Firstly, thank God I’ve been invited to comment on the mortgage market World Cup rather than the football competition that is due to kick off any day now. The players in the mortgage market World Cup are, of course, the distribution channels – brokers, networks, packagers, high-street branches and sticker clubs. The referee is the Financial Services Authority (FSA), adopting a principles-based rather than rule-based approach. The coach is the Association of Mortgage Intermediaries (AMI) and the match has been brought to you by Mortgage Introducer. So, let’s get to know a little about the players. Having visited them at their secret training camps, I can confirm that some are in better shape than others.
According to the fans and the bookies, there can only be one winner. The fans will, of course, base their predictions on emotional criteria. The bookies will be more scientific when setting the odds. But both have a lot to lose and none can afford to get it wrong. The demise of one or more of the players has been predicted for some time, but as the marketplace continues to evolve and develop, which, if any, will be the first to go out of the competition?
Straightforward but effective
Many commentators point the finger at sticker clubs – the ‘no frills’ distribution channel who play a simple, straightforward but effective game. There is no mystique about them – what you see is what you get. No complex moves or slow build ups from the back. It’s an extremely uncomplicated way of assigning credit by the lender for a mortgage allocation – a sticker on the mortgage application equals a procuration fee for the broker and the broker deals directly with the lender. That arrangement works well for brokers particularly if they want a post box facility and nothing more. The reward for the broker is for some lenders they pay over the gross procuration fee and in others they retain the same margin as the mortgage clubs, on products such as buy-to-let, self-certification and non-conforming. They do not offer the range of services that the mortgage clubs offer, but they do deliver huge volumes of business to the lenders to justify the enhanced procuration fees.
As a post box type facility, the great thing about this business model is that it is extremely profitable, as any margin they keep can go straight to the bottom line, as all dealings such as proc fees are sent direct to broker by the lender. So, as a business model, as long as brokers do not change their habits, it is very profitable with no real outlay or service to deliver and fits well into many brokers’ way of working (or should I say playing). For that reason I feel that sticker clubs, will be a strong contender when we get to the knock-out stage.
Added value and service
If sticker clubs play a ‘no frills’ game then the opposite can be said of the packagers that deal in added value and service. As long as there is no huge improvement to automation and technology via sourcing systems, there will be a place in the industry for mortgage packagers. Their biggest threat is the ultimate all-singing and all-dancing software for sourcing non-conforming cases across all lenders and all products. Even then, some brokers will still like the personal service and contact that has been nurtured over the years. More will like the idea of passing over the paperwork plus the fact that there are often larger procuration fees for packaged cases. The death of packagers was predicted for two years, so some will be surprised to even see them here at the World Cup at all, but they have proved that they are more resilient than anyone gave them credit for.
From predictable to innovative
Then there are the mortgage networks. Again, sudden death was predicted by some pundits pre-regulation, but they have changed their model from the predictable four-four-two formation to a more innovative three-five-two pattern. Packing the mid-field with added value has ensured that they will again flourish and could well go all the way. They have concentrated on trying to remain the one-stop shops they have always been. Many have been busy building appointed representative (AR) networks and that’s a situation that is ongoing. But to try to retain the directly authorised (DA) business from their broker base, they need to employ a combination of straightforward service – the ‘it does what it says on the tin’ approach – but coupled with a high level of service and building up relationships to give both the broker and the lender added value.
Established mortgage networks have always had to justify their margin over and above the brokers’ fee, but in fact that is often the same as sticker clubs, with the specialist lenders. To survive, the mortgage networks need to do what they have always done – keep adding more value to the total proposition to attract brokers and, in my opinion, the financially stable will survive and flourish in the same way as Chelsea have at club level with Russian money behind them.
Those networks offering mortgage clubs must add value. They must reward brokers who are loyal and place their business with them through enhanced procuration fees and by making them feel extra special. To achieve this, some will need to specialise. For example, Mortage Intelligence places a strong emphasis on exclusive products and higher procuration fees. But, we can’t all focus on the same benefits so its up to each club to come up with its own differentiators. Speed of payment is another issue, as members must avoid cash flow problems.
Well-established
The high-street branches are a well-established team playing a predictable game. But they have trouble keeping up with the fitter, faster brokers and lack the quality to go all the way. They can be a difficult team to manage and are an expensive set up to maintain in this highly competitive market.
The mortgage World Cup is and has always been, a relationship game. These may be packaging arrangements, new lenders with strong track records in other sectors or established networks that have a reputation for delivering what the broker needs. The resilience of the packaging industry has been one of the biggest surprises of the competition so far. Many felt that they would go out of the competition during the qualifying stages as they found it difficult to understand what their role would be in a regulated environment. But they have thrived and deserve their place in the competition because demand for their services from intermediaries continues to be strong.
This leads on nicely to loyalty of supporters. In the past it has been suggested that intermediaries have no commitment to any channel. But post-regulation we have seen a great deal of loyalty with intermediaries proudly displaying the colours of their favourite team. Brokers have been particularly keen to maintain relationships with clubs and networks and this allegiance is as strong now as it has always been.
Likewise, the referee (FSA) must manage the competition. Some have accused it of allowing inconsistency over what the players can and can’t get away with. Its move to a principles-based approach is evidence that the FSA understands that it can’t make a rule for every action. But while this approach is to be applauded, red and yellow cards need to be used consistently so that we all understand the rules and can all play by them.
So, sticker clubs, mortgage networks and packagers all offer value in different ways and potentially all offer a good each-way bet for a place in the final. Ultimately, it will be the broker who decides who will go all the way and lift the coveted trophy. I for one will enjoy the competition.
