|John Kehoe | AFR | 19 July, 2011
http://afr.com/p/business/financial_services/big_four_and_online_mortgages_threaten_Dhl4mp70EtLv659DfbpfvMING Direct, Australia’s fifth-largest home lender, has delivered a stern wake-up call to mortgage brokers, telling them to lift their game or risk becoming irrelevant.
Lisa Claes, an executive director at ING Direct, which relies on brokers to sell more than 90 per cent of its home loans, warned that the dominance of the big four banks was threatening the broking business model.
The big four are writing nine out of 10 new home loans, up from just seven out of 10 a decade ago, partly due to a retreat by small lenders since the credit crisis.
Ms Claes said brokers were reducing their relevance by driving 80 per cent of their business to the big four –Commonwealth Bank of Australia, Westpac Banking Corporation, ANZ Banking Group and National Australia Bank.
Still, there has been strong mortgage competition of late, following the launch of NAB’s “break-up” advertising campaign, and its cut-price home loan offer.
“Don’t be mistaken – the current spate of fierce competition in the home loan market does not necessarily bode well for the long-term future of competition in the market and mortgage brokers are in danger of becoming an early casualty,” Ms Claes said.
“What do brokers think will happen when fewer players have a bigger slice of the pie? Looking at any other industry the answer is simple: greater pricing power for the surviving incumbents and less choice for consumers.”
In the 1990s brokers and mortgage managers, led by Aussie Home Loans founder John Symond, waged a fierce competitive battle with the big banks, forcing the majors to reduce their profit margins on loans. CBA bought a 33 per cent share in Aussie in 2008.
“Whatever the outcome, brokers cannot assume their success over the past 15 years will continue and market concentration of home lending to the big four could be the biggest threat they face,” Ms Claes said.
One in four mortgage broking firms closed shop in the 12 months to March, driven out by a slowing housing market, new government regulations and lower bank commissions.
Only 119 broking firms sold a mortgage in the March quarter, compared with 161 firms a year earlier,according to MSCI Global research. This is the lowest number of active firms since MSCI began pooling data from mortgage brokers and banks in 2001.
Those surviving firms are also writing less business as the $11.6 billion in mortgages sold through brokers in the March quarter was 20 per cent lower than a year earlier.
Ms Claes said technology was also threatening brokers, because customers can now shop online for mortgages. “Comparison pricing information is becoming less of an advantage for brokers, as is personalised service, as online offerings become easier and in some cases cheaper,” she said.
“The one true advantage of the broker offering is providing the consumer with an informed choice, backed by experience.”
Mortgage and Finance Association of Australia chief executive Phil Naylor said the big four were increasing their dominance, but brokers had to act in the best interest of clients.
“Where the loan finishes up has got to be the broker’s assessment of the most appropriate product for the consumer, regardless (of whether) it’s a large bank, small bank or non-bank,” he said.
Westpac is trying to reduce sales of home loans through brokersin an attempt to increase its margins. Banks typically pay brokers a fee for selling a home loan.
CLSA analyst Brian Johnson estimates a mortgage sold through a bank branch delivers a return on equity of about 30 per cent for the bank, compared with a 20 per cent return when the same mortgage is sold through a broker.
St George Bank has lost market share since it reduced its reliance on the broker channel. It recently updated the structure of trailing fees it pays brokers, in response to concerns raised by the industry.