November 2015 saw a major upheaval in the usually unremarkable world of wholesale funding: the departure of Firstmac. Kim Cannon’s non-bank lender had its own reasons of course – the expansion of its directto-broker and direct-to-consumer arms – but Cannon cast doubt on the entire wholesale funder–mortgage manager business model.
Low margins and fierce competition meant there was no space for “another mouth to feed”, Cannon warned. “I think the nonbank mortgage manager space has had its day, unless ... you’re doing something specialised like subprime lending or you’ve got either a retail offering or a unique connection with somebody who is referring business to you.”
It’d be easy to dismiss Cannon’s comments as bluster – a cover for Firstmac’s changing business model. Yet those comments reflected a very real tension that has been building for years in the wholesale funding sector, between traditional mortgage management and the development of white label products. This tension has now come to the surface and, combined with regulatory changes, means that the wholesale funding space is changing faster than at any point since the GFC.
MPA talked to four wholesale funders about whether traditional mortgage management is on the way out; how they’re navigating regulation; and what the sector will look like 12 months from now.
Solutions-based mortgage management
Clearly, mortgage managers presently play a major role in the industry. Deloitte’s 2016 Australian Mortgage Report noted that “the largest non-bank lenders in Australia continue to have strong support from ADIs, with healthy warehouse capacity and a proven track record of delivering on their issuances, including calling all deals on time”. However, the report added that “for nonbank lenders, while still largely reliant on wholesale markets, the opportunity continues to be in the near prime rather than prime sector, where a premium can be priced-in, due to less competition from the banks”.
RESIMAC Financial Services is an example of a wholesale funder prospering in this space.
Mortgage managers are “still a very important distribution channel for us”, says Daniel Carde, director of product, marketing and strategic partnerships. “When you partner with several of them it allows you to reach the panels of all the aggregators.”
RESIMAC aims to fund a comprehensive range of products, from prime to specialist to SMSF, in order to harness changing appetites, explains Carde. “Not all mortgage managers used to embrace specialist lending; they have now, and that continues to grow.” In this environment, says Carde, funding is about creating solutions. “We actively seek them [mortgage managers] out, and they actively seek us out to fill a product gap.”
Mortgage managers who can create solutions are those who are best placed moving forward, believes Adelaide Bank’s general manager of third party mortgages, Damian Percy. “Partners who are able to transform the products we create and align it to customers have always had a good business and will continue to do so.”
Basic resellers, however, are “an additional mouth to feed”, says Percy, who argues that these resellers will be at risk long term. He also notes that the mortgage managers currently thriving in the market are adding value, despite being disadvantaged by the current economic climate. “When rates have been so low for so long, and prices have been driven so low, it’s difficult to offer a premium service proposition, but these things are cyclical,” Percy says.
Wholesale funders’ need for control
Mortgage managers are not of course the only subject on wholesale funders’ minds; they need to consider a range of developments. MPA spoke to Pepper’s Mario Rehayem, director of sales and distribution. Rehayem believes there will “always be a place” for traditional mortgage managers with their own customer service, collection and credit infrastructure, due to broker and customer loyalty.
That said, Pepper now does all the underwriting on its loans, and doesn’t give out any delegated lending authorities (DLAs) to mortgage managers, which means Pepper’s products are closer to white label products. While a double-up of credit teams improves quality, it may not be sustainable, explains Rehayem. Mortgage managers “will be challenged, and the reason they’ll be challenged is purely on the cost-effectiveness and the minimal margins associated with carrying such infrastructure, when most lenders feel more comfortable holding their own DLAs than giving them away”.
This is the challenge mortgage managers face: continued performance won’t entirely protect them as wholesale funders look to exert more control and consider new strategies. In Pepper’s case, this control has given them additional confidence as ASIC reviews remuneration, notes Rehayem. He says “Pepper has never been in the market when any mortgage manager has autonomy to increase or decrease a borrower’s rate on a case-by-case basis”. The funding appetites of Adelaide Bank and Advantedge, which is wholly funded by NAB, were both directly affected by APRA’s limits on investors (and the banks’ continuing distaste for specialist lending), while RESIMAC and Pepper say they also try to follow APRA’s directives.
Ultimately, there are two forces at work in mortgage management: the economic climate, which pushes mortgage managers towards specialist lending; and the strategies of wholesale funders. For Brett Halliwell, general manager of Advantedge, this is why mortgage managers, despite continuing to be important and a “heritage of the business”, are declining as a proportion of Advantedge’s lending. “They’ve been tending to work with lenders in the market who may be tending towards the specialist space … to an extent we’ve gone the other way and become more about core lending to the mainstream mum and dads, backed by strong rates,” Halliwell says.
WHO FUNDS THE FUNDERS?
White label’s ‘coming of age’
MPA asked our wholesale funders where they’re getting their funds from:
-80% retail depositors
-Listed on the ASX
-100% funded by NAB
-Funded by CBA, NAB and Westpac banks
-Listed on the ASX
-Securitisation – in May 2016 Pepper completed the largest non-conforming RMBS deal in its history, and the largest in Australia since 2006
-Warehouse lending: RESIMAC borrows funds from CBA, NAB and Westpac, which it uses to create its products. The funds are repaid when RESIMAC securitises the loans
All the wholesale funders MPA talked to have white label brands, so it’s important to not only consider what might be pushing them away from mortgage managers but what’s pulling them towards white label lending. Two conclusions of Deloitte’s mortgage report stand out here. Deloitte’s panel of industry experts flagged “broadening value chain capture”, a category that includes white label, as the biggest opportunity for brokers in the next three years. Secondly, when asked what features would guide consumers’ selection of mortgage products, ‘brand of provider’ was the panel’s least popular answer.
The last 12 months have certainly seen an upsurge in the availability of white label products. Advantedge alone created five new brands, partnering with AFG, Connective, Astute, Loan Market and LJ Hooker. This, says Halliwell, represented an important move beyond their historic base of NABowned aggregators PLAN, Choice and FAST, and a new stage for the lender. Advantedge claims the proportion of brokers with access to its products has increased from 40% to 80%; correspondingly, NAB’s lending through the broker channel grew 12%, driven by a 14% increase in white label settlements. AFG’s white label home loans division played an important role in AFG’s increased halfyear profits, announced in March.
Advantedge boss Halliwell is enthusiastic about white label’s expansion. “Advantedge really has become a mainstream lender in its own right; white label has become a popular and well-accepted feature of the broker landscape … it’s really come of age to the point where we are a second-tier lender in our own right.”
Diversity (or lack thereof) in the white label space
Whether or not you agree with Halliwell, if wholesale lenders do want to promote their products as second-tier competitors, they face a number of challenges. The first relates to the range of white label products and their ability to fill niches.
“With most of these models the pricing’s identical, the service proposition’s identical,” says Adelaide Bank’s Percy.
At last year’s MPA Aggregator Roundtable, aggregator chiefs talked about features rather than just competitiveness. Connective’s Mark Haron said they were looking at “stronger, more unique products … as opposed to the standard banking offerings”.
Rehayem believes Pepper’s white label products have the diversity brokers are looking for. The same cascading product application form is used for both Pepper-branded and white label products, so borrowers who aren’t eligible for prime products are automatically transferred to near-prime and specialist options without having to reapply. “It gives comfort to both the borrower and broker,” Rehayem argues, “that this application will maximise their chances of getting a conversion, rather than going into a monoline policy with other funders.”
Pepper and RESIMAC have the ability to lend in the specialist space, but creating diversified products is more difficult for a funder like Advantedge, which is bound by NAB’s lending parameters. Yet Halliwell claims Advantedge offers – and has always offered – more than mum-and-dad loans. “Something which is possibly not so well known in the market is we have a personalised lending team [PLT], and they regularly do very large, complex transactions,” he says. The PLT deal with applications from $1m to $5m and above, involving multiple trusts, companies and securities.
The challenge is to convince brokers that Advantedge can handle these types of loans, Halliwell explains. “The journey for a lot of brokers tends to be they start to use us with the more basic mum-and-dad loans; they get to know us, they get to understand us and are increasingly confident and aware of what we do. We then have a conversation: ‘You know what? Our offering can certainly go a lot wider with that’.”
The key to creating unique white label products could come from the experience of mortgage management. In August Adelaide Bank will trial a new range of white label products, Percy says. “We’re working with a number of partners around migrating to a mortgage manager type model to a white label type model, and that’ll be a test of the economics and whether they work.”
These products will allow more customisation by brokers and aggregators. “We’re hoping to keep some of the characteristics of mortgage management,” Percy says. “Partners can bring some of their own brand and style and differentiation to the private label type model.”
White label and remuneration
One group that appears to agree with Halliwell’s ‘coming of age’ prediction is the regulators. The Final Scope of ASIC’s remuneration review was published in May and announced the inclusion of white label within the review. ASIC will also consider ownership structures and non-monetary benefits: all concerns for lenders and aggregators who are trying to raise awareness of white label products.
However, the wholesale funders MPA talked to did not appear concerned. “The broker commission we pay is equivalent to other lenders in the market,” explained Advantedge’s Halliwell. “The way we compete is offering great service, turnaround times, commerciality in our underwriting and the relationships with BDMs.” He added that Advantedge “never push or expect brokers to write white label because they happen to be affiliated with an aggregator”. Pepper’s Rehayem and Adelaide Bank’s Percy also don’t believe ASIC will find reasons to make changes to brokers’ remuneration.
Looking in different directions
For wholesale funders, the challenge of the next few years will be about allocation of resources. Not only do they need to balance mortgage managers and white label funding, but they’ll also need to consider their directto-broker and direct-to-consumer brands. “There’s still a lot of space for white label,” insists RESIMAC boss Carde. What RESIMAC is currently doing is customising RESIMAC-branded products for different aggregator panels.
Where white label products are near identical to a lender’s branded products, a different perspective is required. When it comes to Pepper’s branded and white label options, Rehayem believes that brokers “will vote with their feet”. “If they want to use a Pepper brand they can, or if they want to use a brand that’s more familiar to them or fits with their branding strategy they can go down the white label route.”
Halliwell emphasises the role of white label in branding strategy: “The lack of a well-known consumer brand is a way to enhance a broker’s own brand … if the consumer receives a great product and experience, that validates their decision to go see the broker in the first place because they’re getting something the consumer couldn’t have gotten themselves.”
For futurists in the industry, including Deloitte’s industry report, attention to branding has a logical conclusion: brokerages could potentially offer their own white label products. Indeed some national franchises already do, including Aussie, Mortgage Choice, LJ Hooker and Loan Market. However, the wholesale funders MPA talked to were divided on the prospect.
Adelaide Bank’s Percy believes individual white label products could happen, but may take a while. “Branding is costly,” he says, “and like most things these days the cost can come down as technology improves. It’s not impossible to imagine a world where most of the correspondence and branding is electronic and might enable individual loan writers not so much to have the product customised but the visuals and the branding, but it’s probably a fair way off.”
Advantedge is warier on the subject. Halliwell says individual white label is “not something we’re particularly keen on pursuing. We invest a lot of time, effort and money to get the consumer and broker experience right”, such as by producing highquality marketing materials. “Doing that at the individual broker level would mean we’d be unable to make that investment.”
For once the analogy applies: wholesale funding really is at a crossroads, because wholesale funders have a choice of several business models, many of which can be combined. Mortgage managers continue to offer solutions in specialist and custom lending, but an increasing acceptance by brokers of white label, as well as the branded products of wholesale funders, demands attention, suggesting that the upheaval in wholesale funding won’t be ending any time soon.