Mortgages and Home Loan Industry Articles (1) February 2011

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  • Borrowers choose majors for security

    In spite of widespread publicity around consumer dissatisfaction with major banks, many first time buyers are still choosing their main financial institutions for their home loans.

    According to a Mortgage Choice survey of first time home buyers, 32% of first time buyers chose their lender based on having their everyday banking with them. A further 19% did so based on the perceived security of the bank being a major lender.

    “The fact that almost one in every three respondents chose their home loan lender in part due to their banking history and/or the security of using a major lender shows how far smaller lenders need to go to match up to the big banks in many consumers’ eyes, let alone surpass them,” Mortgage Choice spokesperson Kristy Sheppard said.

    “It’s a shame, as there are plenty of times when lesser-known lenders offer a superior deal. Borrowers could very well be missing out on a more affordable loan that has features better suited to them.”

    The survey also indicated 17% of respondents felt regret around their purchase. Sheppard commented that this often came from a lack of research into the market before committing to a property and loan.

    “Recent first homeowners’ most common regrets were caused by impatience and lack of research, which is understandable. It’s easy to get caught up in the emotion of the property hunt and the process of buying your home. Patience, guidance from experts and shopping around go a long way towards a property purchase result that works for the long term,” she remarked.

    Sheppard commented that the survey has seen a downturn in first home buyers, and that those who were entering the housing market were waiting longer to do so.

    “It is interesting to note that 18% fewer people bought their first home on their own this year. Not only that, this year’s home buyers were older than those in last year’s survey, had saved more of a deposit and a greater proportion had made lifestyle sacrifices," she said.


  • FBAA slams LMI providers

    The FBAA has released its submission to the Senate banking inquiry, stressing the need for LMI portability and slamming LMI providers for not disclosing the terms of their policies.

    FBAA president Peter White told Australian BrokerNews the lack of disclosure means LMI is in breach of the Insurance Contracts Act.

    "With no product disclosure statement, the actual person buying the policy has no idea what they're buying," he remarked. "The issue of not having a product disclosure statement is a breach of the Insurance Act as it stands."

    White said many consumers do not understand LMI, and are unaware that it benefits the lender rather than the borrower.

    "They're getting no benefits from paying the premium, and if a lender ever has a claim, the provider will come after you for their losses."

    According to White, borrowers should be presented with a choice of LMI products rather than having to buy a policy with the lender's LMI provider. White also commented that borrowers should not have to ask LMI providers for a rebate when they terminate the policy.

    "Being an insurance product, when it's terminated the client should get a proportional rebate. The bottom line is, if they don't ask for it they're not getting it. Even if you do ask for it, you would be lucky to get 40% back. That's pretty crude," he remarked.

    White pointed out that most LMI policies will not extend a rebate to borrowers after 12 or 24 months. He believes this practice should change, as the lender has the right to claim on the policy for the entire life of the mortgage. White also commented that LMI portability, rather than exit fees, is the biggest barrier to borrowers switching lenders.

    "A $700 exit fee is nothing. There's all this spin doctor marketing and advertising around exit fees, and this is an issue that has flown under the radar for as long as I can remember," he said.

    The FBAA submission suggests that the issue of LMI portability may have had a low profile because banks own stakes in LMI providers, or have their own LMI products.

    "If the banks don't have a share of the LMI market, I'd be more than surprised," White said.


  • The Big Story: Second tiers, non-banks and The King's Speech

    Despite a rash of measures this week from the Big Four banks to attract new mortgage customers, research suggests borrowers are dissatisfied with their primary mortgage providers, and are looking to brokers for alternatives. This week on BrokerNews TV’s The Big Story, we speak with executive director of mortgages at ING Direct, Lisa Claes, Graham Mendelowitz from MKM Capital, and Mortgage Choice national manager for non-core products, Simon Dehne, to find out where this shift in demand is taking the market. Will the urge to switch pay off for lenders outside the dominant Big Four? What do these other players need to do to encourage broker and borrower interest? And why does Simon Dehne feel these lenders should watch the recently released movie, The King’s Speech? Find out on The Big Story, on BrokerNews TV.

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  • St. George sets sights on system growth

    St. George Bank will attempt to come in line with "system" lending growth rates, and brokers will continue to play a key part in that, according to the bank's general manager of intermediary distribution, Steven Heavey.

    Following comments from Westpac chief executive Gail Kelly this week in which she said she was "disappointed" with the bank's lending which had "fallen away sharply" since the Westpac takeover, Heavey said the bank was committed to growth in mortgages.

    "Last year, with challenges around offshore funding, there were some issues around raising capital, and there was certainly a period of time where the group decided to dial down in mortgages," Heavey told Australian BrokerNews.

    Heavey said when capital was harder to come by, the bank had used a range of measures to try and slow things down, such as the decision not to run a Spring campaign last year. He said the result was some lost momentum, which was also evident in the broker space.

    "Now things are in a different position, and while our growth relative to system banking growth has come off the boil a bit, we are looking to grow at system in at least New South Wales and South Australia, and to a lesser extent outside of those areas we still want to maintain current market share levels," Heavey said. This is due to the bank's smaller footprint in these states.

    Heavey said the bank is currently running an intro campaign until May, and is considering a range of different options for credit changes, set to be announced in coming days, to try and support that campaign.

    Westpac's first quarter trading update announcement this week stated that lending growth at St. George was lower, due principally to the repositioning of the business over 2010 to reduce its reliance on brokers and to reduce its exposure to commercial property. The statement said that growth in St. George lending has been below expectations and is being addressed.

    In a speech accompanying the update, Westpac CEO Gail Kelly said, as quoted in The Australian: "We also really wanted to really reduce the relation on third-party broker networks in NSW and SA, where there is already really good distribution with St. George." Kelly was quoted as saying that the strategy was to bring St. George back to its regional roots, and its heartland had been NSW and SA.

    The bank's current intro campaign offers 1% off the standard variable rate for the Introductory Rate Home Loan for the first year, after which the rate reverts to 0.70% per annum off the standard variable rate if taken as part of the Advantage Package. The $500 switch fee at the end of 12 months has also been waived, which makes it a "set-and forget" for brokers, Heavey said.


  • MFAA slams 'ill-conceived' exit fee ban

    The MFAA has spoken out on draft regulations banning exit fees, calling the idea "ill-conceived".

    Under the draft NCCP regulations, any fee collected at the time of settlement would be banned, meaning lenders could not recoup deferred establishment fees, LMI premiums, capitalised account keeping fees or interest equitisation fees to recoup honeymoon rates. An MFAA statement has claimed the ban will see higher costs passed on to consumers, and an end of honeymoon rates.

    "It is self-evident that there is a cost in switching loans, and so those who rort the system by switching regularly will be supported by the vast majority who don't. The result will be higher interest rates for all," the statement said.

    According to MFAA CEO Phil Naylor, the ban will see non-banks rendered unable to compete.

    "If exit fees are prohibited, balance sheet lenders can simply dive into their very deep pockets and wait until their competitors exit because they have run out of funds. Then when competition is reduced, the lenders left standing can put rates up again," Naylor commented.

    Naylor has also decried the way the change has been put through, with the ban added to existing regulations rather than voted on as a piece of legislation.

    "Such a major change to the law should be put through both houses of parliament rather than be snuck through by regulation. The opposition and some independents have already expressed their opposition to the move, but are being denied the opportunity to vote against it," Naylor said.

    "Nobody has advanced one good reason for banning exit fees, and so this initiative is playing on cheap headlines without understanding how the mortgage industry works," he remarked.

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  • Government drops exit fee draft bomb

    The Government has made clear the full extent of its planned exit fee ban, in a draft release to industry yesterday.

    In what law firm Gadens Lawyers has termed a "very worrying" release for the future of the mortgage industry, the Government draft proposes a ban on exit fees that will apply to any fee payable at the time of repayment, other than fixed rate break costs and discharge administration fees. 

    If legislated, this would effectively outlaw all fees collected by lenders at the time of settlement, including deferred establishment fees (DEFs), Lenders Mortgage Insurance (LMI), capitalised account keeping fees, and interest equalisation fees that recoup honeymoon rates.

    The bans will apply to all lenders - not just banks - which Gadens Lawyers claims will be "very bad for competition", especially for non-balance sheet lenders who cannot use deposits to absorb costs.

    The draft also says the measures will apply to residential investment loans, as well as normal loans for residential premises.

    Gadens reacted by arguing the changes would make any refinancing much harder because of the costs  incurred by consumers, and that it effectively meant the end of flexible product design in Australia.

    If enacted in its current form, the measures would apply to credit contracts entered into after 1 July this year. The industry has been invited to comment on the draft by 1 March.

  • Big four discounts 'gimmicks': Sayer

    Mortgage House managing director Ken Sayer has called recent moves by NAB and Westpac to increase home loan competition, "gimmicks". According to Sayer, home loan discounting by major banks will add up to costs being passed on to consumers somewhere else.

    "Banks have to maintain their profits. Unless they increase that bottom line year-in, year out, market share will drop and the CEOs won't be paid out their bonuses," he told Australian BrokerNews.

    According to Sayer, the public may have seen the last of out-of-cycle rate moves for some time, but will be hit with charges elsewhere.

    "Major banks will avoid [out-of-cycle rises] like the plague. They did not foresee the public scorn," he remarked. "They won't be so transparent next time, and will be introducing fees you and I haven't heard of before. They'll institute add-on charges such as non-utilisation fees, pre-determination fees, line fees, that sort of thing."

    Sayer believes the market will soon see the return of non-bank lenders as a major source of competition. He dismissed the idea that second-tier institutions would bring competition to the big four.

    "Smaller lenders are very insecure, because they aspire to be major banks. They'll be very cute and quietly follow in the major banks' footsteps," he said. "Non-banks have upped the ante. CBA has already seen their numbers drop and their market share drop. Non-banks are going to bring equilibrium."

  • New mortgages hit 10-year low

    A new report indicates the number of new owner-occupier mortgages hit a 10 year low in 2010. The Datamonitor report shows the number of owner-occupier mortgages for the year came to 575,000, the lowest since 2010. Datamonitor senior analyst and report author Petter Ingermarsson said the downturn was due to creeping median house prices and interest rate uncertainty. He also stated that average housing lending commitments have more than doubled since 2010, far outstripping rises in income.

    “Record low housing affordability driven by higher property prices and recently raised interest rates will continue to affect the market. Gradually worsening affordability has priced some prospective buyers out of the market, with younger buyers and first time buyers the most affected,” Ingermarsson said.

    Ingermarrson said major banks will continue to dominate in a weakened lending market.

    "There are few short-term threats to the current major bank hegemony," he commented. "The government’s measures to support mutual societies are not expected to be effective, securitization activity is still sluggish, and smaller banks may struggle to compete on price."

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  • Banks squeezing brokers out: Driscoll

    The next three years will see brokers pushed out of the market by banks, a mortgage processing conference has been told. Speaking to delegates at the Mortgage Processing Summit in Sydney yesterday, Mortgage Ezy chief executive Garry Driscoll claimed that major banks will try to undermine brokers as they increasingly market their products directly to customers.

    "Major banks are trying to squeeze brokers out," Driscoll said. "When brokers' customers go into a branch, they'll try to get them to make a slight change to their loan to cut the broker out. As a broker, you'd be very nervous about one of your clients going into a bank branch."

    Driscoll predicted that the coming years would see the banks succeed in making broking unviable for many in the industry.

    "In three years, I think there will be fewer brokers. I think those left will be at both ends of the market," he commented.

    According to Driscoll, larger aggregators and small broker businesses are best suited to survive in the changing marketplace.

    "The small one and two person operations rely on referrals and word of mouth, and they make a good quid that way. You have people like Macquarie who are out there buying up aggregators, and they will still be around. The people in the middle will get squeezed out," Driscoll said.

    These medium-sized operations, Driscoll believes, will have to join forces in order to survive.

    "A lot of the aggregators and brokers will have to come under larger banners," he stated.

  • Branch access not important to borrowers

    A new survey of mortgage brokers by Loan Market has found only 8% believe local branch access is important to their customers when selecting a home loan. Loan Market chief operating officer Dean Rushton said the result presents an opportunity for brokers to write business for smaller banks and non-bank lenders. Rushton commented that the result particularly opens up more options for regional borrowers.

    "When choosing a lenders’ product, particularly for consumers in regional towns, people need to be aware that while they may only have one or two local branches the options to access their accounts are far more extensive. In many cases, regional consumers have more options available to them then they may be aware of and mortgage brokers can provide them with this important information,” Rushton remarked.

    The survey has also found 76% of brokers believe internet banking is the most important account feature to customers, while only 14% said ATM access was important and 2% said telephone banking services were a factor.

    “This certainly comes as no surprise, the amount of technology which is now available to consumers’ means that people expect top tier online banking services,” Rushton said.

    “These survey results reflect the dramatic changes that have occurred in the financial services sector in recent years.”

  • Genworth may take ratings hit

    LMI provider Genworth may find its financial strength rating downgraded by Moody's. The ratings agency has released a statement saying Genworth Financial Mortgage Insurance's A1 rating is currently under review.

    According to the statement, Moody's will examine the rating in light to Genworth's financial exposure to its US-based parent company. The review follows a $133.6m net operating loss for the US company in the fourth quarter of 2010.

    "The review will focus on the degree to which Genworth Australia's financial flexibility and business operations may be affected by weakness at its parent," Moody's vice-president and senior analyst Wing Chew said.

    According to the statement by Moody's, Genworth's Australian arm partially relies on a reinsurance agreement with its US arm in order to meet capital requirements. While Moody's said Genworth Australia had a good record of profitability throughout the GFC, the ratings agency has commented that losses in the US business could impact the stability of the company's Australian business.

    "As its parent's and affiliates' credit profiles deteriorate, the capital enhancement afforded by this arrangement could decline," the statement said.

  • NAB margins drop amid pricey funding

    Higher funding costs have led to a drop in margins for NAB in the first-quarter. However, the bank posted a larger-than-expected  increase in first-quarter cash earnings due to stronger Australian banking operations and lower bad debt charges.

    "Business banking and personal banking were key drivers of Group revenue during the first quarter," NAB chief executive Cameron Clyne said.

    Clyne remarked that the bank has maintained strong momentum in mortgage and transaction accounts, and has improved income from wholesale markets. The bank's bad debt charges were $493m for the three months to December, compared to $739m in the previous corresponding period. The bad debt charges included a $25m overlay as a result of Queensland's floods.

    "The overlay will be revised as we further assess the impact of this and subsequent natural disasters in Eastern Australia," the bank said.

  • YBR launches term deposits

    Non-bank lender Yellow Brick Road has partnered with Gateway Credit Union to launch a term deposit product. The move makes YBR the first non-bank in Australia to offer term deposit products.

    YBR executive chairman Mark Bouris has pointed out that the company's partnership with an ADI allows it to offer products with a government guarantee. He said the product would further increase competition with the major banks.

    "As the first non-bank in Australia to offer term deposits, we’re continuing to close the gap between the big banks and independent lenders,” Bouris remarked.

    The product offering comes as other non-banks eye the ADI market. During the Senate inquiry into banking in December, non-bank FirstMac stated that it had been actively seeking access to an ADI licence. The lender also increased its stake in The Rock Building Society from around 5% to 8.5%.

  • Aussie economists defend housing heat

    Leading economists from two of Australia's biggest banks have defended the Australian housing market, in the face of continued international predictions of a potential dire downturn in house prices.

    Westpac global head of economic research, Bill Evans, and  Paul Braddick, head of property and financial system research at ANZ, have both argued that while prices have entered a period of slower growth, no immediate serious correction in prices is likely.

    Speaking at the Mortgage Processing Summit in Sydney today, Evans said that international investors were often concerned when comparing the recent trajectory of Australian house prices with those of the UK and US, which experienced considerable corrections during the financial crisis.

    Evans said that the unemotional investor overseas would think "it's only a matter of time" until Australia experienced a comparable correction, and that from an international perspective this was a "not unreasonable argument".

    However, Evans said that such projections were erroneous because they were based on "exaggerated" house price to income ratios, which place Australia's ratios among the highest in the world. Evans said such figures are biased, as they don't account for the many dwellings in Australia that are apartments, which are cheaper and more affordable particularly when combining two incomes.

    Evans said Australia also has a "huge imbalance" between underlying demand and supply, due to population growth and a shortage of dwelling stock, which would further support the market in future.

    Evans acknowledged the housing market had entered a "dismal" period of growth, and expects the impact of a slow down in house price appreciation will last for some time. However, he said while Australia was not immune from big cyclical corrections, current conditions did not indicate this. 

    ANZ's Braddick said the biggest constraint on currently "subdued" house price growth in the current market was affordability, and said ANZ was predicting Reserve Bank rate rises of 100 basis points over the next 18 months, which he expects to keep a  cap on house prices.

    However, he said any forced selling from mortgage holders would remain at the very margins of the market, as continued economic growth and low unemployment would ensure its continued strength.

    Evans was more subdued in his predictions of interest rate rises in the coming year, arguing that he foresees only one rate rise before the end of the year, and is even "toying" with the idea of calling no rate rises at all. While the market had priced in two rate rises and the RBA had indicated it would seek to raise rates, Evans said it was unlikely they would receive the excuse to do so.

    Both economists said the mortgage industry would have to adapt to much lower volumes than they were used to over the past few years, with credit growth of between 5% and 7% for some years to come.

  • Real estate agents not reliable referrers for mortgage brokers

    A top sales coach has warned that brokers can no longer rely on real estate agents for referrals.

    David James, principal of Salescoach (Australia), told brokers at the NMB national conference in Melbourne last week that real estate agents are not a reliable source for leads anymore.

    "Real estate agents have no idea and no respect for what you do, and we're just not getting the referrals from them we used to," James commented.

    Instead, James said brokers should seek out other opportunities to generate referrals. He remarked that brokers should build relationships with small businesses and seek out employees who may be considering a move into the property market.

    "Get your foot in the door with a small business. It won't be hard to see who's thinking about buying a house. They'll be on real estate websites all day," he remarked.

    According to James, landing a client who works at a small business can lead to more referrals than brokers may see from real estate agents.

    "You have another 20 potential buyers. It's an opportunity to get more referrals," James said.

  • Market complexity ensures Australian mortgage broker future.

    Brokers will continue to play a crucial role in sourcing mortgages for clients, despite predictions that growing direct sales through online channels may render the third party channel obsolete.

    Firstfolio executive director Mark Flack recently told Australian Broker that in 10 to 15 years, the majority of transactions could be completed online, and that brokers had to adapt if they were to survive.

    However,Smartline managing director Chris Acret said the future is bright for brokers.

    "I remember that there were predictions at least twelve years ago that mortgage brokers would become redundant as mortgages went online. That hasn't happened, with maybe 1% of all home loans currently arranged online," he said.

    Acret said that for a transaction as complex and important as a mortgage, the majority of people wanted a trusted adviser. He added that if anything, getting a home loan is more difficult today than it was 20 years ago.

    "There's much more paperwork, the products are more complicated with more fineprint and the NCCP is just going to add another layer to that. Online mortgage applications will probably grow but we don't see them transforming the market anytime soon."

    However, Acret urged brokers to develop an effective internet presence, as more research will be done by consumers online.

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