Like all sectors of the mortgage market, packagers and those in professional relationships with packagers are keeping a very close eye on the situation in the sub-prime sector, as lenders continue to rationalise their product offerings and distributors adapt their own practices to suit the current climate.
The packager sector has come under constant scrutiny since regulation and rumours about consolidation have been rife. There has been constant banter about the sustainability of current packager models, particularly as the sub-prime crisis takes hold. While the Regulatory Association of Mortgage Packagers (RAMP) has urged brokers and packagers to ensure their contracts with lenders are “robust”, it has also warned that fellow packagers need to ensure their businesses survive falling business levels (mortgagesolutions-online, 02/10/07).
However, lenders and networks are concerned that some packagers have not robustly stress-tested their own business models, in the event of a continuing dip in the adverse market.
As a result, Personal Touch Financial Services (PTFS) has decided it is going to impose a split-fee system (12/11/07, p1). This is where the lender will pay the brokers directly for business, rather than paying the full amount to packagers who would then pay the brokers their cut. Another suggestion that has been put forward is to ring-fence broker funds within the packager account.
Eddie Smith, managing director of the Professional Mortgage Packagers Association, has been looking at this system. He says: “We are still in negotiations over setting up a reserve fund, though it definitely will happen at some point. The question is, if anything happened to one of our members in terms of them going into administration, what would the result be? It is important to point out we have had absolutely no indications that any of our members will be affected by the current situation – we are simply looking to get a scheme in place. We are in a position where we can put substantial funds aside, so we can act quite quickly in terms of getting this up and running.
So, in the event of a packager’s unfortunate collapse, the fees owing to the brokers will be saved. However, to what extent is this lender and network intervention into the sacred independence of packager businesses?
Kevin Paterson, group marketing director at Enterprise, says: “Packagers will still receive their packaging fee, so it should not be a great concern for them. Some may be relying on the extra funds for their cashflow, and those will be the ones that are hit hardest by this. However, you can argue it is not packagers’ money in the first place, and they should not be relying on it. I would imagine some packagers will feel a little put out by this at first, but once they think it through they will see there is nothing really there for them to object to. Those that have a proper cashflow in place have nothing to fear from it.”
Perhaps there are personal circumstances surrounding PTFS’s new stance that have led to its recent announcement. Kay Leslie, network services director at Pink, has concerns. She says: “It could be interpreted that PTFS does not trust packagers to pay the brokers. I would be worried about what this says about Personal Touch Packaging. It sounds to me like it might be trying to slim down some of its costs, and using this as the explanation.”
She adds that whenever Pink goes into a relationship with a packager it goes through a due diligence process to ensure it is suitable to be on its panel, and to ensure it has the necessary steps in place to deal with any worries or problems. She says: “I can understand why PTFS wants to do this in terms of protecting itself if a packager goes bust and avoiding the middleman, but it all really comes down to the model of the packager in question, as well as the relationship the network has with that packager, its infrastructure and parent company.”
Paul Brett, managing director of Freehold, believes the move is sensible in the current climate, but understands why others may think it is a threat to their independence. He adds: “While some people will welcome this, others may take a more cynical view and ask whether it is an indication that perhaps PTFS’s own model is not so strong, and is covering itself.”
Undoubtedly, the interests of all involved in the mortgage chain have to be protected. But at what cost? Is independence simply a matter of pride, and should this be put aside in today’s climate? Alternatively, perhaps the latest announcement from PTFS tells us more about its own business model. Nevertheless, it is undeniable the next few months will be critical, and the survival of all distributors will be under the magnifying glass. n