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Banks vs bond originators – Which offers a better deal on your home loan? ( Part 2)

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The Press has recently had another look at Originators vs Banks and the articles have become well-publicised. A link to the MONEYWEB Today article is  below for your convenience.

In my first blog of this 2-part series, I covered the history of the banks and their homeloan businesses culminating in the business model of homeloan consultants who called on estate agents and paid small commissions for their business. In 1999, the landscape changed again.

MortgageSA and PA Homeloans, [now, ooba and BetterLife] began to slog it out in the market and were later joined by the ex-NBS team in the form of Bond Choice. The three originators, made hay while the sun shone and decimated the bank homeloan sales forces. In this context, just a brief note on the so-called “love-hate relationship” between the banks and originators. Bear in mind, I express my personal views and, in doing so, fully accept that I may have people who disagree with me.

In 1999, if the banks wanted to retain their own dedicated sales forces into the market, then what they did was difficult to understand. Any amount the banks paid to the new originators that enabled the originators to pay the estate agents more than the banks’ 0-0.3% was destined to disintermediate the banks from their estate agent relationships. No profit-orientated business person would walk away from a higher homeloan introductory commission – the end of the bank homeloan consultant was in sight from the beginning. To keep it simple, let’s say the originator commission was 2%, then the originator could pay 1% [anything more than 0.3% was good enough] to the estate agent and keep 1% for their consultant, overheads and profit. Throw the dramatic property market upturn of 1999 to 2007 into the mix and the stage was set for massive change. If there is love-hate, the banks can be forgiven for giving away their direct right of access to the residential property market. No wonder they might feel aggrieved. By the way, the banks’ commercial property divisions did not follow their residential counterparts’ leads and to this day, have a small broker component with the majority of business coming directly.

On the other hand, what the originators did to the banks was unacceptable. One thing an originator cannot argue, morally or contractually, is that they do not take the risk of the homeloan. Controlled by onerous Banking legislation which incorporates capital and informational requirements, the banks proceed to approve the homeloan application and then administer it and its risk for the lifespan of the loan. Every event of the customer –  death, joblessness, errant credit behavior, over-indebtedness, interest rate increases – is felt by the bank and worked through for 20 to 30 years.

Let’s never forget that banks are fiduciary institutions and, as channels of the nation’s savings, bear responsibility to depositors to give them their money back with interest, and on time. I always say, a bank’s name is spelt, T-R-U-S-T. Break that and you break everything. In the light of this view, the behaviour of the originators was sometimes arrogant and demeaning to banks. All of us had a role to play in the response eventually taken by the banks to bring the industry into line. Just the practice of “shopping” to every bank willy-nilly was unacceptable. The average conversion rate of 18% was in poor taste and mathematically boiled down to 4 banks divided by four submissions of the same deal less NTU’s; plus-minus 25% – 7% = 18%. What a waste of admin capacity, time and money.

With these strong views as both a banker and an originator, I read the article below and make some pertinent comments in closing.

Banks deserve the utmost respect of the originators. They carry the risk for the lifetime of the homeloan in the face of increasing compliance legislation. Nothing or no one in origination should be allowed to treat this responsibility lightly.

In turn, banks benefit from a variable, once-off commission, or introductory fee if you prefer,  at a rate they have calculated over years and agreed contractually. Some points bear emphasis:

  • As a variable rate, the banks bear no overhead in the ongoing acquisition costs of the originator. They have effectively curtailed the fixed cost, fully absorbed nature of their homeloans’ acquisition. That’s good business.
  • The use of Comcorp and the originators’ own platforms radically reduce homeloan processing costs.
  • I contend that the current commissions paid to originators are not only variable but also less than the fixed cost, let alone the fully absorbed fixed cost, of acquisition for a bank. In this regard, it is no accident that insurance companies have long embraced the broker model and latterly only, the digital platforms, even in the face of their broker strategies.
  • Sensibly, a bank would outsource to a responsible origination force but for the relatively few customers who insist on dealing with bank-branded homeloan consultants in specific higher net worth channels.
  • The banks will never outsource their credit evaluation models. The seduction of lower costs is far outweighed by the risk of manipulation. On this front, banks’ fraud protection units are critical to combating this scourge in financial services. Regretfully, this stance will always mean a higher cost of delivery but no bank can be blamed for holding credit quality as sacrosanct to itself.
  • Origination exists because the banks want a secure, reasonably priced, variably-costed channel. In doing what they did with the average origination commission, the banks effectively stabilised the industry and made it sustainable.

 In turn, the originators have a compelling proposition. It is simply this:

  • The originators provide Choice in a financial services industry awash with options. Choice of product, institutions and interest rates. I am often asked if I “get the best rate” and my answer is No, I get the best credit terms. What I mean by that is, does a customer want Prime-0.5% with a 10% deposit, or Prime+0.5% without? That is Choice in action; the customer’s call. I have the chance as an originator to present such options repeatedly and from different banks.
  • The originators provide Convenience. At the offices of their agents, in the homes of their customers, over the phone with attorneys, linking with bank assessors – origination consultants do an incredible job Conveniently. Their costs are their responsibility and they are paid on success only – like estate agents, true entrepreneurs who start every month from scratch.
  • Originators are Experts. Because they only do homeloans, origination consultants, many of whom came from the banks in the first place, are steeped in homeloans. This expertise, coupled with close networks with principals, developers, conveyancers, assessors, bank representatives and insurance specialists, is brought to bear in the submission of the homeloan application. Such dedicated focus is rare in retail banking today. It’s quite correct, as one of the experts in the article below mentioned, that origination consultants have an excellent idea where to place a particular customer’s homeloan for best results.
  • As regards interest rates, I sense that customers are viewed by the banks for pricing in sophisticated pricing models and that little deviation occurs from it for the sake of an originator’s customer. On the other hand, I’m not convinced that customers get better rates by going direct – the full absorption cost of a bank would probably make sure of that. As a result, an originator’s ability to consistently get better rates for their customers will remain confidential to the banks with much annecdote around it. One thing is for sure though, a hungry, commission-driven originator consultant will fight tooth-and-nail for her customer.
  • Finally, the customer gets all this for Free. That’s the biggest factor in favour of the value proposition of origination. You don’t pay at a bank either if you go direct but the cost of time parking, in queues, the car guard and the paper trail all add up.

Now let me sum up. The history of homeloan acquisition is interesting and its evolution has netted for South Africa one of the most effective homeloan businesses in the world. The banks spawned origination when they bought the origination proposition. The originators have taken hard knocks to reach the point at which their industry is attractive  to the banks as viable and sustainable with acceptable credit and fraud risk in the process. It would seem, like many new industries, the origination industry has matured into a worthwhile business proposition and partnership with the banks.

Love-hate? I guess not. Partnership is more how I like to think it; built on mutual respect, a desire for long-term sustainability and cost effectiveness.

Here is the link to the article on Moneyweb – Banks vs bond originators – Which offers a better deal on your home loan?

Want to know more about the services Bond Originators offer, Get in Touch

 

Banks vs bond originators – Which offers a better deal on your home loan? ( Part 1)

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The Press has recently had another look at Originators vs Banks and the articles have become well-publicised. The MONEYWEB Today article is copied below for your convenience.

Looking at it and the articles received courtesy of ooba Marketing, I am excited again to write about the phenomenon called Origination. I will spill over into two articles.

I have an uncle who quotes: “Life without history is no life at all,” so let’s go back a little…

In 1999, origination began with an offer by Standard Bank to MortgageSA to pay a commission for completed bond applications. This event spurred the Property Association to become involved in the industry. In those days it was called Bond Broking but the word, Origination, was eventually adopted from the American term.

The Americans had a different means of origination which has never taken hold here and probably never will. In their case, Fanny Mae and Fanny Mac, their great executors of The American Dream, were established as the conduits of the Nation’s savings into home ownership.

We have much to thank the Americans for when it came to South Africans being brought up to believe that home ownership was an important step in “growing up”. “You need to buy a house”, your mother would tell you. In order to garner home loan applications that could be discounted into the companies, both Mae and Mac set up Originators and Servicers [two terms still used in the Securitization industry today].

The originators did what we do – called on the estate agents, completed the application and submitted it to the Servicer sometimes via the credit score of the company, or the Servicer did the credit approval. The Servicers captured the application and administered it for statements, arrears, upgrades and all payment calculations.  The point is that Mae and Mac both had similar models and outsourced their homeloan acquisition and servicing to Originators and Servicers. In this model lay the seeds of the disgusting practice of black-box finance that eventually lead to the Sub-prime crisis that brought much of the World’s economy to its knees in 2008-2010.

What the originators and servicers did was reason that it was silly to administer home loans one at a time when you could package them as a portfolio of risk and then just sell them in billions of Dollars at a time to banks, and Mae and Mac. The premise was simple, “you can’t lose on property” so who cares about affordability, you just repossess the house and get your money back.

Problem is that when lots of houses come back at the same time, property prices collapse. Then the financiers, wooed [greed was alive and well] by market share and interest earnings, took away deposits and over-lent on properties. 30 year fixed rates at less than 3% were marketed so you were crazy not to borrow against your house. What mayhem followed! Our banks over-reacted though as the tsunami of negative sub-prime sentiment swept across the finance world and, in many ways, changed the landscape of mortgage finance completely. By the way, “sub-prime” does not mean “less than Prime interest rate”, but rather it is the term given to assets in a portfolio which are “less than their best” ie “below being “prime” assets in value”.

So why do I say “has never taken hold here and probably never will”? Our banks are multi-product institutions which are fully integrated from an administrative point of view. They do not need Servicers as their Operations departments are effective and efficient in multi-product administration and, legally, it would be very difficult and unacceptable, for our banks to sub-contract affordability which has now become law through the National Credit Act.

I remember once talking on World Report, a global BBC phone-in programmer, and being slated by an American guy who described SA as a nanny state because we have affordability guidelines and laws that govern how credit can be lent. Shame for him, as two things saved us in Sub-prime, one was that we have always been strict on affordability and the second, that we never conducted black-box securitisation in SA and were somewhat restricted from investing in such homeloan portfolios by our foreign exchange regulations. Thank Goodness!

Back to local history. In the 1960’s bank capital was scarce and the South African Reserve Bank held tight reigns on the banks and building societies. At that time, estate agents brought their completed bond applications to the Building Societies’ branch managers and then vied for the available capital of the day. I can even recall my Dad selling a house in Amanzimtoti and giving his buyer a “collateral” bond. This meant that the seller forfeited some of his sale price, 5 or 10%, to help the building society with capital to finance the bond for the buyer. This process revolutionised with the demise of the Building Societies Act and the modern Banks Act in 1973.

Banks could then more freely access capital and began to do their own homeloans – ABSA and Nedcor were born out of this huge change in legislation. It took Dr Theo Wasserman, CEO Trust Bank, to change the bond acquisition landscape for keeps. He decided to deploy smart looking “home loan consultants” to call on estate agents and canvas business. Their claim to fame was simple: “We come to you and take all the paperwork away.” No self-respecting estate agent would say no to that  and so the other banks followed suit and home loan sales forces were born. It truly was a brilliant move by Trust Bank which was, as you know, eventually absorbed into ABSA. The consultant salesforce model prospered right up to 2000 and were eventually paying between 0-0.3% for bonds for their respective banks.

Now that I have completed dated myself, let me conclude this first blog post saying that the love-hate relationship purported between the banks and the originators has been fantastic for the home loan industry in South Africa. More on that next week……….

Here is the link to the article on Moneyweb – Banks vs bond originators – Which offers a better deal on your home loan?

Want to know more about the services Bond Originators offer, Get in Touch