Have Mortgage Broker Share and Commissions Peaked?

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.

CBA targets third party origination in investment lending crackdown

From Australian Broker.

The recent tightening of investment lending practices by the Commonwealth Bank of Australia only apply to those loans coming through the third party channel, it has been revealed.

Last week, it was reported that the CBA had halted any new refinance applications for standalone mortgages.

A notice sent to the bank’s broker network stated: “To ensure we continue to meet our commitments, from Monday 13th February we will be suspending the acceptance of new refinance applications for Investment Home Loans, until further notice.

“Applications which include both Investor and Owner Occupier loans are not impacted.”

While the notice appeared to apply to all refinance investor loans, the major bank has now told Australian Broker that these changes apply solely to intermediary-sourced loans. Borrowers will still be able to access refinance investor loans via CBA’s retail branches.

“We’re committed to meeting our responsible lending and regulatory obligations and to ensure we continue to meet this commitment, we are unable to accept new refinance applications for Investment Home Loans from our broker partners,” a CBA spokesperson told Australian Broker on Wednesday.

“The vast majority of our single property investment home loan refinances come to us through our broker partners so the decision was made to address this in the first instance to ensure we continue to meet our regulatory requirements.”

“We constantly review our products, policies and processes to ensure we’re meeting our customers’ financial needs,” the spokesperson said.

This decision comes soon after CBA subsidiary Bankwest announced it too would halt all new applications from customers looking to refinance their standalone investment lending.

ANZ, Westpac and NAB have thus far made no changes to their investment lending policies in either the third party or retail channels

Aggregator slams ABA Review’s “ludicrous” broker findings

From Australian Broker.

There is a “significant risk” that the Australian Bankers’ Association (ABA) Retail Banking Remuneration Review will draw “false conclusions” on broker remuneration, according to the Australian Finance Group (AFG).

Managing director of AFG, Brett McKeon, said the review does not have the information gathering powers or resources required to include broker remuneration within its scope. Instead, it should cede this responsibility to the review currently being conducted by the Australian Securities & Investments Commission (ASIC).

The ABA “should not risk reducing confidence in its findings by referring to, or basing recommendations on, isolated anecdotal statements,” he said in a letter to Stephen Sedgwick AO, who is heading up the review.

An example of how the Sedgwick review misses the point can be found in its recently released Issues Paper which highlighted the banking industry practice of increasing the commission rate of a mortgage product to increase its sales, he said.

McKeon added that this emphasis failed to consider the combination of incentives that a bank may offer brokers, the consumer benefits of brokers fulfilling their responsible lending obligations under the National Consumer Credit Protection Act 2009 (NCCP Act), and negative factors such as increased processing delays caused by these types of promotions.

“The suggestion that a broker will chase higher commission at the risk of recommending something unsuitable or risk clawback and damage their reputation and therefore their business for a few dollars more is ludicrous.”

“In fact, AFG has provided extensive empirical information to ASIC for the purposes of the ASIC Remuneration Review that indicates that there is no real correlation between the commission rate offered and the market share of a lender.”

McKeon also slammed the Sedgwick Issues Paper for alleging that “third-party mortgages are likely to be larger, paid off more slowly, and more likely to be interest only loans than those provided to equivalent customers who dealt directly with bank staff”.

“It is extremely disappointing that the above statement was included in the Issues Paper, albeit with the final acknowledge that the information that was considered is not conclusive,” he said.

Instead, it was important to note that the attributes of loans introduced to the banks through the broker channel directly relate to the attributes of customers who sought out the broker in the first place.

“For example, consumers seeking larger loans may seek the assistance of a broker in order to maximise potential savings.”

Finally, McKeon said there was a danger that the Sedgwick review could treat the roles, responsibilities and risks associated with mortgage brokers as equivalent to financial planners.

“It is important to remember that the government intentionally excluded mortgage brokers from the Future of Financial Advice reforms (FOFA),” he said.

“This approach recognises that the regulatory failures that the government sought to address with FOFA did not include residential mortgages and that mortgage brokers were already subject to an appropriate protective regulatory regime under the NCCP Act, including the responsible lending obligations.”

New ASIC funding model a “tax” on brokers, MFAA warns

From Australian Broker.

The Mortgage & Finance Association of Australia (MFAA) has expressed concern about a new industry funding model proposed by the Australian Securities & Investments Commission (ASIC).

The model, which is set to commence in the second half of 2017, hopes to draw funds for ASIC from parties within the finance industry.

“ASIC has long believed that those who generate the need for ASIC’s regulation should pay for it, rather than the Australian public,” said ASIC chairman Greg Medcraft.

“An industry funding model for ASIC is about establishing price signals to drive economic efficiencies in the way resources are allocated within ASIC. Industry funding will also improve ASIC’s transparency and accountability. That means business will better understand the job we do by having greater visibility of the cost of doing that job.”

However, Cynthia Grisbrook, chairman for the MFAA, has warned that proposed changes would see licensed mortgage brokers and broker groups paying “up to seven times” the amount for each dollar of credit facilitated compared to lenders.

“We believe that this equates to a ‘tax’ on brokers. Unlike lenders, brokers are – in most cases – unable to pass this additional cost on down the value chain,” she said.

Under the current proposal, licenced brokers and broker groups would face a levy rate of $1,000 plus $1.14 per $10,000 on credit intermediated greater than $100 million. This was compared to $2,000 plus $0.15 per $10,000 facilitated for lenders on credit provided greater than $100 million.

“On ASIC’s current calculations this could leave licensed brokers and aggregators (where applicable) each out of pocket in the amount of $39.90 on an average $350k mortgage given that the levy is charged at multiple points in the value chain. Lenders would be levied $5.25 on the same average $350k transaction,” Grisbrook said.

While these amounts would only be payable once the relevant party has reached the threshold of $100 million – which Grisbrook admitted may not affect brokers directly – she warned that this could impact aggregators who may then expect brokers to carry a portion of the cost.

“Overall, the MFAA believes that the model currently under consideration is inequitable, anticompetitive and unnecessarily complex to administer,” she said.

The proposed changes could also lead to the consolidation of licensing with many individually-licensed brokers handing back their licences and joining broker groups instead. This would reduce industry competition, Grisbrook warned.

“The MFAA is currently working with members and other industry participants to develop an alternative model based on the following four principles: simplicity, equity, achievability and neutrality.”

To get a feel for any unintended consequences, the MFAA is talking with aggregator and member groups, Grisbrook told Australian Broker.

“We have a lobbyist panel that’s made up of a lot of aggregators, and we’re sharing information and data to look at different angles.”

The MFAA also has a select group of brokers that it is working with on this. “We’ve sent something out for their input,” she said.

ASIC is currently taking submissions on the proposed funding model through the Treasury website. The submission process will close on 16 December.

In light of this short deadline, the MFAA has spoken to ASIC and is seeking an extension so that all industry players are on board and are working towards a common goal, Grisbrook said.

“We want everybody who’s involved in this to have a say in it and ensure that we’re all on the same page.”

A closer look at UBS’ survey and mortgage fraud

From Mortgage Professional Australia.

With the publication of ASIC’s remuneration review imminent, broking faces a tough summer, and as temperatures rise, so do tensions within the industry. So when global investment bank UBS published a report claiming that mortgage fraud was “systemic”, and driven by brokers, the reaction from the  industry was swift and predictably outraged.

In an environment of suspicion, UBS’ report is the last thing the industry needs right now. Surveying 1,228 Australians, the report found that 32% of customers who secured a mortgage through a broker misrepresented at least part of their application; and of that 32% more than half said their broker told them to do it – furthermore this figure was higher in 2016 than in 2015.

Broker clients were significantly more likely to overstate income and understate other debts, according to the report. UBS’ conclusion was damning: “We believe banks need to tighten underwriting standards via the broker channel, even at the expense of near-term market share.”

Covered by the ABC and The Australian, UBS’ findings quickly spread beyond finance into mainstream news, and have been noticed by the regulators. On being asked about fraud by the Senate Economics  Legislation Committee, APRA chairman Wayne Byres noted that “we have told the larger institutions that we’ll be asking them to have their external auditors do a review of what are essentially fraud control mechanisms to ensure that there are mechanisms in place and … are working,” according to The Australian. UBS’ report clearly cannot be ignored so, MPA asks, should the industry be seriously concerned?

The problems with UBS’ survey

FBAA CEO Peter White has made his views quite clear: “This really should not be taken seriously … I believe that not only are these figures wrong, but that they are based on claims that can never be verified.”

He’s not been the only one to question UBS’ methodology. Lawyer Matthew Bransgrove, author of Avoiding Mortgage Fraud in Australia, told MPA that he is “dismissive” of the report: “It is a self-assessed survey. Obtaining money by deception is a criminal offence in all jurisdictions in Australia, so it would be surprising if those who were fraudulent were candid.”

The MFAA also criticised the report.

UBS’ approach of asking borrowers to admit they lied on applications – even under the condition of anonymity – hardly seems likely to get honest responses from people. Yet to UBS this uncertainty is a reason for more concern, for the report states that “if anything we believe it is more likely these figures may understate the level of misrepresentation in mortgage applications, as some respondents may not want to state they were less than completely accurate despite anonymity.”

It’s possible that borrowers may simply be mistaken. Talking to MPA about fraud prevention, Mortgage Choice CEO John Flavell questioned whether borrowers really understood their application: “Can every single respondent who said their lender and/ or broker misrepresented their financials in their loan application pinpoint exactly what is was that was fraudulent?”

UBS’ report states that “respondents were required to be personally and deeply involved in the discussion and completion of the mortgage paperwork” but, again, we don’t know how or if they verified that.

As for the blame game, proving that 41% of 2016’s “not completely accurate” applications were because of brokers rather than the borrower is, again, extremely difficult to verify. UBS’ survey was done online, and although it involved 63 questions, whether it goes into enough detail to prove a broker encouraged misrepresentation is again doubtful.

Don’t get too comfortable

Picking holes in UBS’ report doesn’t prove broking doesn’t have a problem, however. Fraud and misrepresentation in mortgage applications are real problems, according to Veda’s 2015 Cybercrime and Fraud Report. Fraudulent mortgage applications made up 17% of all attempted fraud – second only to credit cards – and broker fraud had risen by a quarter, to represent 21% of fraud overall. Meanwhile, fraud through bank branches has fallen by a quarter to 11% of fraud overall.

Worsening housing affordability could drive systemic fraud. Asked about fraud, Martin North, principal of Digital Finance Analytics, noted that consumers “know they have to do a double somersault backwards to get into the market”.

Nevertheless, North cautioned, broker advice was “not the same as telling porkies, but I guess it’s a gradation. I don’t see structural issues coming through. We know brokeroriginated loans are slightly more risky, but that’s only two to three points more risk, and it’s partly to do with the business mix in that channel.”

ASIC regularly bans brokers for fraud, most recently Bernard Meehan in October; Jennifer Farias in September and Madhvan Nair in July. Since July 2010, ASIC has banned 74 individuals or companies from providing credit services, including 32 permanent bans, and prosecuted 12 in court.

Individual cases, however, don’t back up suggestions that fraud is “systemic”. The closest to that the industry has seen was earlier this year, when Westpac and ANZ admitted they were hit by hundreds of loan frauds involving fraudulent Chinese documents. The Australian Financial Review, which reported the story, claimed that mortgage brokers had been involved. ANZ spokesman Paul Edwards told the AFR that “the issue is relatively small” and that the value of loans inflicted was well under $1bn.

Several of the major and non-major banks later pulled back from the foreign buyer market, although this could also be attributed to changing capital requirements.

Fraud and turnaround times

UBS’ second claim is just as concerning for brokers, and relates to turnaround times: “While the banks continue to target greater automation and faster mortgage approval process to improve customer service and maintain market share, this may be coming at the expense of rigour in credit assessment.”

Turnaround times are critical for brokers, and consistently voted their No.1 concern (above interest rates) in MPA’s Brokers on Banks survey.

Many banks have highperformer segments, whose members get preferential turnaround times; others are investing huge amounts in automating as much of the lending progress as possible. One of these is ING DIRECT, whose LendFast system aims to cut turnaround times by a third and is the largest investment in broking infrastructure the bank has ever made.

While agreeing that fraud remains a risk, ING CEO Uday Sareen told MPA that “there is absolutely no compromise when cutting down turnaround times or any relaxation in our systems and policies to prevent fraud.” In fact, Sareen claims that by automating more of the workflow, LendFast actually has the opposite effect.

“The element of discretion and rules and parameters that get hardcoded actually reduce the potential and the incidence of fraud,” he said.

Asked by MPA, Suncorp Bank’s executive manager of lending, Barbara O’Conor Nash, also pointed to automatic fraud checking,noting that: “We continuously review our processes to ensure we’re addressing any known real or emerging risks. Application, property and income verification are critical parts of our lending practices and the bank also uses extensive automated fraud processes, which work in parallel.”

Automated fraud prevention has come a long way in recent years, driven by Veda’s Shared Fraud Database, which automatically flags individuals previously involved in fraud when they apply for credit.

Yet, evidently, software can only go so far: in May, CBA introduced individual checking of applications by a case officer, to help detect whether brokers are deliberately engaging in fraudulent behaviour. Mortgage Choice told MPA they also conduct regular in-depth checks of their brokers, including annual “mystery shopper” visits and annual compliance checks of multiple applications.

Fraud expert Bransgrove is confident fraud prevention tactics are getting better, not worse.

“The threat is reducing because of the Veda database, the vigilance of aggregators and brokers, and because of the good work ASIC is doing in removing the bad eggs from the industry,” he said.

UBS’ report, Bransgrove’s comments and Veda’s aforementioned figures make for confusing reading, because they point in such different directions. Veda’s figures show that mortgage fraud is down, but increasingly more likely to go through the broker channel than branches, suggesting that fraud prevention, while effective, is more effective in some areas than others. This would support UBS’ view that mortgage brokers “are a potential area of weakness” in the fight against fraud.

Clearly more research is needed to determine whether that potential weakness really translates into systemic problems in reality; Veda’s 2016 fraud report late in the year will therefore become essential reading.

Counter-intuitively, with such heightened regulator tension, simply dismissing fraud allegations may do more damage than publicly engaging with efforts to stamp out what is an age-old problem.

Suncorp Announces Third Party Role Changes

From Australian Broker.

Suncorp has announced the Head of its Wealth & Life Intermediaries team, Mark Vilo and the Head of its Bank Intermediaries team, Steven Degetto, will swap roles in 2017.

suncorp-pic

The announcement comes five months after Suncorp’s intermediary businesses were brought together under the leadership of Andrew Mair, to take advantage of the size and scale of the collective businesses, and to better serve intermediary partners and their customers.

Mair commented on the the role changes, saying they highlight the great bench strength in Suncorp’s intermediary team and allow it to start working with partners to build resilient and responsive businesses across the spectrum of financial services.

“The new appointments will give our intermediary partners the opportunity to benefit from the diversity offered by Suncorp’s senior leaders,” Mair said.

“Mark has more than 25 years’ of financial services experience and has been integral in the development and implementation of sales, product and marketing strategies across the independent financial advisers’ market.

“I have no doubt he will continue to build on the excellent results Steven has delivered for our banking brokers over the past three years.

“Steven has more than 20 years’ experience in the finance industry with the majority of this based in the intermediary channel.

“He has been instrumental in reshaping the business to deliver quality, sustainable growth and an exceptional proposition for broker partners and their customers, culminating in being named MFAA 2016 non-major lender [of the year].”

Mair said Mark and Steven are both passionate supporters of the value that intermediaries provide for their customers, and will bring that commitment and a fresh perspective to their new roles. “The role changes demonstrate the breadth of talent across Suncorp and the initiative underlines Suncorp’s commitment to being the partner of choice for intermediaries,” he said.

Of his new appointment, Vilo said: “I’m thrilled to be taking on the new role and looking forward to working in a dynamic market that shares similar challenges and opportunities that are being experienced in the independent financial advice market.”

“I’m very proud of the business the team we have created over the past few years. I have made a number of great friends and colleagues in this fantastic industry and I am looking forward to the opportunity to develop my expertise in a different type of intermediary business,” added Degetto.

Vilo and Degetto will start in their respective positions for a period of 12 months, effective 1 January 2017.

Broker channel sees significant rise in fraud

From Australian Broker.

The significant growth in fraud found in the broker channel is an ongoing concern, Veda’s 2016 Cybercrime and Fraud Report has revealed.

broker-shares-dfa-sept-2016

The report showed broker channel fraud makes up 15% of all credit application fraud and has risen by 25% in the last half year period (H2 FY2016).

Speaking to Australian Broker, Veda general manager, fraud and identity solutions Imelda Newton said it is in brokers’ best interest to take measures to detect fraud.

“A lot of the activity we see through that broker channel is where people falsify their personal details to be able to secure the finance so things like altering payslips, bank statements, tax assessments,” said Newton.

The research found the falsifying of personal details has risen 27% per cent year-on-year and more than a quarter (27%) of Australians have been a victim of identity theft, which has risen 80% in the 12 months to June 2016. 56.94% of all credit application fraud  comes from an online channel.

“Even though they might not suffer the ultimate financial loss – the lender will – the thing for the broker is their reputation,” Newton told Australian Broker.

“Being associated with some fraud that’s happened is not a good thing for that sector and for those individuals whose reputation can be everything in terms of the credibility of their business.”

The data also found fraud occurrence has increased among bank branches, rising 13% on 2016, with branch channel fraud making up 12.78% of all credit application fraud.

“Everyone is getting better at detecting the fraud – there’s a lot more quick investigation and detection going on, so that’s how we’re finding out more about these cases that are happening in the branches.”

She said the rise in fraud in the branch channel may stem from banks and other lenders using manual methods of identity verification.

“One of the downsides to these manual processes is the subjectivity of manual identity verifications. By using electronic verification the subjectivity is removed and a common standard set of rules can be applied.”

Newton said from the latest insights, growth in fraud shows no signs of slowing down this year.

“This trend is likely to continue into the future, as individuals and businesses become more reliant on the internet for their banking, shopping and other financial interactions.”

The Interest-Only Loan Debt Trap

Today we discuss some specific and concerning research we have completed on interest-only loans.  Less than half of current borrowers have complete plans as to how to repay the principle amount.

Interest-only loans may seem like a convenient way to reduce monthly repayments, (and keep the interest charges as high as possible as a tax hedge), but at some time the chickens have to come home to roost, and the capital amount will need to be repaid.

Many loans are set on an interest-only basis for a set 5 year term, at which point the lender is required to reassess the loan and to determine whether it should be rolled on the same basis. Indeed the recent APRA guidelines contained some explicit guidance:

For interest-only loans, APRA expects ADIs to assess the ability of the borrower to meet future repayments on a principal and interest basis for the specific term over which the principal and interest repayments apply, excluding the interest-only period

This is important because the number of interest-only loans is rising again. Here is APRA data showing that about one quarter of all loans on the books of the banks are interest-only, and that recently, after a fall, the number of new interest-only loans is on the rise – around 35% – from a peak of 40% in mid 2015. There is a strong correlation between interest-only and investment mortgages, so they tend to grow together. Worth reading the recent ASIC commentary on broker originated interest-only loans.

interest-only-apraBut what is happening at the coal face? To find out we included some specific questions in our household survey, and today we present the results.

We were surprised to find that around 83% of existing interest-only loan holders expect to roll their loan to another interest-only loan, and to keep doing so.  More concerning, only around 44% of borrowing households had an explicit discussion with the lender (or broker) at their last loan draw down or reset about how they plan to repay the capital amount outstanding.  Some of these loans are a few years old.

interest-only-surveyAround 57% said they knew the capital would have to be repaid (we assume the rest were just expecting to roll the loan again) and 26% had no firm plans as to how to repay whereas 39% had an explicit plan to repay.

Many were expecting to close the loan out from the sale of the property (thanks to capital appreciation) at some point, from the sale of another property, or from another source, including an inheritance.

Thus we conclude there is a potential trap waiting for those with interest-only loans. They need a clear plan to repay, at some point. It also highlights that the quality of the conversation between borrower and lender is not up to scratch.

We think some borrowers on an interest-only loan may get a rude shock, when next they try to roll their interest-only loan. If they do not have a clear repayment plan, they may not get a new loan. There is a debt trap laid for the unwary and the APRA guidelines have made this more likely.

Next time we will delve further into the interest only mortgage landscape, because we found the policies of the lenders varied considerably.