What lies in store for the mortgage world in 2008?
Mortgage professionals managed to weather a few storms in 2007, but they face further challenges in 2008. MPA chose a panel of experts from various sectors to discuss the major trends that will shape the mortgage industry over the coming months."
The impact of the US sub-prime crisis on Australia is likely to worsen, while further interest rate rises are also on the cards. It is expected that the major banks will continue their attempts to win back business from brokers, and give the non-bank lenders a run for their money. To top it all off, the problem of housing affordability does not appear to be going anywhere fast.
Yet with all this doom and gloom, brokers still have good reason to feel upbeat about their prospects in the 'year of the rat'. Despite predictions that 2008 will be more challenging for the industry than previous years, most professionals interviewed by MPA were confident that brokers would continue to grow their market share. While this growth may not be as spectacular as years gone by, there is a strong sense of confidence that brokers have not only firmly entrenched themselves in Australia, but will continue to make further inroads. For this reason, there are expectations that the industry will undergo further consolidation and segmentation, as businesses seek to ensure their profitability.
The mortgage broker
Julie Saxon
Saxon Finance
List the three biggest issues likely to impact on the mortgage industry in 2008. Explain why each is important.
1. Rate rises.
2. Increasing property values, which will price first home owners out of the market
3. Sub-prime mortgage market problems, which will cause a shortage of funds for lending.
Name one thing that you would like to see happen in the mortgage industry this year, and why?
I would like the government to make home loans for owner occupation to be tax deductible (like they used to be many years ago). I believe this is the only solution to the affordability problems faced by first home owners.
Name one (emerging) industry trend that will rapidly develop in 2008.
Reverse mortgages and cash flow lending, I believe both are going to rapidly increase in the next year, but this is the area we really need to be looking at, as there are already signs of these being written for the wrong reasons. Regulation will address some of these issues.
Your specific industry sector will evolve in what way this year?
National regulation. The industry has improved over the past five years, but it still has a way to go. Regulation will contribute to the quality of people and training in the industry.
It is December 2008. Mortgage brokers have managed to do what in the previous 12 months?
It is 2008 and the public perception of mortgage brokers has improved due to national regulation.
The industry body
Phil Naylor
Chief executive officer MFAA
List the biggest issues likely to impact on the mortgage industry in 2008. Explain why each is important.
1. The details of the new national legislation will be known. Although it is unlikely it will be operative in 2008 (2009 more likely) it will be a catalyst for operators in the industry to determine whether they want to continue/or qualify for, future involvement in the industry. From MFAA's point of view, it is all about consumer protection and ensuring consumers have confidence in the broker sector. But as with other sectors of the finance industry, when faced with legislation, some operators may decide they do not want to continue.
2. Interest rate increases are likely to be on the agenda - although this may be seen as a dampener of activity, it will also provide opportunities for brokers and others in the industry to better service their clients.
Name one thing that you would like to see happen in the mortgage industry this year, and why?
It would be great to see the new national regulation implemented for the reasons stated above
Name one (emerging) industry trend that will rapidly develop in 2008.
Apart from the obvious that everyone talks about (consolidation) we will see more brokers diversifying or adding services to their client offer.
Your specific industry sector will evolve in what way this year?
MFAA will continue to enhance its offerings to members eg new compliance assistance programs, continued promotion of MFAA membership to the public and even more professional events (eg National Convention) which are accessible and attractive to members.
It is December 2008. Mortgage brokers have managed to do what in the previous 12 months?
The bulk of MFAA members have successfully completed the MFAA online AML program enabling them to be compliant with the various lenders' AML requirements.
The technology company
Andrew Duerden
Business Development Manager
Loanwork Technologies
List the three biggest issues likely to impact on the mortgage industry in 2008. Explain why each is important.
1. The sub-prime fall out - this will change the core funding and underwriting guidelines for a large number of non-balance sheet lenders in Australia which will directly impact margins and rates.
2. Consolidation/Acquisition - there will be more consolidation and acquisitions by businesses better positioned to capitalise on the down turn in an effort to ensure volumes and profitability will be maintained. This will cover all sectors - aggregators, broker chains & non-bank lenders.
3. Regulation if it happens
Name one thing that you would like to see happen in the mortgage industry this year, and why?
A more succinct understanding of the non-bank sector in the media. The largely media-driven outcry demonstrated the lack of understanding within the main stream media and public of the types of businesses that are lumped together in the non-bank sector. It will be very important over the next year for the true non-bank sector (not mutuals and not non-conforming) to differentiate themselves and increase their profiles.
Name one (emerging) industry trend that will rapidly develop in 2008.
Commissions processing. It will become more important to deliver commissions accurately for less overhead and with a move from LIXI to re-assert themselves in this area and some of the larger aggregators jumping on-board we should see an industry wide move to making this process more seamless and simplified.
Your specific industry sector will evolve in what way this year?
Being involved predominately in the non-bank sector I see these businesses becoming more focused on service delivery and differentiation with a greater focus on default loans and customer care.
I also believe there will be a move toward further product diversification (leasing, short term loans) which are easy extensions to the core business of a non-bank lender.
The bank
Simon Terry General Manager Loan Writing Services
NAB Broker
List the three biggest issues likely to impact on the mortgage industry in 2008. Explain why each is important.
1. The consequences of the credit crunch will translate to brokers continuing to focus on the strength and stability of their lending partners. Specifically, on the sustainability of relationships and their client solutions. It is more important than ever to understand whether the deal is right for the client not just today but into the future. A great rate may have a sting in the tail.
2. Diversification will continue as brokers broaden their offering to retain and realise the value of clients. There is a significant opportunity for brokers to expand the advice and assistance they provide clients both during and after the initial sale. NAB Broker is working with brokers to best support them in the diversification process.
3. The evolution of broker business economics will provide a significant shift as brokers cope with tougher mortgage markets, examine new revenue streams, and look to improve efficiency and quality within their business. Good staff are difficult to find and retain so it is essential to maximise the return from their time. NAB Broker is developing loan writing and other services for brokers to support this.
Name one thing that you would like to see happen in the mortgage industry this year, and why?
It would be satisfying to see the industry end the year with consumers perceiving brokers as a trusted consultant providing quality financial solutions to meet their needs for the long-term. This positioning is the beginning of the move towards a profession that is growing and focusing on sustainable economics beyond a one product, one deal proposition for clients. Consistent, relevant, national regulation or at the very least debate to this effect will help to foster this.
Name one (emerging) industry trend that will rapidly develop in 2008
Insurance poses a considerable growth opportunity for brokers and in 2008 we will witness sales by brokers grow to be an everyday activity for many. This will be best leveraged through personal advice models, such as NAB Broker's Vivid Advice offer, placing brokers in a position to advise clients on an effective debt insurance solution, such as MLC EasyCover. Advice is the critical element in the insurance sales process to ensure long-term benefits for the client and the broker. Without it the potential risks for brokers, financial and otherwise, are too great.
Your specific industry sector will evolve in what way this year?
Major lenders, like NAB Broker, will continue to move towards a partnership philosophy in their approach to brokers in order to realise the substantial opportunities for the industry. We have already seen a shift in focus from the quantity of business written to the quality and sustainability of the relationship and resulting business.
It is December 2008. Mortgage brokers have managed to do what in the previous 12 months?
Grow their incomes from their current client base by focusing on segmentation and retention, realising cross-sales opportunities, sustainability of business and increased efficiency. Everyone hopes it will be another bumper year but the best businesses are planning for, and will achieve, growth regardless of the conditions.
The aggregator
William Lockett
Managing director
Specialist Mortgage
List the 3 Biggest Issues likely to impact on the Mortgage Industry next year. Explain why each is important.
1. National regulation is still the major key and element that our industry requires as currently there are two many varied state regulations to comply with. National regulation provides clear uniformity and direction on a national basis which provides clarity with compliance and one which is easier to administer and places all finance broking companies and finance brokers on the same level.
2. Turbulence in the sub-prime lending market - The recent upheaval and uncertainty in the sub-prime market in the US has led to both disruption and uncertainty when dealing with some lenders within this category. This also will have a flow on effect to our total lending market and in speaking to a number of prominent financiers in Australia today, they believe this credit crisis is still to have greater impact on both the world and more importantly, the Australian market.
3. Consolidations and take-overs - In recent times, we have seen a flurry of activity through acquisitions and take overs and I believe this will continue to happen in both the aggregating sector but also that of small brokering firms and a large reason for this occurring is the cost of operations today in businesses maintaining value and services to their members and brokering base. They are also on increasing pressure to maintain both volume and service levels from various financial institutions and this is another reason why companies are either selling or merging.
Name one thing that you would like to see happen in the mortgage industry this year and why.
I would as previously mentioned like to see a service charter provided by all financial institutions to both aggregating and brokering firms which clearly outlines both their service and obligation to the introducer which can be relied upon when dealing with both the institution and the most important person in the equation and that being the consumer.
This also keeps additional pressure on the financial institutions to work hard to maintain a service charter which can only be a good thing in dealing in our industry.
Name one (emerging) industry trend that will rapidly develop in 2007/2008
Even though I have been asked to name only one, I again probably reiterate a number of issues that will rapidly develop and they again range from National Regulation through to consolidation within our industry and particularly that of smaller groups which have not kept up the pace with change. Another emerging industry trend is that of the financial institutions continually looking at ways of cross-selling to the data base of third party introduction and also looking to build market share through alternative channels and sometime conflicting channels to that of third party/broker introduced business.
Your specific industry sector will evolve in what way this year?
Being in aggregation, I see our sector evolving in the way where we need to be as flexible as possible in moving forward and both realise and understand that potentially as an aggregator, we may have to look at the options of providing various aggregation services such as the option of being able to offer the flexibility of agreements ranging from percentage based through to fee for service as an example. As all industries have evolved, ours is no different where we have to continue to improve the current facilities that we provide whilst not only adding to them but also providing great flexibility.
It is December 2008. Mortgage Brokers have managed to do what in the previous 12 months?
It is without doubt that I believe that Mortgage Brokers have managed to realise the great importance of their existing data base and more importantly, keeping this data base up to date and being in regular contact with their clients. This has certainly been helped with the advent and introduction of better CRM software platforms today but it is still ultimately the broker that must understand that they must maintain an extremely close and regular contact with their data base. The competition for their clients is greater now than it has ever been and this has been heightened by other industries such as accounting firms and financial planning firms also getting involved in finance broking, therefore smart brokers within the last 12 months have re-evaluated the importance of their existing client base.
The mortgage manager
Josh Norris
Director
Future financial
List the three biggest issues likely to impact on the mortgage industry in 2008. Explain why each is important.
1. The biggest issue is the sub-prime continuation because it peaks in 2008, in terms of the amount of adjustable rate mortgages that expire. That peaks at the middle of 2008, from July through to November. They're estimating about $400bn worth of loss that's going to come out of that. Currently $60bn has been written off. That's going to continue to affect the liquidity in the market and the cost of funds, not just for us but for the banks and everyone else in the market.
2. I think for us non-bank players there will be continued competition from the banks as they try to claw back market share. Right now they're attacking the non-bank sector.
3. I think the other big issue will be segmentation. There will be a lot more segmentation in the market. There will be more concentration by lenders as a whole into finding segments that are profitable and really owning those segments, as opposed to the gun-shot approach.
Name one thing that you would like to see happen in the mortgage industry this year, and why?
Personally I would like to see the banks reprice their mortgages because at the moment their pricing model is not based on profitability for shareholders, it's based purely on market share and taking non-banks out of the market. The segment of the market I'm in, the non-bank lenders, they created a lot of this pricing competition, through your Aussies and so on, in the 90s. The banks are trying to shut them down now. Competition is being driven out of the market.
Name one (emerging) industry trend that will rapidly develop in 2008.
Segmentation and trying to find profitable clients will be the big driver for people who want to stay in the business. They (brokers) won't be chasing the client that will expand their books for 12 to 18 months and then change banks every time a new special comes out, they'll be looking at building relationships with the profitable clients.
Your specific industry sector will evolve in what way this year?
I think there will be growth for the good operators. We all have to remain competitive through segmentation as opposed to price. I think there will be a big repricing and the rates will go up across the board. The last few years have been price driven by the client and by the brokers. I think that's going to swing around and it will be more driven by liquidity in the market.
It is December 2008. Mortgage brokers have managed to do what in the previous 12 months?
I think they will have grown their market share, albeit a little bit slower. Some sort of legislation will be imminent. There will be a lot of change in the industry, as well as consolidation.
The commercial broker
Bob Whetton National manager - commercial business
Australian Finance Group
List the three biggest issues likely to impact on the mortgage industry next year. Explain why each is important.
1. Regulation - To further improve the credibility of the Industry.
2. US Sub Prime fears - will place greater scrutiny on mortgage brokers to source the best deal for their clients.
3. Interest Rates - increasing interest rates tend to see investors move from the residential market to the commercial space. This could provide increasing opportunities for brokers to write commercial loans.
Name one thing that you would like to see happen in the mortgage industry this year, and why?
Lenders acceptance of all levels of experience of commercial Introducers and develop products to suit the varying levels of experience. This will help transition the residential mortgage broker into the commercial space and remove the fear that seems to be associated with the sector.
Name one (emerging) industry trend that will rapidly develop in 2007.
Regulation
Your specific industry sector will evolve in what way this year?
The commercial sector will continue to evolve with more and more residential focused brokers dabbling in commercial loans. There will be specific emphasis on training and upskilling by all parties.
It is December 2008. Mortgage brokers have managed to do what in the previous 12 months?
Accept diversification is essential for their survival in an increasingly competitive market.
The mortgage insurer
Peter Hall
Managing director
Genworth Financial
List the three biggest issues likely to impact on the mortgage industry next year. Explain why each is important.
1. There is no doubt that we can expect to see continued changes in the mortgage industry as the effects of the US sub-prime market continue to unfold. To date, this has had a considerable impact on lenders' ability to access funding and to continue to offer competitive products in the Australian market. The result is increased prices as well as product reviews by lenders, a trend which is likely to continue in 2008.
2. The strong performing economy and resulting inflationary pressure is placing stress on interest rates. This may continue to place further pressure on borrowers who are struggling to meet their total repayment commitments, which may include a mortgage, as well as credit card or other forms of debt. Affordability continues to be a major issue in Australia with home loan affordability at its lowest level since 1989, making it harder for first home buyers to get into the market.
3. The APRA regulation, Basel II will be introduced in 2008 and the anticipated industry changes will start to emerge, however it is too early to say what impact this will have on the mortgage market. A development we expect to see in 2008 as a result of this, is that smaller, more regional lenders will need to introduce more competitive solutions to compete with the larger lenders.
Name one thing that you would like to see happen in the mortgage industry this year, and why?
I would have to say a greater focus as an industry on quality. I would like to see greater investment in upholding verification standards through training and processes.
We have seen as an industry increasing levels of fraud and it is more important then ever before that we work together to uphold our verification standards and protect ourselves against this growing phenomena.
Name one (emerging) industry trend that will rapidly develop in 2008.
As the effects of the US sub-prime market play out, we can expect to see consolidation in the market resulting in a smaller number of participants. We will also see segments of the industry redefine their target market and their value proposition. The result is likely to be fewer participants with diversified products focusing on quality rather than quantity.
Your specific industry sector will evolve in what way this year?
The importance of LMI has been emphasised globally due to the recent events in the US market and as a result we are seeing a greater appreciation for the role that LMI plays. As the local market continues to evolve in 2008, the role of LMI will also evolve, becoming more focused on tailored and customised solutions.
For Genworth, a one size fits all approach will no longer be feasible in this changing environment, and we expect to provide greater assistance to customers through knowledge sharing, leveraging our global strength and utilising our expertise so that we can grow in partnership.
It is December 2008. Mortgage brokers have managed to do what in the previous 12 months?
I would hope that as an industry we find solutions to address the continued affordability issues in Australia and we really do strengthen standards for verification and weed out fraudulent individuals.
