Tomorrow’s Dinosaurs: Australian Mortgage Brokers

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By Andrew Nelson

A new survey of Australian mortgage brokers, conducted by independent market analyst Datamonitor, confirms the global credit crisis has not only hit brokers, but is adversely impacting almost everyone in the mortgage industry. And in the end, it’s consumers that will pay.

Total housing lending commitments have fallen by almost 15% from last year, from $264bn in 2007 to $225bn in 2008 and this has seen the near demise of non-bank lenders.

The financial crisis fuelled downturn has forced many non-bank lenders to exit the market, which is having a serious flow on effect across the mortgage broker industry. The major banks are now focusing in on the direct channel and are able to force down broker commission rates. The survey results indicate that average commission rates received by brokers have fallen significantly in the last 12 months. This is forcing some brokers to leave the industry altogether.

Petter Ingemarsson, a financial services analyst at Datamonitor, points out that in the past, mortgage brokers and non-bank lenders enjoyed a symbiotic relationship in Australia, but the downfall of non-bank lenders has hit both of these sectors hard. The survey shows that Australian mortgage brokers are certainly feeling the pinch, with brokers around the nation branching off into new service areas as they become increasingly less optimistic about their short term business prospects.

In July 2007, non-bank lenders accounted for 21.2% of lending commitments to owner occupiers. The figure was down to just 6.8% by December 2008. As the crisis wears on, more and more mortgage customers are opting for the perceived safety and security of the major banks. It is this development that is hurting mortgage brokers the most, since non-bank lenders traditionally paid higher commission rates. Compounding matters is a move by the major Australian banks to unilaterally cut mortgage broker commissions.

Asked about their average upfront commission levels, 80% of surveyed brokers in the Datamonitor Australian Mortgage Broker Survey currently have a commission rate below 0.60%. In 2007 only 27% of surveyed brokers had commission levels in that range. The forward outlook is even worse, with most brokers surveyed believing that commission levels will either stay the same or fall even further in 2009.

Datamonitor reports that Westpac ((WBC)) was the first of the major banks to reduce mortgage broker commission levels, announcing drastic cuts to both upfront and trail commissions in April 2008. St.George, Commonwealth Bank (CBA)) and National ((NAB)) followed suit in May 2008, bringing in lower commissions for brokers unless specific performance targets were met. ANZ Bank ((ANZ)) was the last to join the party, revising its commission structure the following month.

The problem with this trend is, as mortgage customers leave the smaller lenders in favour of the bigger banks, competition in the market will naturally decline and this will come at the expense of not only smaller industry participants, but borrowers as well. With the demise of Australian non-bank lenders, the major banks have been able to build an almost unassailable competitive position.

The Datamonitor Australian Mortgage Broker Survey shows that almost three quarters of surveyed mortgage brokers agree that the absence of non-bank lenders has lowered competition in the market.

The hard times have seen consolidation, diversification and specialisation become the new catchwords for the mortgage broker industry as it tries to evolve and survive in these difficult times. Better economies of scale make it more efficient for large lenders to deal with large mortgage brokerages, so consolidation continues across the industry at a fairly frantic pace.

At the same time, brokers are looking to diversify into other financial products, like insurance and financial planning, which may offer higher commissions, and a more stable market. Lastly Some brokers are specialising by focusing narrowly on a particular customer segment or product area, allowing them to maintain rates by offering a more customised service.

Datamonitor notes that some industry observers expect the mortgage broker industry to make a strong comeback when market conditions improve. At the same time, federal regulation of mortgage brokers is being introduced by the Federal Government in 2009 and the endresult of these trying times could well be a stronger and more transparent broker industry, providing more and better choices to consumers.

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