We are experiencing interesting times in the mortgage packaging sector, with a substantial proportion of packagers feeling that their traditional business will have to adapt to survive. This is especially true for smaller packaging firms, and brokers that aspire to develop into packagers, who are hitting a glass ceiling when it comes to growing their businesses.
Successful and profitable packagers are increasingly dependant on being able to offer a branded lending distribution channel, with on-site underwriters that can give immediate decisions, and give all parties in the chain the highest degree of control over the sometimes frustrating process of getting an offer from a lender. There is nothing worse for a packager than putting together a complete package in record time only to have it sit at the lender for several days, or even weeks, before anyone looks at it. The poor service reflects badly on everyone involved, but the management of the problems caused by these delays land, in the first instance, on the packager’s desk.
In addition if a change of lender is required at some stage during the processing, on-site underwriters ease the transition. A packager with several branded or on-site arrangements has instant access to knowledge of where best to replace a case which may have been declined by the first choice lender. This adds speed and certainty to a process that can otherwise be slow and frustrating, and adds value that can be passed to the customer via the mortgage intermediary.
Some smaller packagers however, are not in a strong enough position to command on-site underwriters, and in some cases may not even be able to support a full panel of lenders. In the current compliant environment, where the choice of lender must be the broker’s and not the packager’s, a small panel can be a serious problem. Where a packager cannot produce the volumes to keep the size of their panel at a competitive level, becoming a satellite to a larger packager with access to all the lenders allows the satellite to continue to offer a full selection to their customers.
Vital ingrediant
This brings us to another vital ingredient – access to market leading (or at least very competitive) exclusive products that brokers cannot obtain in the open market. Only a guaranteed and substantial distribution capability (either singly or as part of a packager association) will be able to secure such products. In addition, some lenders (such as Unity, Beacon and Victoria) sell exclusively through a select group of larger packagers, so smaller packagers simply have no access to these attractive products.
In order to attract more business from brokers, smaller packagers need to offer the market leading exclusive products and speed and control benefits that the market demands. However, they are caught in a ‘Catch 22’ situation. Without these vital service and product offerings, smaller packagers are obliged to stay small, while the bulk of brokers that use a packaging service will increasingly send their cases to branded lending packagers, so the smaller packagers can never reach the critical volumes stipulated by lenders.
These smaller packagers have often commenced life as a broker and progressed to packaging for a couple of lenders. Once they have the capacity to package however, they may as well package for as many of the lenders they deal with as possible. Packaging allows the broker to have control of the timing of the valuation, and gathering of the information to support the application. This gives them a distinct advantage as they are in control of the application at every stage, and can keep their clients informed without referring to a third party.
Solutions
Of course, in an innovative and entrepreneurial sector, solutions will always be found and there are a number of options open to smaller packagers that are looking for growth. Packager associations are a growing phenomenon, and there are now associations catering for the smaller packager that can use the combined distribution power to secure good products – but translating this to on-site facilities is not as straightforward. Some larger packagers have gone down the franchise route and grown their size and scope by franchising their business name and model in return for a licence fee. Satellite packaging is an increasingly popular solution, and it is a business strategy that we are developing.
At the core of the satellite packaging proposition is the fact that the satellite firm gets access to better products and on-site underwriters, combined with a higher proportion of the packaging/procuration fee to reward them for the extra administration work that they are doing. A broker packager also gains control of more of the process for a wider spread of lenders than previously. The master packager benefits because, although it is paying a proportion of the packaging fee to the satellite business, it is building greater business turnover by shifting to a lower margin/higher volume business model. The bigger the turnover, the more branded lending agreements it can secure, and so on. This can be viewed as the master packager cashing in its market knowledge and long years of experience by outsourcing the bread and butter administration but retaining the overall lender relationships, taking responsibility for and controlling the quality of the satellite-packaged cases.
The devil’s in the details
Around this core proposition, the detail must be right for success to be assured. For example, lenders must be agreeable to the arrangement and will expect reassurance of no slippage in the quality of the packaging. The satellite packager may have to make changes to their professional indemnity cover to met the minimum levels specified by lenders, and key facts illustration (KFI) details on remuneration will need to change in line with the altered distribution of fees. On the plus side, the satellite packager may be able to enjoy economies of scale by using the master packager’s panel valuers and solicitors at very competitive rates, and possibly negotiate joint marketing initiatives. It’s up to both parties to explore all the options for mutually beneficial outcomes.
Above all, master packagers will be keen to take on satellite packaging partners that have some administrative know-how and are not simply sales operations. Minimum delay in obtaining the lender’s offer is the goal, because this is what makes brokers happy and will turn them into loyal customers. Poorly packaged cases will inevitably encounter setbacks, so training and quality control will be vital elements for the arrangement to succeed. Each master packager will devise their offering to satellites in their own way, but service and quality standards are bound to be tied into the satellite’s remuneration levels: quality has a direct effect on profitability for all concerned.
Misconceptions
There is still the misconception in some quarters that the work of a packager is similar to submitting a case to the Halifax and then doing a bit of phone chasing on it. The truth is that packaging grew as a distinct sector to serve the needs of non-standard lenders and brokers, that required expert middlemen in the field to sort out the paperwork needed to get a case to the offer stage. This need shows no sign of disappearing, and is likely grow in proportion to the number and variety of non-standard products available in the marketplace.
As already mentioned, the newer market entrants catering for non-conforming niches have opted for wholly packager distribution routes and old favourites such as The Mortgage Business (TMB) are re-affirming their commitment to packagers. As a relatively new lender, Freedom Lending started out by only accepting business direct from brokers but is now realising it needs packager distribution to grow and has started to woo packagers. GMAC-RFC – a giant among intermediary lenders – has made its prime business (that sells itself) available through brokers and dedicated its best non-conforming products to the packager distribution route, which it knows can deliver volume sales. With margins higher on non-conforming business, this gives lenders the leeway to pay packagers, which in turn drives in the business.
The market will continue to sustain any element that fulfils a useful purpose, adds value to the chain and remains sought after. So, as long as packagers continue to deliver quality and volume they can expect to remain in demand, and satellite packaging promises to be a fruitful way of underpinning both of these success factors.
