A game of two halves

The intermediary mortgage market is, as that infamous saying goes, ‘a game of two halves’. Brokers have the choice of either becoming appointed representatives (ARs) of a network or remaining independent and being directly authorised (DA) by the Financial Services Authority (FSA).

For those brokers who choose to go it alone, mortgage clubs extend an extremely valuable helping hand, by providing a large number of small businesses with the benefit of collective bargaining power and access to products and services they would find difficult negotiating for themselves.

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However, DA brokers are not tied to clubs in the same way that ARs are committed to using their network principles. They can and usually do deal with several mortgage clubs at the same time and clubs therefore have to ensure that their propositions, both in terms of products, procuration fees, exclusives and added value services, remain as competitive as possible. This is a tough market where the rewards for success can be great, but where there is no room for second best.

Origins

Mortgage clubs have their origins in the mid 1980s, when the mortgage market was starting to go through the first stages of a major revolution. For decades, mortgage lending had been dominated by building societies, who distributed and administered mortgages via traditional branch networks. Intermediaries were not a significant force until the emergence of a new breed of specialist lenders such as National Home Loans – now Paragon, The Mortgage Corporation and The Household Mortgage Corporation.

These lenders were part of the important process of fragmenting the mortgage market. Up until then, the key processes of origination, servicing and funding mortgages were all undertaken under one roof by the same organisation, but from the mid-1980s onwards companies started to specialise, which opened the doors to a raft of new developments.

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A flood of ‘new money’ hit the market and suddenly mortgages were being distributed via intermediaries, including life companies and brokers. Life companies were particularly influential, as they recognised the value of mortgages in boosting the sale of endowment policies. Many set up their own ‘mortgage desks’ and brokers quickly became responsible for generating huge volumes of new business. Today, brokers generate the lion’s share of all new mortgages; a big turnaround from the early 1980s.

However, although the floodgates had opened for intermediaries, they were still being left to flounder around in the dark when it came to sourcing and submitting mortgages. This need gave rise to organisations such as Private Label, The Mortgage Operation and, in the 1990s Mortgage Next, all of whom acted as the ‘intermediaries intermediary’, negotiating exclusive products, procuration fees and service deals with lenders.

The rest, as they say, is history. Distributors grew rapidly over the course of the next decade only to face the challenge of regulation in 2004. Regulation was a defining moment for many such organisations, as they had to decide what they wanted to be in the future: regulated networks servicing the needs of ARs or mortgage clubs looking after DA brokers. Mortgage Intelligence was one of the first organisations to launch a multi-brand strategy and others quickly followed suit.

The UK mortgage market today is totally different in almost every respect from the market in which clubs first developed and intense competition means there is little scope for non-essential products and services to survive. If organisations cannot demonstrate their ability to add value, then they are more than likely to disappear. Margins on mortgages are constantly being squeezed and everyone in the food chain has to be able to demonstrate their worth.

Getting things right

The survival of mortgage clubs has therefore not been as a result of a philanthropic gesture from lenders. Clubs have to ensure that their propositions in terms of products, procuration fees, exclusives and added value services, are as competitive as possible. The fact that so many clubs have not only survived but prospered suggests they are getting something right and that they are adding genuine value.

They have succeeded by adopting one of two strategies. The first is what is sometimes referred to as a ‘sticker and submit’ strategy. Essentially clubs act as collective bargaining partners, negotiating enhanced products and procuration fees with lenders on behalf of brokers. As a result of their buying power, they are able to negotiate better deals than brokers could negotiate for themselves. For lenders, they offer the benefit of being able to deliver volume business. A classic ‘win win’ formula. However, clubs adopting this strategy have little to do with actually processing mortgage application which go direct from intermediaries to lenders, with little more than a sticker denoting that the deal is subject to terms negotiated by each specific mortgage club.

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This is a tried and tested strategy and one Mortgage Next adopted when it first opened its doors for business 11 years ago. The reality is that we were simply a marketing business. We promoted products to brokers and brokers submitted applications direct to lenders – no mortgage applications passed over our desks.

However, the downside of this strategy is that a club is only as good as its latest exclusive. It’s difficult to build up a loyal broker base when there is no reason for brokers to remain loyal.

Interestingly, regulation provided the opportunity for clubs to adopt an alternative strategy. Suddenly, DAs required a number of additional services including help with training, new business generation, the provision of non-core products such as commercial loans and car leasing and even help with compliance support.

Since regulation the model of mortgage networks, and clubs had undoubtedly changed, with separate identities for their DA and AR braches and a greater focus on compliance, particularly with regards to Financial Promotions. Many DA brokers had previously expressed concerns over this particular strand, and clubs have been able to tweak their propositions to provide greater support in this, and other, areas.

Enhancing services

This provided scope for some clubs to enhance their services by adding real value for mortgage intermediaries and, as a result, building genuine loyalty. Mortgage Next decided to take this route and launched Mortgage Next Partners.

So which is best: a sticker and submit strategy or an all-encompassing added value mortgage club? The answer is that there is no best and there is room in the intermediary market for both. Whichever strategy a club decides to adopt, one thing is for sure – they must continue to add value for both mortgage lenders and intermediaries or their future will be short-lived.

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