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As
reported earlier, the sale of residential mortgage products
in Australia was the exclusive domain of Australia’s
big four banks. Following deregulation a number of foreign
and non-bank lenders entered the market. Currently we
have 61 banks operating in Australia (14 of which are
Australian owned), 11 Building Societies, 121 credit
unions and 68 non-bank lenders (foreign and international).
Despite the presence of competition, Australian banks
still maintain control over 80% of mortgage sales volume,
while foreign banks hold around 5%, credit unions and
building societies approximately 5% with the remainder
accounted for by non-bank lenders.
Australian
banks have two main sources of residential mortgage
funding; securitisation (the process of selling mortgaged
backed securities to the capital markets) and balance
sheet lending (usually from their own deposits and lending
channels). However, non-bank lenders (wholesale lenders)
in most cases only have access to funds via securitisation
markets. As a direct result of the current global economic
crisis fund availability in the mortgage backed securitisation
markets has become limited and in some cases more expensive.
This together with the Australian government’s
recent introduction of banking guarantees (for Australian
banks only) have significantly impacted on the position
of non-bank lenders – many are currently struggling
to source funds and offer competitive products. This
is the first time the Australian financial services
industry has seen credit rationing since the late 1990’s.
Economists believe that this will ease over time and
bring with it new lending standards designed to prevent
a recurrence of the problem.
Beyond
funds origination, supply arrangements in the Australian
Mortgage Industry also refer to those services provided
by aggregators to brokers. Essentially an aggregator
provides access to a panel of lenders and a varying
degree of processing, IT, administration and sales support.
Under this type of agreement the broker shares the upfront
and/or trailing commissions with the aggregator –
typical
industry
averages are an 80/20 split in favour of the broker.
Most aggregators also hold the position of broker with
sales enquiry serviced by aggregator members. Larger
aggregators typically rely heavily on automated processes
and systems to preserve profitability. Also worthy of
note are the increasing aggregator membership requirements;
certifications, qualifications, registrations and codes
of conduct.
Aggregators
like brokers are re-posturing their businesses in response
to the current economic climate. Apart from rationalising
commission structures, many aggregators are also likely
to pursue a greater degree of service automation, higher
lending standards and be more discerning as to where
they place their broker support resources. Establishing
a preferred position with aggregators will be necessary
for brokers to establish incremental service and revenue
advantages in an increasingly marginal industry. Conversely,
sub-standard broker practices and behaviours will be
subject to less tolerance by aggregators.
Also
worthy of note is the discrepancy between a typical
mortgage broker’s value proposition and their
relationships with lenders and aggregators. Most brokers
claim active access to hundreds in some cases thousands
of mortgage products through a range of lenders. Their
promise, to shop the market and secure the best mortgage
deal for their client. In practice 64% of brokers place
all of their business with between 4 to 6 lenders, consistently.
The likely reason being lender volume and value requirements
for brokers to access optimal commissions. The cost
of avoiding the conflict between a broker’s value
position and their supply arrangements in the current
environment is likely to be either reduced commissions
or compromised service integrity.
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