Intermediary, packager, lender
Jon O’Brien, Operations Director, Professional Mortgage Packagers Alliance (PMPA)
Having seen more than 10 years of niche and non-conforming lending, the vast majority of which has flowed through mortgage packagers and brokers, I believe we are seeing the end of one cycle and the beginning of a new one, with regard to lenders and their attitudes to broker and packager distribution.
When small, innovative lenders get to a certain size – for example, at around £2 billion completions annually – they then tend to be bought out by large financial institutions and lose their independence. For example the trio now owned by Lehman Brothers – SPML, Preferred and London Mortgage Company – and Mortgages plc’s ownership by Merrill Lynch. Advantage Home Loan’s ownership by Morgan Stanley is a variation on the theme, but it still illustrates the interest that large banking operations have in owning smaller UK mortgage lenders.
Once the independence of lenders that traditionally used packagers is lost, pressure is put to bear on them to markedly increase turnover and look towards other distribution channels and away from packagers. In the case of Mortgages plc, this is even planned to extend to setting up an operation to sell direct to consumers. The reason for this move away from packagers is that the mortgage lending arms of these multinational financial institutions are regarded as simply existing to generate profits for the shareholder/s. The holy grail is currently seen as a broker-direct distribution supported by technology, thus eliminating the packaging link in the chain and so adding more to the bottom line of the owners’ profit and loss accounts. However, lenders do this at their peril and there is no lender that will not alienate their original distribution line – the packagers – by starting to woo direct business from broker and/or consumers. In fact the cycle is revolving so rapidly, we are seeing the likes of BM Solutions and the Oakwood lender-to-be starting to make overtures to the ‘important’ packaging sector. If they expect cooperation and help from a packaging sector that they formerly took every opportunity to damage, I fear they may be disappointed.
Those lenders that differentiate their products to bring in direct business from brokers, for example fee-free deals and cheaper products, are alienating packagers and driving themselves way from an important sector. Recent research from The Mortgage Business (TMB) showed packagers are responsible for 30 per cent of all mortgage originations, 55 per cent of all non-conforming business, 20 per cent of self-certified business and 15 per cent of all buy-to-let. With 60 per cent of all mortgages going through intermediaries, this shows there is real distribution power in the hands of packagers. Just taking the PMPA itself, group members control over 500 appointed representatives (ARs) and have access to members of 15 IFA networks. These are complex relationships with many different access points and packagers understand how the dynamics work and the need for small units, a flexible approach, and tailor-making access to lender products in a way that suits the various needs of different brokers. Lenders that have always had these high levels of packager service on tap will be disappointed when they discover that they can’t just impose their own models onto a diverse and complex marketplace.
What we need now is for lenders to be honest about their intentions and tell us which camp they are in – direct to broker or packager. We understand that s
ome brokers prefer to go direct to lenders – there are some that packagers can’t help, and the future lies in multi-distribution channels – but in order to plan their own way forward packagers need to know what lenders are planning. If a lender openly supports the packager distribution route but is also promoting broker-direct business (hoping that packagers won’t notice) it’s rather like two-timing your steady girlfriend. Once the old girlfriend finds out about the new one, there is no way to keep her happy.
One problem is a lack of understanding about how mortgage distribution works best. When it comes to the big banks running their UK mortgage lending operations, often the finance director is recruited from outside the mortgage industry. This individual will take a cold-hearted look at the finances and will see that, if a direct to broker route can be found, then the cost of using packagers can be eliminated. Unfortunately, those newcomers are not familiar with the way that packager distribution works and have no idea of the added value that packagers add to lenders. Therefore, the technical links, paper trails and cost of distributing mortgages to brokers that do not want to use the direct route, that are currently provided by packagers, are not understood and discounted. As part of my role as operations director of the PMPA I have spoken to many lender finance directors who do not or will not understand the true added value that packager distribution gives, but some of these are now coming back to the table once they have gained a better understanding of how intermediary mortgage distribution really works within a market that needs multiple routes to the consumer.
What will happen is those packagers that are surviving and thriving in the new market will use lenders that embrace their distribution, fully understand the value packagers bring, accept the price of specialist distribution, and bring it into their cost calculation. As a consequence, those lenders that disregard, forget about, or remove packagers from their distribution policy are now facing competition from new packager/lender joint initiatives. This competition is good for the consumer, but not so good for lenders that thought it would be a good idea to edge packagers out of their distribution model.
A ‘people’ business
The much hyped paperless mortgage application that will supposedly enable all lenders to deal direct with brokers has also yet to be proved in the field. While the theory that IT will cut costs and benefit customers is perfectly sound, it takes no account of the fact that mortgage broking is a ‘people’ business. The majority of mortgage intermediaries are aged 40-plus and have had 20 years experience of selling mortgages by talking to customers and lenders either face-to-face or on the telephone, and they probably make little use of e-mails and the internet away from the office. Likewise, customers that choose to get their mortgage via an intermediary have done so because they want to talk to a human being. To disregard the fact that people buy people is over-optimism verging on foolhardiness on the part of lenders. If brokers start regularly to experience the pitfalls of submitting agreements-in-principle (AIPs) direct to lenders only for them to disappear into a black hole, leaving them with no explanation with which to comfort their customer, it won’t be too long before they turn back to using a packager that can provide them with surety of placement. PMPA research in December 2005 showed 35 per cent of all applications fail with the first choice lender and need to be re-placed. Whereas packagers are geared up to find a home for such applications very quickly and effectively, if an online application fails the broker has to start all over again from square one. Our research also shows the application-to-completion ratio is 75 per cent for packaged business but is less than 50 per cent for applications submitted direct to lenders. This is because packagers see their job as seeing the case through, whereas lenders tend to see their role as just shaking out applications, and this will be increased once applications are handled 100 per cent by computer systems instead of humans.
Successful packagers are now specialist distributors and quasi-lenders rather than paper shufflers. They have built up expertise within their own offices to get offers issued fast and to chase completions effectively, and this is backed up by the fact the average application-to-completion time in the marketplace is 25 days whereas packaged applications frequently complete in around 10 days. The new, smaller and nimbler lenders entering the market will need to listen to packagers about product design and provide technology links and on site underwriters, because they want to build lending volumes quickly and this is the best way to ensure high levels of completions.
Now, as the mortgage packager sector reaches maturity, the grouping together of packager businesses into associations will continue to make the packager proposition stronger. For example, brokers that submit applications via a PMPA member packager get access to 16 lenders under one roof – and we have lenders keen to swell this number. As offshoots and copies of the PMPA model continue to start up and grow, this can only help to make the services of their members more indispensable to lenders and brokers alike.