On the comeback trail
There can be no doubt the industry contracted in the wake of the GFC with the Big Four banks, helped considerably by the federal government’s bank guarantee, consolidating their position.
But as an appetite for risk returns, and credit becomes more available, competition will emerge. The Australian Competition and Consumer Commission (ACCC), too, will ‘encourage’ competition in this market.”
Being realistic is one thing, but surely the re-entry of Macquarie back into the mortgage market and the return of Wizard’s founder Mark Bouris with his Yellow Brick Road business – which is set to provide funds to brokers and borrowers – must be promising signs.
“A new business that drives competition is definitely a good thing for the industry, so Yellow Brick Road looks like one to watch,” observes James Boyle, chief operating officer of Liberty Financial. “In contrast, Macquarie’s much publicised return is a consolidation play, which may be good for some but on its own probably isn’t a cause for celebration.”
Steve Ramage, Citibank’s head of mortgages, is not sure that these developments are a good omen for the industry just yet. “Their competitiveness is still limited by funding issues, however, it is a good time to go through the process of building a profile in readiness for when they can really compete,” he concedes.
But Mark Forsyth, CEO of specialist mortgage and financial services company Firstfolio, saw these developments as unquestionably positive.
“The fact that Macquarie and the likes of Bouris are ramping up their plans is a definite sign that conditions in the mortgage lending space are turning for the better,” he insists. “This is welcome news for everyone in the industry – competition is healthy.”
Jeff Zulman, CEO of Vow Financial, concurs. “The answer to both these questions has to be a resounding yes,” he says. “I am not privy to either groups’ future ambitions in this market space, but as a general comment bringing competition into the industry in the wake of the GFC can only be healthy for the industry.”
I’m still standing
Getting away from the main mortgage market, our experts were asked to reflect on the non-conforming market, which has really fallen on lean times. And it looks pretty promising for this sector.
“Players in this space who effectively managed their businesses in the crisis are ready to again fill a valid void in the market,” says Ramage. “Those left standing and in a position to move will have the benefit of a bigger market due to the prime lenders tightening their credit. They will also be able to restore their margins to the original and appropriate sub-prime levels.”
Boyle thinks the reality for non-conforming players is that there will always be customers who need a little extra flexibility and this potential market is actually growing by the month. He says the current economic view is leading banks and mortgage insurers to tighten credit and get less flexible, which directly leads to what he describes as “yesterday’s conforming borrowers becoming tomorrow’s non-conforming customers”.
Forsyth was less positive on this subject, arguing non-conforming lenders are still thin on the ground, and will probably be the last segment to return to something approaching pre-crisis conditions. He blames the stench from the sub-prime loan heap of dung for his negativity.
“Funding for non-conforming lenders remains tight – the odour surrounding the segment in the US still lingers, and this affects local lenders,” he says. “However, it will be back and Firstfolio for one is now looking at creating some new products for this space.”
Zulman thinks history will repeat and these products will re-emerge.
“The underlying factors that created this market have not gone away and Vow expects these loans to re-emerge as market confidence picks up and access to funding lines reopen,” he says.
The winner takes it all
What do our industry leaders think about the pros and cons of broker consolidation for the industry and the consumer?
“The overwhelming pro of consolidation is survival – survival of brokers, survival of competition and survival of products,” argues Boyle. “But for the industry, the downside is less competition which leads to more concentrated market power. In turn, for consumers that can only mean higher prices and less choice.”
That said, he believes as long as brokers survive we can be sure they’ll return to drive innovation and price compression in the future.
Forsyth thinks better quality brokers have survived and generally have consolidated into better-resourced groups, but it’s not all blue sky.
“Most broker groups have been acquired by the big three banks, which has been bad for competition,” he declares. “However, if service drops off that creates opportunities for smaller, nimble groups to fill the gap.”
The consolidation or takeover of broker groups by the big banks worries Ramage on one level.
“There is the danger that brokers’ competitive position and independence could be eroded through enticements,” he says. “And it would be disappointing to see segments of the industry being cajoled into using inferior offerings that do not match the consumer’s requirements now or in the future.” But he had an additional take on this viewpoint.
“In saying that, it’s our view that brokers are by and large, independent. Our experience shows that this independence is fiercely guarded irrespective of who they have consolidated with.”
From another point of view, Ramage thought the consumer is the big winner following the consolidation, with a more professional level of service now being the norm.
And he adds: “As an industry, brokers are more selectively chosen, better trained and managed – which in turn creates a higher level of service and a superior customer experience.”
Zulman is a fan of the consolidation movement.
“Vow is a firm advocate of broker consolidation,” he says. “Consolidation, if correctly handled, should give brokers a stronger voice in their industry. It’s Vow’s contention that brokers believe they have less control over their businesses than in past, and by consolidating they can arrest this trend by being better placed to achieve economies of scale in areas such as IT excellence and compliance.”
Out with the old
On the GFC, our panel of experts acknowledge that the GFC was a great opportunity for the big banks, but most conceded that the boom created practices as well as businesses that needed to be purged from the system. Most were positive that new lenders would re-emerge but a return to the old days will be a long way off, while some aspects might never return.
Jeff Zulman’s take on the issue was worthy of consideration for all mortgage players. “In the current shake-out from the GFC we are seeing the industry consolidate – both aggregators and brokers – which will put it on a much firmer footing when other lenders come back into the market,” he says.
He explains the federal government’s decision to guarantee bank deposits had consequences with the most serious being that money fleed from mortgage trusts (not guaranteed) to banks (guaranteed).
“Funds that operated with liquidity of between 10 per cent and 20 per cent were simply caught short as investors sought safer havens,” he points out. “Today, many of these trusts (the sector is worth about $20 billion) are still struggling to unfreeze redemptions and pay distributions. It’s only when the underlying property market – most of the debt are commercial mortgages – improves and projects are sold will trusts have the liquidity to pay redemptions and make distributions.”
He believes when this happens, investor confidence will (slowly) return and trusts will look for lending opportunities. But it will not happen overnight.
“Remember it took the unlisted property trust sector some time to recover after imploding in 1989,” he reminds us.
But it did recover.
Published on: Friday, November 05, 2010