Initially little more than an administrative overspill facility for mortgage lenders, the packaging sector has been forced to redefine itself this year as the mortgage industry has adapted to differing market conditions and challenges.
It is not so much that packaging per se has changed, but the expectations of what a packager will provide and how it can help both intermediaries and lenders with their businesses has increased this year. As such there have been multiple cries of ‘the end of the packager is nigh,’ and for those refusing to adapt how they do business, or change to meet the needs of intermediaries and lenders this is no idle threat.
Steve Scholes, director of Scottish Life Mortgages (SLM), could not be more to the point when he comments: ‘Simple packaging will not survive.’ According to Scholes, it is imperative packagers offer ‘whatever the intermediary needs’ to help their business do better and sell more products.
This takes form in many ways and many packagers, including SLM, have now put, or are putting together propositions to help intermediaries with marketing and business management, as well as organising events to bring lenders and intermediaries together.
Reap the rewards
Clearly these propositions are not suitable for everyone in the intermediary market, and packagers have had to be wary of imposing themselves onto larger operations that already have their own in-house departments. However, for the smaller intermediaries, the benefits can be huge and offer a means of improving their business that simply would not have been affordable on a unilateral basis.
With regulation stampeding its way into the intermediary market, compliance costs are a real worry for firms, and this is an area where packagers are trying to prove they can really help out. Many are, or have already, developed compliant software that will ensure all applications meet incoming standards, and can also provide help in sourcing mortgages and generating leads.
Matthew Bright, managing director of packager, Optoma, says his company has spent around £250,000 developing its software which will be made available for free to registered brokers.
While Optoma will take a fee for any business the broker puts its way when using the software, Bright says intermediaries can still use the software as a free compliance tool, before submitting business direct to lenders, although clearly he hopes this is not the model that takes dominance.
For many, and especially those in the smaller organisations, spiralling professional indemnity insurance premiums have been a cost that has threatened survival. If intermediaries can gain access to such systems it has to be of benefit to them, although it will take time to assess whether compromises have to be made with their businesses and to what extent.
Next year developments in technology are going to have an even greater impact on packagers and the benefits they can provide to both the intermediary and the lender.
Ian Balfour, marketing director of Solent Mortgage Services, comments: ‘Over the next year I see the main changes being a heightened focus on improving technology and the speed of the process. This means working more closely with lenders, interfacing with their systems, and in general becoming more streamlined and integrated.’
Time is money
For lenders to invest this time and money in creating closer links with their packaging partners, they are going to want certain volume and quality levels to be in place, which is going to have an increased impact on the relationships that packagers and lenders enjoy next year.
Victor Jannels, managing director of AtoM Express and chairman of the Professional Mortgage Packagers Association (PMPA), agrees. Many lenders are moving towards a situation where they will only deal with what he calls the ‘high quality, high turnover’ packagers. He foresees a volume threshold of around £10m per packager coming into play and although for many this will be no problem, the smaller outfits may struggle.
With margins now being squeezed lenders simply cannot afford to pay for underwriters to be in packagers’ offices and compliance measures to be put in place if they are not going to get the return business, let alone for IT developments and links to be established with all the packagers they currently deal with.
Exploring other avenues
As such it seems consolidation is set to be a major factor for packagers in the days ahead, although what form this will take is not clear. Some have suggested a raft of simple takeovers, but there has been little such activity to date and rumours of future deals are scarce on the ground. One possible development in the market may prove to be what Jannels calls ‘satellite packaging.’ As the drive to achieve volume continues, smaller packagers may ‘piggy back’ onto the larger outfits and deliver their business into them before being passed on to the lenders. Nothing concrete has yet been established, but according to Jannels, it is one of the options being explored.
However there are concerns and Bill Dudgeon, managing director of sub-prime lender, The Mortgage Business, says he would be wary of such a move.
He says: ‘Satellite packaging could actually dilute the offering and as a lender I am not sure if we would like to see this happening.’ He feels that if a partnership deal has been established with a certain packager, then they should be bringing the business in through their own channels to ensure it meets the quality controls in place and not relying on others to deliver it.
One key development this year has been the establishment of the Mortgage Distributors Co-operative. Packagers involved are Pink Home Loans, Genesis Home Loans, ICMG, Mortgage 2000, Solent Mortgage Services, BDS Mortgage Services and The Mortgage Operation (TMO).
The idea is to get funding from lenders and then securitise the books of business after the mortgages have been completed. For the lenders large-scale distribution is the attraction, while the packager will be able to have more control on the design and completion of the products.
Plans are still at an early stage and Mark Howell, marketing manager of Pink Home Loans, says it will take some time to see exactly how things work out in the final model.
However, Balfour believes it should further improve the products and services available from packagers. He says: ‘It is an innovative concept of distributing products that should result in keenly priced products to the benefit of the consumer.’
Packagers are clearly aware of the volume issue and want to increase the control they have on the products being offered and the time it takes to complete the applications. Jannels refers to the Co-operative as being: ‘A step further down the road from branded lending’ and expects there may be other such initiatives as the possibilities are explored.
As Balfour comments: ‘The biggest positive change over the last year is having more control of the mortgage process to completion in the form of branded lending. This has been a good thing for the broker who will have seen processing time decrease significantly.’
As packagers begin to leverage the power their distribution networks have it seems likely, as Jannels believes, more such ventures will be brought to the market.
Although the packagers have acted as an outsourcing operation for the lenders, and helped them avoid having to hire and fire staff according to changing levels of business, packagers themselves are having to ensure they do not scale up and face being left over staffed.
To this end, Stuart Johnson, director of product development at TMO, says this year has seen the business split into a packaging operation and its Lender Direct club, which allows intermediaries access to lenders without TMO having to take on the administration of the business.
From the lenders’ point of view, Dudgeon agrees more business has come in direct at TMB and hopes technological advances will allow lenders to deal with this influx of business in a fast and efficient way, without the need for burgeoning staff forces.
The ability to integrate new technologies and maintain scale, service and efficiency is going to prove key for both lenders and packagers as further pressures come from the new regulatory environment and tighter margins. In a constantly changing environment there is going to be no place for those that choose to stand still.
Edward Murray is news editor
Packagers will have to continue to adapt and evolve their service proposition to survive.
The need to deliver larger volumes of business will push consolidation in the market.
Technological improve- ments should begin to help speed up the packaging process and improve accuracy levels.