Australia is witnessing the beginning of the end of the mortgage-broking industry, a prominent finance industry analyst claims.
- Analyst Martin North predicts relevance of mortgage brokers will wane as technology improves
- Comes as questionable lending practices exposed at banking royal commission
- North suggests Australia follow UK and introduce fee-based approach for brokers
The industry has been dragged through the mud during the first round of the banking royal commission, with evidence of conflicts of interest and outright fraud among mortgage brokers.
Independent mortgage broker Bruce Carr says he has been watching the commission with much trepidation.
“I did warn my own clients before the commission started that it would look ugly,” he said.
It is ugly because a conflict of interest has been exposed between mortgage brokers and banks, and the clients.
Mr Carr believes bank managers like ANZ’s head of home loans, William Ranken, who gave evidence at the commission this week, do want to lend more directly to customers to avoid messy business relationships with brokers, but sales pressures often push them into the mortgage broker market.
“Each of the banks have a different way of interacting with brokers,” Mr Carr said.
“On the one hand, they’re very keen to secure business through us as a channel.
“On the other hand, they would like more business to come through their proprietary channel.”
Commission exposes more than a conflict of interest
We have also heard of banks skipping basic checks and balances on loan applications, like the level of an applicant’s expenses.
For example, when mortgage brokers submit applications showing low living expenses, the commission heard banks used a higher Bureau of Statistics-based measure of expenses instead.
Indeed, a recent report by accounting firm KPMG found 73 per cent of reviewed ANZ loan files had the substituted figures.
Senior counsel assisting the commission Rowena Orr put it bluntly to ANZ.
“Why do you bother asking the broker to submit the documentation?” she asked.
But the Finance Brokers Association of Australia (FBAA) — the peak body representing finance and mortgage loan writers — hit back about the relevance of brokers.
It claimed commentary around brokers from the commission was not only sensational and misleading, but also sought to disparage an entire industry made up of predominantly small business owners.
FBAA executive director Peter White said finance brokers ensured loans were not unsuitable for their clients and they provided expertise, experience and service as well as offering a wide choice.
So why would you choose a mortgage broker?
Independent financial analyst Martin North, from Digital Finance Analytics, said a recent survey he commissioned showed consumers wanted the service Mr White was suggesting.
“Once you start getting into the mortgage application forms, and all the documentation, the idea of having somebody local to you who can actually help you through that process and essentially do some of the heavy lifting is quite attractive for many consumers,” Mr North said.
But he suggested there was a big flaw in the mortgage broker business model.
He said even a simple online search revealed a key reason for choosing a broker — that they could get you a cheaper home loan rate than dealing directly with the bank — was simply not always true.
“What’s interesting is that if you look at the loans interest rates, the best loan interests are when you go direct, and not to the major banks, but some of the smaller banks, and customer-owned banks, who are actually offering the better rates at the moment,” Mr North said.
“So there’s a bit of a fallacy about that they’re cheaper.”
That is backed up by a draft report released by the Productivity Commission showing: “Mortgage brokers do not consistently get lower home loan interest rates for consumers than would be available to the consumer by going directly to the provider.”
Ultimately, as borrowers adopt increasingly sophisticated and user-friendly lending technology, there simply will not be much of a desire for a mortgage middle man, like a broker, Mr North said.
“The digital intrusion here is the real critical player,” he says.
“I’ve thought that brokers have a limited life span anyway because digital now allows people to do a lot more and will ultimately enable them to search, apply and transact online, and at that point I’m not sure what the brokers’ value proposition would be.”
As to the quality of a loan heading to a bank and whether from a broker, or directly from a customer, Mr Carr insisted it was not just a numbers game.
“With credit, there’s always an element of judgement in the decision either a broker or a credit assessor makes,” he said.
“You’ve got to use common sense in addition to what the letter of the credit policy may be.”
Mr North agreed with that idea.
“The responsible lending obligations actually requires that lenders do that,” he said.
“And at the end of the day, loan underwriting is fundamentally a judgement call, not just a bit of maths.”
Mr North said Australia’s finance industry would do well to consider how the United Kingdom responded when its financial institutions found themselves in the same position.
“The other model is [a] fee-based approach,” he said.
“Basically it’s a fixed amount that you pay. And then the question is, ‘so who gets to pay that?’
“We have to change the remuneration model I think for the broker.”