the sector?
DP: Not really. Funding costs across most lenders aren’t a mile apart, unlike capital requirements.
MPA: In the wake of the Financial System Inquiry’s final report, should consumers be more aware of what wholesale lenders do?
DP: Depending on how and when the regulators respond, we could see some quite significant and sudden changes to the competitive environment over the short term. The ducking and weaving around higher LVR lending, investor growth, serviceability, and lending to SMSFs and foreign buyers show just how quickly things can change in response to regulatory shifts in emphasis. Add the potential of, say, a floor in risk weights for residential mortgages and the attendant capital impact on the majors and Macquarie, and we could be looking at a pretty volatile and changeable market.
Wholesale lenders and their partners tend to do well when adaptability and flexibility are at a premium, and I suspect we’ll all be needing plenty of both in the near future.
MPA: Do you tailor your products for a particular section of the market?
DP: Yes. Over the years, we’ve tweaked and customised various elements of our program for specific markets or partners. One of the advantages of a genuinely wholesale model is that you are able to respond to partner initiatives in a flexible way. Now clearly, not everything is possible, and every idea can’t be responded to, but the benefit of not selling a locked-down commodity product is that you can differentiate when you want to.
MPA: Will the majority of brokers in the future sell their own branded white-label products?
DP: I suspect the majority have access now. The bigger question to me is why they should. The traditional driver for white-label products in other industries has been the ability to have input into the design or delivery of the product to better align with your customer’s needs, and/or driving costs down and margin up through the preferential dealing arrangements. White label in the mortgage market seems largely focused on the latter, and I think there’s room to do better on the former.
We also previously talked to two wholesale lenders with very different backgrounds: Advantedge, which is backed by NAB and non-bank lender Firstmac. After years of looking back at the GFC and its negative effects on mortgage managers, these three lenders are now looking ahead, in particular at the opportunities regulatory changes present to mortgage managers.
MPA: Is white-label lending – rather than mortgage managers – the future of the wholesale lender business model?
Damian Percy, Adelaide Bank: To be perfectly candid, I’m not sure what we currently call ‘white-label lending’ is wholesale lending. What really has taken off over recent times has been labelled ‘broker propositions’; credit policy, products, pricing and service are pretty well identical across brands. Everybody is just reselling the same stuff at the same price.
Now, there’s nothing wrong with that, but I think it runs the risk of absolute commodification. Once everyone has the same home brand product, what’s the value of a home brand product? To quote Syndrome from The Incredibles, “When everyone’s super, no one will be.”
The key to genuinely wholesale offerings has always been the opportunity for the distributor/ managers to create distinct value propositions at various price points. True wholesaling should deliver greater diversity to the market rather than more of the same. It can and will exist alongside badged broker offerings, and both will continue to evolve over time.
MPA: Can mortgage managers provide a viable alternative for investor financing now that APRA is constraining bank lending?
DP: Mortgage managers have traditionally been a service-based, solution-driven proposition, providing access to multiple funding lines through one process. As APRA nudges, encourages, suggests and fires the odd shot over the bow of various banks, that proposition will, I think, add even more value for borrowers and brokers as navigating funder responses becomes more complex.
MPA: Does the cost of funds remain a significant competitive disadvantage for the sector?
DP: Not really. Funding costs across most lenders aren’t a mile apart, unlike capital requirements.
MPA: In the wake of the Financial System Inquiry’s final report, should consumers be more aware of what wholesale lenders do?
DP: Depending on how and when the regulators respond, we could see some quite significant and sudden changes to the competitive environment over the short term. The ducking and weaving around higher LVR lending, investor growth, serviceability, and lending to SMSFs and foreign buyers show just how quickly things can change in response to regulatory shifts in emphasis. Add the potential of, say, a floor in risk weights for residential mortgages and the attendant capital impact on the majors and Macquarie, and we could be looking at a pretty volatile and changeable market.
Wholesale lenders and their partners tend to do well when adaptability and flexibility are at a premium, and I suspect we’ll all be needing plenty of both in the near future.
MPA: Do you tailor your products for a particular section of the market?
DP: Yes. Over the years, we’ve tweaked and customised various elements of our program for specific markets or partners. One of the advantages of a genuinely wholesale model is that you are able to respond to partner initiatives in a flexible way. Now clearly, not everything is possible, and every idea can’t be responded to, but the benefit of not selling a locked-down commodity product is that you can differentiate when you want to.
MPA: Will the majority of brokers in the future sell their own branded white-label products?
DP: I suspect the majority have access now. The bigger question to me is why they should. The traditional driver for white-label products in other industries has been the ability to have input into the design or delivery of the product to better align with your customer’s needs, and/or driving costs down and margin up through the preferential dealing arrangements. White label in the mortgage market seems largely focused on the latter, and I think there’s room to do better on the former.
