A renowned finance industry expert is predicting that the end is near for Australia’s mortgage-broking industry.
Independent mortgage broker, Bruce Carr, in a recent report, said that he has been observing the recent developments during the first round of the banking royal commission, with evidence cropping up involving conflicts of interest and consummate fraud among mortgage brokers.
Carr said that witnessing all these has caused him much unease.
“I did warn my own clients before the commission started that it would look ugly,” Carr was quoted as saying in the report.
It is unsightly because a conflict of interest has been placed out in the open between mortgage brokers and banks, and the clients.
Carr thinks that bank managers such as ANZ’s head of home loans, William Ranken, who surrendered evidence at the commission just this week, do want to lend more straight to clients to sidestep having to engage in business relationships with brokers, but the pressures of sales often influence them into the mortgage broker market.
“Each of the banks have a different way of interacting with brokers,” Carr explained.
“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,” he added.
Commission exposes more than a conflict of interest
Word has also leaked of banks circumventing basic checks and balances on loan applications, such as the level of an applicant’s expenses.
For example, when mortgage brokers forward applications indicating low living expenses, the commission got wind of banks utilising a higher Bureau of Statistics-based measure of expenses instead.
Indeed, a new report by accounting firm KPMG uncovered 73% of reviewed ANZ loan files had the substituted figures.
Senior counsel aiding the commission Rowena Orr did not mince words when speaking to ANZ.
“Why do you bother asking the broker to submit the documentation?” she queried.
But the Finance Brokers Association of Australia (FBAA) — the group representing finance and mortgage loan writers — defended the relevance of brokers.
It asserted that the talk surrounding brokers from the commission was not just misleading, but also disparaging to an entire industry comprised of small business owners.
FBAA executive director Peter White said finance brokers made sure that loans were not inappropriate for their clients and they offered their expertise, experience and service as well as providing clients with a range of options.
So why would you go with a mortgage broker?
Independent financial analyst Martin North, from Digital Finance Analytics, claimed that a recent survey he commissioned indicated that consumers wanted the service 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,” North explained.
But he proposed that there was a big defect in the mortgage broker business model.
He said even a simple online search bared the very 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,” North stated.
“So there’s a bit of a fallacy about that they’re cheaper.”
That is backed up by a draft report published by the Productivity Commission that showed:
“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.”
What are liar loans?
The financial services royal commission is expected to expend a lot of attention to “liar loans”, but what are they?
“The responsible lending obligations actually requires that lenders do that,” North said.
“And at the end of the day, loan underwriting is fundamentally a judgement call, not just a bit of maths.”
North said it would be good for Australia’s finance industry to consider how the United Kingdom reacted 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.”