Digital Finance Analytics (DFA) Blog
"Intelligent Insight"
I discuss the evolution of the mortgage industry with Anthony Baum, CEO of Tic:Toc Home Loans.
How will the tighter underwriting standards play out, and how will the Royal Commission recommendations impact the industry?
Note that I believe the future of the mortgage industry will be digitally driven, and Tic:Toc is on the leading edge, so an apt topic for “Digital Finance Analytics”! Digital disruption is coming….
Westpac has announced it will lift mortgage rates on existing variable loans by 14 basis points. This was expected (I had said by September a few months back!). Others will follow now. More pain for households in a rising cost, flat income economy. More downward pressure on home prices.
The BBSW stands 19 basis points above where it was in February.
Westpac last week had highlighted a margin problem, and showed the rise in funding, which has squeezed their margins. Expect more “great offers” to attract low risk new customers, at the expense of the back book.
Westpac chief executive Brian Hartzer says he didn’t “relish” having to make the decision to lift variable mortgage rates as higher wholesale funding costs fail to subside.
Following similar moves by several smaller lenders in recent months, Westpac today said variable interest rates for its owner occupied and residential investment property loans would rise 14 basis points due to the “sustained increase in wholesale funding costs” since February.
CEO Brian Hartzer told Westpac Wire it was a “difficult” decision but the bank had “come to the conclusion that what we’re looking at is a sustained increase in that key benchmark wholesale funding cost rate”.
“It’s now been elevated for over six months…reluctantly we came to the conclusion that needed to be reflected in our mortgage costs,” he said. He added that while conscious of the impact the interest rate change would have on consumers’ cost of living, some mortgage rates would remain below where they were three years ago and “from a credit point of view, no, I’m not concerned” about any impact on the bank’s mortgage book.
In an update to the Australian Securities Exchange last week, Westpac said funding costs had risen primarily due to the sharp increase in the bank bill swap rate (BBSW) since February. Compared to the first half, the BBSW was on average 24 basis points higher in the third quarter, the bank added.
Along with a lower contribution from the Group’s Treasury and other factors including changes in the mix of its mortgage portfolio, the higher funding costs dragged on the bank’s net interest margin, which fell to 2.06 per cent in the June quarter from 2.17 per cent in the first half to March 31.
Mr Hartzer said several factors had driven the increase in wholesale funding costs since February, including greater competition for funds from foreign banks that raise money in the domestic wholesale market. The Reserve Bank of Australia has also noted this rise in competition domestically, plus that the cost of raising funding in the United States and then converting it back into Australian dollars has also increased this year and “at times been well above the cost of raising funds domestically”.
Australia’s big four banks will make significant changes to the way mortgage brokers are remunerated after they agreed to implement all recommendations of the Sedgwick review.
The final report of the Retail Banking Remuneration Review conducted by Stephen Sedgwick AO, released yesterday, made a number of recommendations relating to mortgage broker remuneration. These will see volume based incentives and ‘soft dollar’ payments scrapped, and for banks to cease the practice of increasing the incentives payable to brokers when engaging in sales campaigns.
The review also recommended that banks adopt, through negotiation with their commercial partners, an ‘end to end’ approach to the governance of mortgage brokers that approximates as closely as possible a holistic approach broadly equivalent to that proposed for the performance management of equivalent retail bank staff.
In effect, broker commissions would be governed by similar principles that banks would apply in assessing performance against a scorecard for their staff.
“Some commentary has questioned the role of ABA or the banks in this matter,” Mr Sedgwick noted.
“However, banks have a legitimate interest, especially because they both provide the funds that support the operations of mortgage brokers and bear the risks (financial and potentially reputational) if a loan is inappropriately large or inappropriately structured,” he said.
“Ultimately, a commercial negotiation would be required to establish such arrangements and preserve the financial viability of the mortgage broking industry.
“In broad terms, average remuneration per brokered mortgage may not be dramatically different to the current remuneration, but the risks (perceived and actual) of poor customer outcomes would be reduced. I would envisage that some form of trail payments would continue, with trails under existing arrangements ‘grandfathered’.
“To be clear, it is a fundamental principle of this recommendation that, in any new arrangements, competition should be preserved and the viability of the mortgage broking industry maintained. It is for this reason that client funded fee arrangements are not supported by the Review.”
Mr Sedgwick strongly encouraged ASIC to participate in the transition, particularly in light of potential issues with banks adopting the recommendation.
“I therefore propose that the banks with a significant recourse to the mortgage broker channel move to investigate and, as soon as possible, adopt an alternative payment system with strong oversight by ASIC,” he said.
CBA looks set to move quickly on the recommendations, with chief executive Ian Narev confirming that the bank will implement many of the recommendations by 1 July and will have “all changes in place” by the following financial year.
CBA group executive retail banking services Matt Comyn said the changes will involve significant reform.
“The recommendations affect all of our customer-facing teams, including branch, call centres, and mortgage brokers. Implementing them will require extensive consultation across a range of stakeholders, which we will commence immediately,” Mr Comyn said.
ANZ also confirmed that it will implement the recommendations.
“ANZ will work with both the broker industry and relevant regulators to implement the recommendations,” the bank said.
Meanwhile, NAB chief customer officer, consumer banking and wealth, Andrew Hagger, said the group is strongly committed to improving customer outcomes and building trust in the banking industry.
“These recommendations are a significant step for the industry and will require focus, discipline and strong leadership to implement them,” he said.
“In October last year, NAB committed to the Sedgwick reforms and now that we have the final recommendations our focus is to implement them well ahead of the 2020 deadline.”
In relation to the recommendations that impact third parties including mortgage brokers and aggregators, NAB agrees with Mr Sedgwick that any changes to their remuneration structure should be “viable” and “competitive”.
“We see mortgage brokers and other third parties as an important part of the future of our business. We will be working closely with the industry, Treasury and with the regulators, ASIC and the ACCC, to make sure we get the right result for our customers and the industry,” Mr Hagger said.
NAB does not pay volume-based incentives on residential mortgages to mortgage brokers
We have updated our mortgage industry models to take account of the latest loan volume, channel and commission data to January 2017.
New loans have continue to flow via the mortgage broker channel, thanks to increased demand for mortgages, and households appreciating the mortgage broker value proposition. Our surveys show portfolio investors, solo investors, refinancers and first time buyers are all quite willing to use third party assistance to get a mortgage. Especially, when pricing changes are in the works, and rates are volatile.
We estimate that around half of all mortgages written in recent months have been originated via the broker channel. However, we also now believe that this has reached a peak, thanks to CBA’s recent comments that it will favour its branch channels, and some investment loans will only be available via its proprietary network. As one of the industry’s largest players, this will impact. Indeed, their new loan volume via the broker channel slipped to 43% from 46% six months back despite strong loan growth. Their portfolio is 42% broker originated. We have therefore adjusted our market model to reflect a small fall in volumes thought 2017.
At the moment new loan broker commission pools are looking very healthy, with new business earning estimated up-front commissions of more than $100m a month, and equating to more than $1.1+ bn a year. This is helped by a combination of larger loans and volumes.
However, we suspect that transaction volumes will slow now that interest rates are being raised on investment loans in particular, borrowers appear more uncertain about the impact interest rate rises, and there is of course talk of changes to the rules for investment property, which may spook the horses. Given the tail-off in owner occupied loans, we suggest that we may be approach a “peak” of mortgage broker volumes and commission pools.
Brokers of course will benefit from trails which are paid on existing loans in subsequent years, so many will have now built up a nice little nest egg, so it is by no means all doom and gloom. But “peak commission” may just have passed.