KGB TV: Michael Russell
Mortgage Choice CEO Michael Russell tells Business Spectator's Alan Kohler and Stephen Bartholomeusz:
Stephen Bartholomeusz: Michael, interest rates are finally on the rise. Has the enthusiasm with which people have approached the first home buyer’s grant created a scenario where we could have a real issue in the housing market?
Michael Russell: Are you talking from an affordability perspective?
SB: Absolutely and the potential for people to default.
MR: Yeah look, they are obviously historically low and I don’t think anyone’s predicting that they’re going to move materially to the point where they cause a huge amount of discomfort for home buyers. That said, the Australian banks have continued to be very diligent with their credit assessment of borrowers and since the GFC, they’ve certainly tightened up their credit. As well as reducing the loan devaluation ratios, they’ve reintroduced the minimum savings requirements and I think these things will continue to insulate first home buyers for some time. Now, I don’t know how high interest rates they are going to head, but I think they’d have to move substantially before they really started to impact first home buyers.
Alan Kohler: What did you notice happening in the beginning of this month when the interest rates did go up? Did you notice a change in the market?
MR: No. We haven’t seen anything yet in terms of demand. We’ve probably – over the last six to eight weeks – started to see a slipping of first home buyer demand and we’re not sure if that’s come about because the first part of the boost has been removed or that has come about because the lenders are certainly tightening up with their genuine savings requirements. That's meant a lot of the first home buyers are having to be put on savings programs before they can come back to us and get a loan. So, I guess it’s a little too early. If if rates move again next month, I guess that’ll be the real test, but what we’re seeing is still strong demand from first home buyers and we think that’ll continue up until the last part of the boost expires at the end of this year and I guess then we’ll be able to sit back and really measure what’s going to happen thereafter.
SB: Michael, your volumes have held up reasonably well throughout the period of the crisis.
MR: Yes.
SB: How much of that was due to the first home buyer’s grant?
MR: We can be very thankful of the grant. There’s no doubt about that. That said, our volume has remained relatively steady. Mortgage Choice, over a fair period of time, has had probably a slightly higher reliance on first home owners than say our competitors or the banks in general. We tend to have around about forty to forty-two per cent of our loans written to first home buyers, so that’s been fairly consistent right throughout the GFC. But there’s no doubt about it, we’ve had good constant demand from that particular market segment because of the grant and in particular because of the boost. They have probably displaced our residential investment clients, albeit what we’ve seen over the last six to eight weeks is certainly a return of investor enquiries into the market. I think they’ve found it very hard over the last 12 months to get into the market at property prices up to that $700,000 or $800,000. That market has really been the sole domain of first home buyers.
AK: In fact, the property market seems a bit hot at the moment. Have you seen that reflected in loans?
MR: Absolutely. We’ve kicked off this financial year with a couple of really strong approval months, approvals over a billion dollars which for Mortgage Choice takes us back to pre-GFC enquiry levels. Certainly the last three or four weekends have been huge in terms of auctions. And I know in Melbourne, I think they reported over a thousand properties listed for auction and with clearance rates of 82 and 83 per cent, we’re definitely seeing a return to some very strong housing periods.
SB: Michael, one of the interesting things about your performance last financial year was the apparent lengthening in the maturity profile of your loan book. The run-off was slower than it would normally be. Was that a direct response to the crisis and were there any other things that occurred in your business that you can attribute to it?
MR: Yeah look, that was a really pleasing result. We hadn’t had Deloittes look at the performance of our loan book for a number of years and we knew that our loans were stickier, we knew that our run-off was certainly reducing. So when they came back with their analysis and showed us that our existing loans were now out just over four years and four months and our new loans that we were writing were over five years, that was really pleasing for us. Now, we obviously put it down to a combination as you alluded to the fact that people are not getting their homes valued from a refinance perspective. They haven’t done that over the last 12 months for obvious reasons, so we got some stickiness there, but we’d also like to think that Mortgage Choice has been around for 16 years, we’ve got some very experienced brokers within the company and we’d like to think we’re now writing loans that actually really suit our clients requirements and are sticking.
SB: Are you saying that people are withdrawing less equity from their homes to spend on whatever they spend their funds on?
MR: No, the redraws are not affected, but in terms of the refinance activity, refinance enquiries, we have seen a definite lull in the refinance activity that’s taken place over the last probably 18 months. I think most home buyers have recognised that it wasn’t the right time to get their homes valued and look to refinance or to actually increase their borrowing levels, but in terms of clients that had capacity in the redraw that I don’t think has been affected.
AK: The banks were talking about putting the screws on mortgage brokers and cutting commissions. Is that what’s happened?
MR: Look, we’ve had that to tackle or to deal with for the nine or ten years I’ve been involved with the channel. Certainly it has happened. I think it was April 2008 we saw Westpac make the first decision to cut commissions. The good news from the industry’s perspective is they remain the floor price at fifty and fifteen points. All of our other lenders certainly took the opportunity to re-engineer their commission models and that has resulted in certainly a reduction in our overall gross upfront and trail commissions that we do receive, but since that first resettling took place we really haven’t seen much past that. And we’re fairly confident that the lenders reset their economics at the lowest point, at the lowest ebb of the GFC and we’d like to think that that’s where it will stay. We don’t think we’re going to see a recurrence of what we’ve just seen for some time to come and I’ve had a number of reassurances from our major lender partners that the commission metrics that we’re operating within now are not a concern for them.
SB: You lost fifteen , twenty basis points up-front and about ten basis points on the trail. What impact did that have on the business and how have you re-engineered the business to cope with that?
MR: Look yeah, we have. Our up-front hasn’t come down quite that much. Our up-front has come down to about sixty basis points and seems to be holding at sixty basis points. At trail is where we did get whacked and we were receiving around twenty-five points up until this financial year obviously, which was the first financial year of having to absorb it all. What hit Mortgage Choice quite hard was that our gross lender, our trail commission for new loans fell to somewhere around eight and a half points and that was a combination of our largest lender also being the lender that paid us zero trail in the first year. So that eight and a half basis points is starting to trend upwards now and we think we’ll be back at around fifteen points at the end of next financial year.
What we’re trying to do is certainly put great effort into re-engineering our business and I guess the focus for the business going forward is broadening our offering to our customers and the GFC and the commission reductions have been a good kick in the tail for us. It’s really woken us up and we now recognise we’ve got some really good relationships with clients that are repeat clients at Mortgage Choice, so we’re looking to broaden out our offering to them and we’re making some really good inroads in areas such as life insurance and asset financing, personal loans, house and contents insurance.
I guess what we’re trying to do now is really compete with our lenders head-to-head on share of wallet. And I know last month we sold well over five hundred life insurance policies and we think we’ve got some really exciting initiatives to broaden that further.
AK: How are you getting along with the banks? Are there some banks that you have a better relationship with than others or some banks that are more interested in using brokers than others?
MR: Absolutely and I think it’s always been that way and you find that banks often come into the market, come into our channel, and show us a lot of love and affection because at that particular time they’re looking for a spike in the mortgage loans that we introduce to them and then they might go through a period where they really contract credit or what we’re seeing at the moment. They might have funding constraints where they don’t want to show us as much love and affection.
But certainly, the banks that have been in the channel for a long time and have built really mature businesses on the back of the clients that we introduced to them, built really robust systems to reduce their origination costs. They really haven’t changed in the way that they transact with us and we’ve certainly found that the big four banks are still very keen for us to introduce good quality business to them.
AK: So, the big four are all using brokers strongly at the moment?
MR: Yes. Absolutely and I guess one of the topical issues of late has been NAB’s purchase of the Challenger business and I’ve gone on record and am quite happy to say that we’ve been a little disappointed in NAB and the way that they’ve run their third-party business in recent years. NAB have only ever had a penetration of around twenty per cent through the third party, yet, the other banks are certainly up to double that number and what’s been really pleasing out of this whole acquisition is that NAB have finally recognised that a third party business is good business and if they price it right and they built good, sturdy processes that third party businesses are good business to be in. Just in the last couple of months, we’ve see some really terrific initiatives from NAB and are hoping to do a lot of business with them going forward.
SB: Michael, apart from NAB acquiring Challenger, we’ve seen Wizard disappear into the major banks, Aussie [Home Loans] get close to Commonwealth Bank, two regionals acquired.
MR: Yes.
SB: Is that having an impact on the third-party business?
MR: I think it has the real potential to. From a consolidation perspective amongst lenders, I have grave concerns, and I certainly have expressed those concerns to the ACCC, that I wouldn’t want to see any further consolidation amongst lenders. I think we’ve arrived at a pretty critical point now where we just should not tolerate any further consolidation in that space, because ultimately it’s the consumer and not only the current generation of homeowners, but future generation of homeowners, that are going to suffer if there is further consolidation.
I take you all the way back to ’81's Campbell Committee Report, which tried to address the problems of a lack of competition amongst banks back then and and I praise the government back then for recognising there was a problem and there wasn’t any product innovation and there was nothing too exciting on the home loan front back then and the government in their wisdom decided to really open up that market and issue all those new banking licences domestically and internationally and ultimately the big winner out of that was the consumer.
The consumer really has been spoiled with choice of lender and product and some terrific innovations around home loan products and I just worry that we’re running the risk a little bit of closing all that good work down. So, yeah I am concerned and I just hope that what we’re seeing at the moment is the worst we’re going to see and we can talk about funding, but I’m certainly looking forward to when funding does return and we can see these really entrepreneurial second tier lenders come back into the market place and create that necessary equilibrium again to ensure that we have a really robust competitive home loan market.
AK: What do you see in the future of the securitised mortgages business and can you see it coming back? What does the government need to do, if anything, to ensure that it does come back?
MR: I think it is starting to come back. I know Members’ Equity Bank have got two away. Yes, I think they were something around the order of 140 points above swap rate, which is a bit more than the ten or fifteen points they were being written at, but they did get two away. It’s really interesting that I think Australia has been the unintended consequence of what’s happened overseas to the mortgage market over there because, Australian residential-backed mortgage securities have always been much sought after, have performed very well. We’ve just been the unintended victim.
But what I’d like to see and what I’ve have been advocating for some time is that the Australian government really does step in to really provide that necessary support for the second tier lenders and the regional lenders and there’s a number of ways that they can look at doing that and it’s great to see that they’ve just released another $8 billion through their AOFM [Australian Office of Financial Management] program. I’m not sure how far that’ll go, but one of the things we’ve all got to look at is that we’ve got the futures fund with $64 billion of cash, albeit four of it tied of it tied up with Telstra, but $60 billion sitting there. We’ve got our superannuation industry with just over a trillion dollars sitting in it and one would think that Australian residential mortgage backed securities rated A would always be a reasonably sound investment and I think we need to give some thought to that. Yes, we can rely on securitisation to return and I’m sure it will in some format, but we probably had the solutions at our fingertips and it just needs some people a bit more creative and intelligent than me to come with the answers, but I think there is enough funding there to solve the problem.
AK: Thanks very much for joining us, Michael.
MR: Thank you.
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