With questions over service standards and impending regulation on the horizon there have been a lot of questions asked recently concerning the future role of packagers. One sub-prime lender has even gone as far as to suggest packagers are now simply ‘middle-men,’ who slow down the whole mortgage process. Is this just a generalisation or is it a fair assessment, and if it is, how will packagers survive the next few years?
Like any industry, mortgage packaging is a mixture of good and bad, and it is important packagers are not all tarnished with the same brush. Nevertheless, in the near future, the traditional role of the packager must evolve to be more in line with the needs of mortgage advisers and their clients. They must have a clear strategy and understand how they are going to build their businesses and differentiate themselves from their competitors.
If they do not they will find fewer intermediaries will place business through them. And with most prime lenders finally making the long-awaited investment in technology and the emergence of common trading platforms ‘ enabling brokers to submit applications online and receive offers in days not weeks ‘ why would a mortgage intermediary pass a prime case to a packager?
Essentially it is due to the service that packagers can provide in dealing with complicated cases and the exclusive mortgage deals they have with lenders. This has worked well for several years and the sector now accounts for a significant part of the industry. While it is difficult to quantify the size of the mortgage packaging market, given that some commentators do not recognise the role played informally by intermediaries, an analysis conducted by consultant KPMG has suggested packagers account for between £5bn and £15bn of mortgage lending per annum. It has also been suggested the market grew by around 35% during 2000 to 2001 and that this has been a trend for the past three to four years.
Whether this is set to continue is down to a number of factors. For example, consumer debt is increasing month-on-month and some first-time buyers are overstretching themselves to get on the housing ladder. In addition there has been a dramatic increase in the ‘buy now, pay later’ culture.
It is surely only a matter of time before we see a fall-out from this, culminating in an increase in sub-prime and niche lending. With a large percentage of the packager market specialising in these sectors, which are understandably more complex, these growth figures look likely to continue.
But it is not just niche areas that affect the future of the packaging industry. A lot of the larger established packagers evolved a long time before the emergence of the new sub-prime market. This has meant their key relationships with lenders are in the prime sector. They also have a strong core of loyal intermediaries who use them predominantly for their core, prime product range. But while their business volumes are high they do not necessarily return a good profit in relation to their turnover. Increased volume does not necessarily equate to increased profit.
With this in mind, smaller packagers will not be able to look solely at volume growth in order to survive. They will also have to concentrate on quality and profitability by analysing what makes them profitable ‘ volume prime mortgages or lower volume niche and sub-prime mortgages paying higher procuration fees.
Future regulation and the expected culling of poorly performing packagers by lenders will ensure those who do survive will be those who embrace change, invest in technology, employ quality staff to give quality service and therefore give added value to brokers and lenders alike.
The future of most packagers is surely not to look to offer a complete mortgage sourcing service, covering the whole market. They should recognise their strengths and, metaphorically speaking, be happy to sit behind the high street offering the broker a niche or sub-prime solution for their client. As these products are far more complex, sourcing and processing is a unique skill that cannot be done with any degree of certainty by software.
When completed correctly quality packaging provides an added value service to both broker and lender. The key is consistency ‘ delivering first time, on time, every time, removing the burden of routine administration from both broker and lender and ensuring cases are processed quickly and efficiently. The packagers who get this right will always be in high demand.
However, there will always be some brokers who would rather access the lenders direct. This is their choice but if a packager is good they should always be able to sell against this option. How can a single sub-prime or niche lender with one product range compete with a packager offering a wide range of products, from seven different lenders and all accessed with one generic application form? The answer is they should not.
That is unless the packager does not accurately, and at the first attempt, place the mortgage enquiries it receives, or it is slow or inefficient at processing. Either way, if it cannot compete with an individual lender then it is probably because it is not good enough at the things that make a difference to a broker. If a packager does the job it is paid to do, it will become an invaluable link in the mortgage placement and processing chain.
Furthermore, if a packager can get it right for brokers this will surely be reflected in the quality of business that is submitted to the lenders. Lenders are paying packagers a good rate to effectively outsource their marketing and administration functions. If the packager does its job well this money is well earned as it reduces the amount of time and effort the lender expends on making an offer.
The more efficient the packager is the higher its income level will be. Over the next few years packagers will have to look at how much time is spent processing cases that ultimately go nowhere and brokers will have to be aware of this.
Businesses with poor conversion ratios will not only reduce their chances of achieving profitability but will also place their lender agencies at risk.
If a packager does not consistently perform to the lender’s desired standards, the lender should have no hesitation in terminating its agency. After all, the packager is being paid to do a job that it is not performing.
If, in the future, lenders were to pay procuration fees based on the quality of packaging and higher conversion ratios it is likely packagers would work a lot harder to get it right.
The onus should be on the lender, as well as the regulators, to enforce minimum service standards on their packagers. After all, packagers answer to lenders and it is the packagers who provide essential distribution to them. This would increase the quality of packaging and in turn improve the markets perception of packagers.
Lenders will soon need to look closely at their packagers and see who gives them added value and who costs them money. If they are not receiving the right mix of volume and quality at the moment they should not hesitate to act.
Those packagers who produce the right mix of volume and quality will find their lender relationships far stronger. Lenders and their key packagers are now working closer together to ensure they both get the most from their relationship. This in turn benefits both the broker and the borrower.
By having an effective packager panel the lender can reduce the number of packagers it has to deal with to achieve the required volume. This means communication is more focused, more efficient and, most importantly, more cost-effective. As a result, stronger, more effective relationships will be forged.
A closer relationship helps when negotiating exclusive products, or when looking to develop further into branded or correspondent lending. It enables the packager to have even more control over the mortgage process and therefore deliver an improved level of service to its brokers.
This is also the lender’s way of guaranteeing distribution from a particular packager. But how far will this go? Will lenders look to take a stake in packagers? And if so, will it only be after future regulation has taken shape?
Whatever happens in the next few years, evolution will prevail over the ‘old boy network’ ensuring only the best packagers, not the biggest or longest established, will survive and prosper. So whatever long-term strategy a packager has, whether to survive and be profitable or to one day be purchased by a lender, they will have to forge stronger relationships with lenders and brokers alike.
Inevitably the strength of these relationships will be measured first and foremost on quality, not quantity.
Keith Dearling is co-founder and market-ing director of Advantage Mortgage Services
In the future, successful packagers will be those that add value to the more complex, niche cases.
To remain competitive, packagers may look to drop brokers who frequently send in cases that do not come to fruition.
If the way packagers are paid depended on the service they provided, then standards would improve.