Plenty of mortgage brokers are talking about it. But what is really involved with white labelling? And what about mortgage management - is it really a viable, long-term option for brokers to aspire to? Examine the pros and cons of both

White labelling is something of a buzz word in the mortgage industry at the moment.

White labelling, which allows a mortgage broker to sell a loan that is branded with his or her company name, has it benefits. But do mortgage brokers really appreciate what white labelling involves? Even as its simplest level, where a lender will continue to handle most parts of the loan application and fulfilment process, brokers need to be aware of certain challenges and responsibilities that come with having their brand on a loan. 

Some brokers see white labelling as their first stop towards becoming a fully-fledged mortgage manager, part of an attempt to garner more customer control and higher commissions. But if white labelling can be challenging, what's in store for the broker who tackles mortgage management?

This article aims to uncover the realities inherent in white labelling and mortgage management. It looks at the challenges that confront the mortgage broker eager to pursue these strategies, and outlines ways in which the broker can better prepare for the shift.

White labelling

So, what are the key factors mortgage brokers need to consider before taking on a white label product? Here are a number of areas MPA has identified.

Customer retention

One reason brokers are eyeing off their own brand name product stems from a more aggressive banking sector. Many of the brokers interviewed for this story said they had anecdotal evidence that an increasing number of their broker-introduced loans were being pilfered by the banks that were supplying the funds. Not content with simply cross-selling products to broker-introduced customers, the banks are seemingly more intent on snaffling them altogether by offering them a cheaper mortgage deal.

"I'm getting more feedback all the time that the banks are now starting to do their customer care program, and ring the people we introduce," said Steve Marshall of Adelaide-based The Loan Arranger. "I've had three or four of late where branch staff at banks have said [to the customer], 'why did you use a broker, why didn't you come direct?'. It seems very evident that the banks are starting to be far more aggressive."

Banks are under pressure to maintain mortgage lending growth. This is evident in the most recent Reserve Bank of Australia (RBA) Financial Stability Review, which showed new borrowers are receiving an average 60 basis points discount off their mortgages. Banks are also spending big on sprucing up their branch networks, keen to bolster direct business opportunities as this avoids paying commissions to brokers.

Some are adamant that banks now offer lower prices to customers that do business direct. "The banks are beginning, and will continue more and more, to differentially price," says Steve Weston, head of distribution at Challenger Mortgage Management. "Of course, their rationale is they're not paying a broker commission, as their staff and their own structure is a fixed cost."

This practice, which is widespread in New Zealand, will encourage more borrowers to skip brokers and head straight to the nearest bank branch. It may also encourage existing broker customers to refinance with banks at rates brokers cannot match.

For the broker, not using the banks must seem like an increasingly appealing option. Why give them hard-won customers they'll end up taking? This is where white labelling can help, as Gino Marra, chief executive officer at mortgage manager Carrington National, points out. "With white labelling, you actually own the client." Marra, whose firm has just released a white label product aimed at mortgage brokers, emphasises how having this control can help quarantine clients from the banks.

This is a common mantra of the non-bank and mortgage manager space. That most are business-to-business operations that rely on brokers for their product distribution gives their claims added weight.

Extra commission

Gaining access to wholesale funds at near wholesale interest rates is another much touted attraction sprouted by mortgage managers and non-banks. White label products often come with pricing flexibility; the broker can choose how much commission he or she is paid, giving the freedom to either offer a low rate to price sensitive customers, or a higher rate to those less inclined to focus on price.

One Sydney-based broker, who was considering whether to take up a white label product, says being able to offer a heavily discounted rate to some customers who might leave him for a cheaper rate elsewhere was one key attraction. But this would be restricted to just those clients he believes would eventually bring him in more business down the track.

This view is consistent with that of Mary Shalala, of Sydney-based Action Home Loans. She says her white label product, which she sources from GE Third Party Solutions, enables her to cut her commission payment altogether so she can give select customers rates that are well below market value.

"The thing I like about this is that, if you've got family or friends, and you want to make a loan where you make no profit or margin, you can do it," the MPA Top 100 broker says. "You can do that because you're able to play with the rates... That's the only reason I did it. I just did a loan for my sister, and she got a rate that she couldn't get anywhere else."

This view is at odds with Darren McLeod, sales leader at wholesale lender Firstmac. He says while there were some pretty aggressive wholesalers out there offering low interest rates, it's the less price-sensitive customers that brokers should be targeting with their white label products.

He says a key rationale behind going the white label route is to make more money - why else would brokers bother - hence why it makes more sense to target customers that are not as price sensitive as others. This is where McLeod believes strong branding comes into play, along with the right target market.

Marra agrees. He uses the example of a broker who specialises in servicing doctors' mortgage needs; the perceived added value this broker may provide to this market could allow him or her to bolster the interest rate charged. Or, if the loans are more complex and time consuming to process, customers may be more willing to accept a higher rate, he says.

McLeod says Firstmac does not target the broker who might still be with an aggregator and doing around 10 to 15 loans per month. They neither have large enough volumes, nor can they get their head around branding and pricing, he says.

Branding

Another attraction to white labelling is the ability to build up a brand name. And when you talk brand names in the mortgage industry, most are quick to associate success stories like Aussie and Wizard with their own dreams.

"The benefit for them in white labelling is... they can build a strong brand awareness. That's how Wizard started, that's Aussie Home Loans, that's what they were doing," says Fred Alam, director at wholesale lender Resimac.

Building a branding does not just happen, though; as Marra points out. A brand needs to be associated with a point of difference. "You've got to ask yourself the question, what are you and what do you sell about yourself that is different?"

Drew Innes, managing director at Mortgage Origination Group Australia (MOGA), says many people fail to appreciate the energy and work that goes into growing a brand.

"I think a lot of people underestimate the fulfilment required to actually establish a brand," he says at his Sydney office. "It doesn't happen overnight, it happens over time... through some pretty smart marketing, positioning, lobbying and probably a bit of luck. You're selling something to the end consumer, that the end consumer is expecting you to fulfil on ... has the customer got any use value out of the brand that you've sold. Is there a real benefit there?"

Having started his own broking business two and a half years ago, Paul Collis, managing director of Blue Coast Finance, agrees that building a brand is expensive. Collis is in the process of building his business up from five loan writers to 30 in the next 12 months, and is opening new offices in the region between NSW's Hunter Valley and Queensland's Sunshine Coast. A key ingredient in building his business has been his comprehensive approach to branding the business. "We engaged a professional advertising company to develop all our brand, and make sure there was a synergy between our website and business cards and the whole [company]," he says. "The big mistake I think people can do is short cut on their brand development."

And, as McLeod points out, branding also comes with responsibility. The mortgage broker needs to be confident that the funder behind the loan can provide the service they need. "If you're saying this isn't a [bank] loan, this is a Darren McLeod loan, and the funder behind you is stuffing around on service, that will probably reflect worse on you than it would the [bank] who you can always throw it back on."

Weston cautions about the ego that can sometimes encourage a broker to introduce a white label product. The allure of having the company name up in lights can be a flawed premise, he says.

Introducing your own brand also means a broker loses the ability to leverage off some of the most powerful brand names in Australia. While the banks are not necessarily the most popular institutions in the country, when it comes to making what is often the most important purchase in their life many

Australians feel more comfortable dealing with a lender they know.

"Many, particularly longer term brokers, start to believe their own publicity but quickly realise that while their clients value their service, they do prefer to borrow from larger, reputable lenders who they have a higher trust level with," says Foley. "The fact that the major lenders have the greater slice of brokers' business levels confirms this position."

Independence

What Marra does not suggest is taking on a white label offering while retaining a panel of other lender products. "If you sell yourself that you're an independent like most brokers are, I would not recommend white labelling," he says. It would be difficult for a broker to maintain a veneer of independence in this instance. "It doesn't work," he adds. "Clients see through that."

Gerald Foley, director at National Mortgage Brokers (NMB), believes brokers should not underestimate the power of being viewed as independent. It is often what attracts consumers to using a broker in the first place. "Brokers should stick to their consumer proposition to assist clients to find the most appropriate loan from a wide range of lenders and products based on an impartial platform of customer needs first; identify suitable product second."

Barry Elmslie, director at Perth-based Able Finance Broking Services, says proposed Western Australian legislation will demand that brokers outline the reasons why a certain loan was recommended to a client. Even with this requirement though - which is something Able Finance already provides to its customers - Elmslie worries that having a white label product on the books could undermine his independence.

"I would be concerned, especially with higher commissions, that you might have someone make a claim against you down the track...to me, it's very hard to be both [a broker and originator]."

Foley also questions the wisdom of aggregators who introduce their own white label products. Many aggregators see a way forward in growing their revenues, and to protect themselves against lenders restructuring (and possibly reducing) commissions, is to offer their own badged product through their broker network.

"This strategy has some risks associated as often the products are less than competitive over the medium to longer term and the brokers may push back on something they feel jeopardises their impartiality position with their clients," he says. "I believe aggregators should stick to providing their broker networks with an impartial range of lenders and products, services and support that will enable them to better manage and grow their businesses. Let the lenders play the lenders game."

Yet Marshall says the need to protect customers from channel conflict justifies moves by aggregators like AFG and PLAN to set up their own mortgage management arms. He believes while companies his size would not have the volume to justify a similar initiative, this was not the case for the larger aggregators. 

Angelo Malizis, chief executive officer at Mbius Financial Services, a wholesale lender owned by Allco Finance, says when he was chief executive officer at Wizard he had no problem pushing the non-bank's own products as they effectively met the needs of most customers. "You can only do that as a mortgage manager if you feel confident that you have a stable of products to satisfy 85% of customers that walk through the front door."

Problems would surface, though, for a mortgage broker trying to sell both a self-branded loan and a range of other lender products. "Taking an each way bet by still keeping their broker roots... they'd almost need to have two separate companies," he says. "It's very difficult for them to achieve."

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Workload

Another key consideration for brokers eyeing white label products is the added responsibilities that often come with the products.

Exactly what each wholesale lender demands of brokers differs. Some simply want loan applications packaged the same way that any of the main lenders ask for. Others, though, ask brokers to work a bit harder, requiring them to handle the valuation and instruct the solicitor.

Alam says this is why Resimac has its Novasure offshoot, which he describes as being more of an "incubator product". With this product the broker outsources all of the processing (both pre- and post-settlement) to Novasure. "Some brokers have decided I'm good at selling home loans and going to talk to people, not sitting out here and processing... that's not my strength," he says. "And I don't want to go to the extent of hiring new staff."

Carrington National's 'Potentia' white label model sees it handle many things for the broker, excluding back-end customer service requirements such as customer queries. "There all things they have to do and they don't get paid for."

It is for this reason Marra says brokers needed to factor in extra resources when taking on these loans. He says there have been a few brokers who have been quick to package up a loan that is cheap, and then sell buckets of it, but then they go back to Carrington and say they have underestimated the amount of work required to service the loan.

Mortgage management

It may seem like a pipe dream to many in the industry, but there are mortgage brokers and originators who one day aspire to become mortgage managers. If you are one, here are some of the items you will need to consider before embarking on this path.

The big step

Malizis says he is noticing an increasing number of brokers take an interest in becoming mortgage managers. Much of this stems from a desire to obtain Mbius products direct.

After explaining to them that Mbius products are only available from around 19 mortgage managers, often their next query is, "how can I become a mortgage manager?' " It is an increasingly common question being asked by mortgage brokers, often spurred on by increasingly tight loan margins.

"A lot of them don't realise that the transition isn't easy because a lot of them are small, two or three persons, and they're all sales engines," Malizis continues. "And when they realise they've got to have someone who does the credit, someone who looks after arrears... and someone who helps them package their loans... they start recognising it is a jump up in fixed costs."

Certainly, Weston believes some brokers get attracted to mortgage management only to find it is too hard once the responsibilities mount. They are used to just getting the documents together and then handing to the banks. "Now they've got to get valuations, credit checks, confirm employment, instruct solicitors, handle customer enquiries, discharge requests, handle arrears." The list goes on.

Foley says while the margins in a badged loan often appear attractive, the additional duties and responsibilities add another level of cost and risk into a broking business. As an example, you could easily expect your professional indemnity insurance premium to jump up to 50%," he points out.

Marra says that, as a mortgage manager or mortgage originator, if you do the wrong thing and there is a loss incurred on that loan due to fraud by a staff member, there is usually the provision under all white labelling that they actually go after the originator or manager to cover any losses incurred. Insurance premiums are high and only cover for accidental damage, he says.

And for those who think they will make "bucketloads of money" being a mortgage manager, Marra urges caution. "You do make more money than if you were a broker or originator but there's a hell of a lot of staff. We've got nine back office staff to every sales staff member. Whereas in origination, it would be the other way around. They're people that I call dead money... what they do is a lot more important than the sales person but it's a lot of money."

Weston says some brokers think that, by being able to approve their own loans, they can manipulate the system to their advantage, effectively grabbing business at any cost. "There have been a few rogues, who we've tried to weed out. Generally speaking, though, I think those that get attracted to this, they really want to own their own clients and get paid accordingly."

The real deal

As mentioned earlier, spurred on by increased competition from the banks, some brokers are adamant that they want full ownership of their client. According to Weston, by going into a full mortgage management model they end up owning their own customer, and nobody else can market that client.

"I'd rather do it myself" is the common broker refrain, he says. "I can control it, I can control the application process, once the loan is funded I do the customer service. And, you know what, there's only me to blame if something goes wrong."

Weston believes that not every broker, though, wants to brand their own name on a mortgage. "A lot of brokers out there want to remain completely independent, and just have an interest in broking, and that's it. We'll never see them shift across to the mortgage management side."

Iain Forbes, director at mortgage manager Australian First Mortgage (AFM), says he is confident most brokers are fully aware of the complexities involved in this area. If they are not, he suggests they take heed. "Mortgage brokers should not venture into this area unless they have done their research and are totally aware of credit processing and assessment operational issues, IT processes, follow-up of overdue accounts and arrears management."

If a broker remains committed to becoming a mortgage manager, McLeod says he or she will need three key things. "You've got to have the right people to do the processing, the credit... the second thing is you've got to have a very good system... you've got to have a system to manage the loans coming in, and also your book, post-settlement. And [third] you need staff, resources and systems to cope with managing your book."

He says many aspiring mortgage managers fail to appreciate just how often customers will contact them for simple things like discharges, partial discharges, and address and payment changes. "That's where a lot of people get caught out. They don't realise that they as a mortgage manager have to process a lot of these transactions and deal with the client."

Another factor to consider is distribution. McLeod says relying on brokers as their sole distributors can severely limit their ability to sell product.

"Any sales company that's got a one-dimensional distribution model that can be squeezed by the market is at threat," he says. "There's really only the same amount of quality brokers that everybody is chasing to get the business from, so those brokers can demand what they like. The one dimensional mortgage manager that just relies on the traditional broker for their business is really struggling."

He says the mortgage managers that are more successful have got distribution diversity. "We're seeing more and more mortgage managers, rather than relying on paid brokers, they're relying on different referral sources that don't demand a higher payment such as brokers do." McLeod estimates that it costs a mortgage manager around $3,000 to $5,000 to get a loan on the book via a broker, money that could be spent on advertising if they went direct.

Crowded market

So, should brokers make the move? "Mortgage management... if someone was thinking of getting into it now, I think they've probably missed the boat," says McLeod.

His comments were in relation to the number of mortgage managers currently operating in the market. Estimates vary, although most of the wholesale lenders MPA spoke to suggest there are too many. One wholesale lender says it has around 700 mortgage managers on its book, although around 400 would be active in any one given month.

Around 20 of these would be considered large mortgage managers; by that, they have a loan book in excess of around $500m.

Marra believes there are around 150-200 full mortgage managers in Australia that have a delegated lending authority (DLA). But only 10 would have the ability to approve loans on behalf of the big mortgage insurers. This is consistent with McLeod's view. He estimates there are around 100 large mortgage managers that have loan books in excess of $500m.

Innes also believes there are around 100 "pure" mortgage managers in Australia, although in his view the industry is relatively small. "Is that too many? I don't think so. There is space for more. It depends of what their program is and what products they carry."

Moreover, he does not believe there are too many mortgage managers on the west coast. Instead, there are a lot of east-coast mortgage managers that manage business nationally.

Mergers are also occurring, further diluting the market, according to AFM's Forbes. "A number of small mortgage managers have sold their businesses to competitors, merged their businesses or retrenched staff and downsized which is a sign that not everyone is capable of running a mortgage management company."

Regardless, it can be assumed that competition will be tough.

Steady as you go

Marra is adamant brokers need to take a steady approach to moving up the mortgage management food chain. "I think it needs to be a natural progression," he recalls. "We started in 1998 as mortgage brokers, [but] we only became mortgage originators in 2002, mortgage managers in 2004, and only this year have we received an authority to approve our own loans."

Anything quicker may have compromised his company's ability to properly bed down the processes and systems required to advance to the next level.

As Brett Morgan, executive director of retail mortgages at ING Direct says, mortgage brokers need to understand it is a long road to travel down before you could consider yourself a fully-fledged mortgage manager. "To me it [mortgage management] is such a different skill set. It's a different model."

Even those contemplating a modest, smaller scale mortgage management type model will likely be disappointed, he says. As highlighted earlier in this article, tight lending margins, staffing and IT requirements are just three of the hurdles mortgage brokers will need to overcome. "You have to be so highly efficient now," he says.

Even those mortgage brokers with some scale and experienced staff baulk at the idea of moving into mortgage management. Paul Collis, managing director of multi-office Blue Coast Finance, says he decided against heading this way after asking himself what his firm was really good at it. It was then that he realised sales, marketing and customer service - and not managing mortgages - were the key drivers of his business.