Mortgage origination: breaking new ground

The National Consumer Credit Protection Act has opened up opportunities for brokers to sell risk products. Janine Mace reports.

While the broader mortgage industry may be facing a number of challenges as it struggles to come to terms with the shape of the post-GFC world, the outlook is good for mortgage brokers who have survived the upheaval and are ready to cope with the demands of the new regulatory environment.

In fact, many are looking towards the opportunities that have been created by the more advice-focused National Consumer Credit Protection (NCCP) Act.

Although full-scale financial planning is not on their radar, selling risk products certainly is – and traditional advisers will need to keep a watchful eye on this potential source of new competition.

Although around 20 per cent of the mortgage brokers working in the industry before the GFC have exited, Mortgage and Finance Association of Australia (MFAA) chief executive Phil Naylor believes the future is bright for those remaining.

“Brokers write about 40 per cent of all mortgage loans, and this can only go higher. There will be good opportunities for the remaining operators. Consumers need assistance and want advice, and the new NCCP legislation helps to encourage the use of brokers for this purpose. I don’t see any real negative from it,” he says.

Deloitte Actuaries and Consultants banking partner James Hickey believes the legislation will benefit both consumers and mortgage brokers.

“The raft of important regulatory protections, which are coming into force in 2011 via the NCCP Act, will give greater transparency of lending information and are designed to ensure lenders and mortgage brokers always act in the best interests of the borrower,” he says.

“The Act will also rationalise the smaller brokers and strengthen the top 10 mortgage brokers.”

New business opportunities

Despite concerns about the effect of the new legislation, Naylor believes most brokers are prepared for the changed requirements ushered in by the NCCP Act and are already considering new business opportunities.

“Mortgage brokers have been diversifying over the past few years to not be so captive to one income stream. Some residential mortgage brokers have been looking at financing and equipment finance for diversification,” he says.

When it comes to future opportunities for mortgage brokers, respondents to the annual Deloitte Australian Mortgage Report: 2011 Reforming the Agenda survey had clear views on the best potential opportunity areas. Among respondents, 10 per cent felt sales of life risk products at point of sale with the

mortgage offered good cross-selling opportunities for brokers, while 90 per cent believed life and general risk (packaged home and content cover) at the point of sale offered brokers potential opportunities.

None of the survey respondents believed financial planning was an appropriate area for expansion or that it would be too hard for brokers to offer anything other than mortgages, according to Hickey.

“Respondents felt that, for brokers, the best path for cross-selling was life and general risk sales. They felt it was a big step to full financial planning and too far for mortgage brokers to go.”

This view was discussed at Deloitte’s Residential Mortgage Lending Roundtable. According to Resimac chief operating officer Allan Savins, the new legislation creates real opportunities for brokers to sell risk products.

“NCCP gives us the best opportunity to cross-sell.

It provides us with an opportunity to find out if the loan is suitable, and to do that you will be asking a question about insurance at the point of sale. So you are creating a process from which to effectively build an opportunity,” he said.

Steve Weston, general manager broker platforms for Advantedge Financial Services (which has 40 per cent of all mortgage brokers on its three platforms), is another who sees insurance sales as a potential diversifier for brokers’ income streams.

“The most adjacent business to mortgage broking is risk and it also fits with the requirement to help clients by fully understanding their needs and requirements,” he explains.

Interest in selling risk is also likely to be driven by the higher business value it creates. “The value of a risk book is about double a mortgage book due to the longevity of the business compared to loans,” Weston says.

According to Hickey, many mortgage groups are ‘tip-toeing’ into life and general insurance sales, but still have a long way to go.

“They have set up commercial alliances, but are still struggling to develop a model to help their brokers to sell risk business,” he says.

“It is very easy to strike a commercial alliance with insurers, but how to get brokers to sell the product is the big question.”

Weston agrees it is proving a tough nut to crack. “Penetration rates are lower than expected with risk sales to date, but now with NCCP, as mortgage brokers need to ask those questions it will help give brokers confidence.”

To help with this process, Advantedge has introduced a basic insurance product and mortgage brokers can now refer their clients to have the business handled by the firm.

“In the future, mortgage brokers are more likely to write the business. Because brokers need to do two to three interviews under the new regime, risk will be easier to approach – but it will be a slow evolution,” Weston says.

Despite the interest, Naylor believes moving into risk sales may create problems for some brokers. “The danger is becoming a jack-of-all-trades and master of none,” he says.

Another area of contention is whether mortgage brokers should be providing advice and sales of equity release products such as reverse mortgages.

The debate was sparked in February by comments made by Senior Australians Equity Release Association of Lenders (SEQUEL) chief executive, Kevin Conlon.

At the time, Money Management reported he believed there was “no reason why the broker market can’t step up to the challenge of providing the advice necessary to make an informed decision”.

The Financial Planning Association was quick to respond, claiming reverse mortgages need to be provided within the bounds of a comprehensive advice plan and with a full understanding of the client’s needs.

It seems any move by mortgage brokers to expand their businesses into other product areas is likely to meet stiff resistance.

Moving to provide advice

Aside from the competitive resistance, there is also significant debate within the broking industry itself about whether to move into the provision of consumer advice given the increased requirements of the NCCP regime.

“We expect to see brokers increasingly move away from the transactional side of the loan business and into providing credit advice to customers,” Naylor says.

“Initially there was concern about breaching [Financial Services Reforms] requirements, but we believe the new Act does allow mortgage brokers to provide credit advice to customers.

"We think the thrust of the Act is that the broker sits down with the consumer, and then does a needs analysis to understand the customer’s needs. This is providing a value-add service.”

While this may be acceptable under the legislation, it is not without controversy.

“The hot issue in the industry is whether brokers should charge for advice. Many people argue that consumers are willing to pay for professional advice, but there are strong views both ways,” Naylor says.

Weston believes this is the way of the future, since brokers must diversify their income streams due to the difficulty of making what would be considered an acceptable level of professional income from residential mortgages.

“For most brokers, it is now difficult to make a professional income from just broking commissions.”

He expects to see many brokers head down the fee-for-advice path. “We will not see commissions banned, but we do expect to see charging for advice becoming more common in the future,” he says.

Such a development would have the added benefits of increasing the attractiveness and value of broking businesses.

“Adviser fees will create real value in the business as the multiples paid for a mortgage business book are less than the multiple paid for a risk book due to the lower value and length of the loans,” Weston says.

Broking and planning

Although brokers may be interested in moving into risk sales, a further evolution into full financial advice seems unlikely.

Hickey believes there is still some way to go in terms of convergence between broking and planning.

“The convergence of mortgage broking and financial planning is more likely to see an outcome where financial planners train up their staff and extend their reach into debt lending,” he says.

“Mortgage brokers’ heartland is the first or young homebuyer, compared to financial planners whose clients are older and have more complex needs, so financial planners are better placed.

“Financial planners are more focused on the asset side than on the debt lending side, but with the introduction of a fee-for-service model, advisers may well be interested in debt lending. The challenge for mortgage brokers is they have commission-based remuneration and how to move to giving fee-for-service advice,” Hickey says.

Naylor agrees convergence is some way off.

“It is not all that common for a financial planner to do mortgage broking as well. They mostly tend to have specialists for that or refer the business. Some one-off operators do both, but I expect we will mainly see larger entities with both specialist finance brokers and financial planners,” he says.