The Royal Commission We Had to Have
And so the Royal Commission into banking has started. We are only at Day 8 and already we have witnessed a stream of horror stories: major banks withholding information from the Commission, systemic fraud in loan applications, useless credit card insurance pushing, and IT system errors taking years to detect.
Not a good look - at all.
The best the banks have been able to do so far is try to deflect some of the blame and mortgage brokers are also in the firing line. It has been a weak defence given that the biggest problems with lending so far exposed have been through the bank's proprietary channels. But that is not to say that the mortgage broker channel is without blemish, or does not have its few bad apples.
Respected industry commentator Martin North of Digital Finance Analytics has even gone so far to suggest that this is the beginning of the end for the mortgage broking industry - an industry segment that nearly 56% of mortgage borrowers presently choose to engage when they apply for a loan. Mr North suggests that the function of a mortgage broker can be replaced by web apps or online forms supported by robots or similar in bank land.
If this were the case it would have happened already.
So it is timely to re-examine why 56% of consumers currently choose to access finance using a mortgage broker:
1. People Do Not Trust the Banks
A global banking survey by Ernst & Young in 2006 found that four out of five Australian customers say they don't trust their bank to give unbiased advice and put their interests first.
Time and time again I am contacted by people who have already tried their bank, or been pestered by the bank to take out a mortgage, or some other credit or insurance product. Many feel that they are either dealing with someone who is inexperienced or does not have their best interests at heart. They are sold to by employees incentivised to sell. Quite often they are bullied and sometimes lied to so that they will take extra products that they do not need, cannot afford or provide them with no benefit.
2. Every Loan is Different
In the same way that consumers purchase different motor vehicles because they have different size families, different incomes, different travel needs or simply just different tastes they end up paying widely differing prices for sometimes very different vehicles. It is no different with property loans.
We have borrowers who are self-employed, full time PAYG, casual employees, on short term employment contracts, work more than one job, are single, are married, have large deposits, have small deposits, have children in child care, are about to go on paternity leave, are professionals, are tradespeople, live and work overseas.
We have residential properties in capital cities, country towns, small apartments, large apartments, houses, high rise dwellings, in flood zones, in NSW, Victoria, Tasmania, and have Titles which can be freehold, strata, company or community (to name a few).
We have loans with offset accounts, redraw facilities, restrictions on changes, are flexible, are rigid, have high exit costs, are differently funded, have annual fees, professional packages, are suitable or unsuitable for construction etc.
We have interest rates which are fixed, variable, high, low, bait marketing, stable and unstable.
We have large banks, small banks, international banks, non-banks, bank owned non-banks, plus brand names that are not lenders at all.
Brokers with 10 years experience have difficulty keeping track of it all. Now what were you saying about that web app and online application form?
3. Consumers Do Not Just "Buy" Loans
While the arrangement of finance is central to the process of mortgage broking it is so much more than filling in forms and choosing the lowest initial interest rate. A good broker helps their client with the overall process of buying a property. They act as advocate, project manager, assist with the assessment of financial risk, and liaise with solicitors, real estate agents and the bank's back office to make settlements happen on time. Sometimes they help borrowers to understand their living expenses, and help them to draw the distinction between how much they can borrow and how much they should borrow.
And after settlement they provide ongoing service to keep the lenders honest. Lenders are frequently making adjustments to their reference rates, lending margins and discounts which mean that invariably interest rates lose their competitiveness over time. A good broker helps their clients to pro-actively manage this by re-negotiating with lenders, and where necessary by helping to refinance the loan where a clearly better alternative becomes available.
A good broker/client relationship is a partnership. Each party must trust the other and over time they develop a mutual understanding that works to their mutual benefit. From the client side they do not have to deal with a different employee, or heaven forbid, a call centre every time they wish to discuss and plan their financial objectives. And they are not beholden to one institution's capabilities, pricing and policies. And from the broker side they form a stable business that provides them with a reasonable income and can provide service over many many years.
What Will the Future Bring?
The Banking Royal Commission is investigating serious matters affecting the lives of many hard working Australians. It will expose unacceptable and potentially criminal behaviour across the entire finance industry. Its work is important and necessary.
But it should not be allowed to be manipulated by the banks to achieve outcomes that serve their own ends. Any actions which serve to weaken the mortgage broking sector will transfer market power back to the banks, to the detriment of the consumer.
I do not believe we are witnessing the beginning of the end for mortgage brokers. The value proposition goes far beyond looking up an online table of initial interest rates and picking the lowest number.
Perhaps I am being myopic. Like the Encyclopaedia Brittanica which refused to believe that the information revolution would destroy its business model.
Or am I Mark Twain where "the reports of my death are greatly exaggerated"? Time will tell.