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Industry in depth
Mortgage packagers
4 August 2007
Vic Jannels charts the history of the mortgage packager and considers what the future holds for the sector
It is often said that, if we want to understand the present and, more importantly, look into the future, we need to start with history. This maxim is usually brought into play when discussing such weighty matters as the power struggles between great nations, or how we are ruled and governed – but it also holds true when looking at the market dynamics of our own sector. In particular, if we want to speculate on how the packaging sector will develop in the future, we need to understand how it got to where it is now.
Tipping point
Looking back to the late 1980s, most informed commentators would probably agree that the tipping point for mortgage packaging was provided by Stephen Knight’s Private Label. Market conditions included, on the one hand, cash-rich lenders keen to lend and, on the other hand, insurance company mortgage desks with huge distribution potential created by their large field sales forces. Private Label stepped into an entrepreneurial role between the lenders and the brokers by offering to take basic applications, package them, and present them to lenders, ready for offer. At the same time, by offering lenders this easy route to bulk distribution, Private Label was able to work with them on designing products that the insurers’ mortgage desks could sell with ease. As these products started to cater more and more for the needs of niche and non conforming customers, this boosted the mortgage intermediary sector by supplying it with products that could not be accessed by consumers directly from lenders.
Clearly, the role played by this sort of mortgage ‘wholesaler’ added value to both ends of the chain. Intermediaries could sell more mortgages without the administrative burden of packaging the applications, and lenders could enjoy far wider distribution and reduced administrative costs. Therefore lenders wishing to use the intermediary route to boost sales were happy to pay the middle-man firm for its services as well as paying the intermediary’s procuration fee. Sounds familiar? We may not have called it ‘packaging’ in those early days, but the core concept had been established.
Meltdown
The next set of historical circumstances that helped to boost the significance of the packaging function came together in the early 1990s, when economic downturn and high interest rates prompted a housing market crash and personal debt problems going into meltdown. Although it may be hard to believe in the enlightened 21st century, in 1993 there were 1.8 million CCJs issued; 58,500 properties taken into possession – down from a peak of 75,500 in 1991); and, at the end of 1992, 826,000 mortgage accounts with arrears of three months and more. These millions of people with newly acquired adverse elements in their credit records still needed somewhere to live, and a mortgage loan with which to purchase that property. Unfortunately for them, the credit scoring systems being implemented by high-street lenders took a dim view of CCJs and arrears, and would simply decline their applications.
Such a vacuum in the marketplace could not last for long and, by the middle of the decade, the new breed of non-conforming lenders started to establish itself, spearheaded by Kensington. Operating according to credit policies that priced products to cover the added risk realistically, these lenders raised funds in the wholesale money markets and by successfully securitising their loan books. They were lean and hungry lending machines with lots of cash to pay third parties to originate business for them and package the applications.
Dealing with non-conforming applications was, and still is, not as straightforward as introducing prime credit mortgage cases, and took a lot more time and effort. Acknowledging this extra workload, lenders paid generous packaging fees which, in turn, encouraged large numbers of new packaging firms to enter the market.
Influencing strategies
By the beginning of the third millennium, major changes in mortgage processing had started to influence lenders’ distribution strategies. The power of web-based communications and data transfer was being realised, and each advance that was made in this direction seemed to reduce the need for the sort of paper-based information that mortgage packagers had hitherto sourced. At the same time, competition in the lender market was starting to drive down product pricing and squeeze profit margins. Unsurprisingly, lenders’ thoughts started turning to the direct-from-broker origination route, which would enable them to reduce costs considerably by cutting down on their packager fees.
The most recent historical event that also appeared to threaten the existence of the packager community was the build-up to and implementation of Financial Services Authority (FSA) regulation in November 2004. The packaging function, and its role with regard to giving advice to would-be borrowers, did not fit easily within the FSA’s definitions of what constituted the mortgage advice and sales process. So, when the time came to apply for authorisation, some packagers were faced with a ‘Catch 22’ situation. Many lenders, determined to be as squeaky clean as they possibly could be with regard to the FSA’s requirements, were putting out the message that they would only deal with authorised firms. On the other hand, packagers that only dealt with brokers and did not have a direct-to-consumer operation could not be FSA-authorised because they did not carry out any regulated activities. For a time this appeared to pose a real threat to the continued existence of ‘pure’ packager firms, but in reality the majority of packagers were able to become regulated and those who did not have been able to trade successfully alongside the other regulated parties.
The future
So much for the historical build up – but where does packaging stand now and what does the future hold? One thing is obvious – lenders cannot afford to ignore the bulk distribution power both of larger individual packagers and packager associations. Packager associations are now a well-established part of the mortgage distribution marketplace and no doubt we will see more of them emerge to serve the unique needs of their member firms. One thing they all have in common is the ability to deliver results to lenders in the form of guaranteed distribution and supply brokers with keenly priced exclusive products and top quality service standards.
Will the packaging sector survive in the long term and can it continue to offer valuable service to lenders and brokers in order to do so? I believe that the answer to this lies in the historical roots of packaging – i.e. lenders needing a steady supply of good quality cases on which to write profitable business and individual brokers needing a shoulder to lean on when they are faced with a non-standard customer.
Taking lenders first, it is an indisputable fact that packaged applications have a far higher success rate than applications direct from brokers. In 2001, the PMPA did its own research among its lender panel that revealed less than 50 per cent of broker-introduced applications reached offer stage as opposed to 85 per cent of packager-introduced business.
On the broker side, too, packagers can offer a very attractive combination of benefits. Brokers cannot possibly have the overall experience and up-to-the-minute knowledge of lender criteria and processing times that will exist within larger packager films.
A lot has happened to the packaging sector over the last 15 years, and we are still evolving. Overall, the evidence all points to a thriving packager sector, delivering added value to lenders and brokers, for the foreseeable future.
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Written by Jeremy Russ (Head of Compliance and Marketing, Beacon Group)
Although very few members of the financial services industry claim to be Mystic Meg, everyone is quite happy to make predictions as to the future of the market. One area that has come under fire is packagers with doom mongers muttering that they are fundamentally flawed and shortly will go the way of the dodo. However, as Head of Compliance for a group that has two packagers in its portfolio, I rather disagree.
Packagers were established to help brokers find the best products for their clients by using their in-depth knowledge of each lenders unique criteria, packaging the deal, and smoothing the process. The greatest demand for this service lies in the more complex non-conforming end of the market but even mainstream mortgages are occasionally sourced using these services. Indeed, there are even some ’packager-only’ lenders who find that dealing with these organisations rather than directly with brokers suits their business model far better.
So surely packagers provide a highly valuable service especially as the market is set to become ever more regulated, complex and diverse. The majority of pundits agree with this but worry about the ‘rise of the machine’. As the industry becomes more reliant on IT sourcing systems, some pundits have even claimed that packagers will become obsolete.
I seriously disagree with this argument, as not only has it been proved wrong in the past but the human touch is essential to underwriting mortgages – especially in the non-conforming sector. With each company using a unique system to grade borrowers with poor or no credit history, can an IT system which needs definitive parameters hope to keep up?
And it is not only that! Most packagers know the teams at each lender and who is happy to discuss and accept slightly more complicated cases than their literature states, without compromising their responsible lending standards, whilst treating the customer fairly in the process. This can be invaluable when a broker is attempting to place a particularly difficult case.
In addition, some pundits seem to forget that IT and packagers are not mutually exclusive entities. Indeed, some packagers have developed excellent technology solutions to assist with the provision of their services. So it does not need to be a choice of one or the other but rather the opportunity to use a service which ‘cherry picks’ the best aspects of both, the primary driver being for the benefit of the customer.
There is one potential cloud on the otherwise sunny packager horizon, and that is regulation. Some packagers are regulated and some have decided not to be. If it is decided to regulate this sector of the Market I firmly believe that the packager community would deliver what is required.
So as you can see, not only are packagers not dodo’s but they have the potential to soar like eagles if they continue to adopt sound TCF practices, adapt to changes in their market and strive for improvements in their own operating models.
em- TBC
The race for the best technology amongst packagers is certainly hotting up within the industry at the moment, with a strong focus not on who gets there first, but who can offer the best, most sustainable and customer-centric system.
They key issue here is that the packager needs to offer a system that is as good as any other. Packagers are here to make their clients lives easier and the technology they offer needs to contribute to this. It needs to be able to offer one password to enter the site and then give the client the ability to navigate any lenders site (eg to get Click or POSO) without the need for re-keying information and repeating passwords.
The best packaging sites are those that then have a sourcing system that is completely up to date and contains all the available products from all their lenders, including any offers and any exclusives. From this, the customer then has the ability to source products, to do credit searches and to be able to match property types and classes against lending policy. To be able to source products instantly by doing an AIP they could then get confirmed responses from the chosen three or four lenders resulting from a search. To support this process there would also be an onsite Underwriting team running alongside to manually underwrite any cases as required.
As the race is heating up it is now becoming clear that a packager who doesn't have this type of technology will quickly be dead in the water. There are obstacles to reaching the holy grail of an all singing, all dancing technology system. It costs a lot of money and takes a long time to build, putting added pressure on the resources of the firm. Getting a ready made system ‘off the shelf’ doesn’t really work as it isn’t tailored to the company itself and doesn’t give the packager the competitive advantage it needs. In fact, although this way can seem initially cheaper, any changes the packager wants to make to the system will be expensive and costs will quickly rise.
We have put a great deal into developing our own system in order to meet the high demands of our customers. Whilst the cost in time and money has been significant, this system is priceless to us as it adds extensive value to our company and improves our offering even further.
It is also important that in the race to create the perfect technology offering that packagers remember how important the human touch is for their customers. A state of the art sourcing system needs to work in conjunction with a strong customer service team in order to give customers a full 24/7 service offering.
In fact, I believe those packagers that think a state of the art technology system will reduce the need for good people will be the first to crash and burn. Packagers need to ensure as they get swept up in the race for technology that they stay focused on the end result for their customer. The race is indeed on, not for the quickest packager but for the packager that offers the best overall system for its customers.