Courtesy Realestateweb
Jackie Cameron*
18 September 2009
Should we allow banks to wean us off home loan consultants?
Big banks are trying to wean themselves, and us, off our dependence on mortgage originators. These are the people in between banks and property buyers who have carved out the role of shopping around for home loans.
In return for sourcing a deal and processing loan applications for house-hunters, banks have been giving these intermediaries commissions which in some cases have been pretty hefty. For example, 2,5% of the value of a home loan was common in the property boom days. On a bond of R1m, that amounted to about R25 000.
But, thanks to far fewer mortgages being granted, banks have seen their revenues reducing along with the reduction in property sales in the past year or so. One way to counteract this has been to increase bank charges for customers. Another way has been to squeeze mortgage originators on their commission payments.
The latest strategy by Standard Bank is to get originators to bid for business, and then give it to the three with the most competitive commission rates. Its aim is that next time tenders are asked for, originators will be even more aggressive in cutting their commission rates - and in this way the bank hopes to make this arena more competitive. This time Standard Bank left out ooba, the big originator owned by estate agencies like Pam Golding Properties and Seeff Properties.
Standard Bank's move, in theory, should be good for bank customers. After all, it must ultimately be the customers who pay for these commissions.
But, like the big life assurers that rely on brokers for business, when commissions to intermediaries are not paid this benefit does not seem to be passed on to the end client.
A Realestateweb visitor with the nom de plume Originator highlighted this point when asking, under the article Big bank dumps biggest mortgage originator: "It has been more than six months since originators' commissions were slashed by at least half. Have you enjoyed any drop in fees or interest from the banks?"
And, there is another problem. Banks, despite all the well-paid professionals within their ranks, are not known for giving customers good service. When it comes to their home loan departments, there is a perception they are not equipped to pick up the work they handed over to originators earlier this decade.
Said Realestateweb visitor @er about the matter: "All the banks used to have specialist home loan consultants who chased the process, did the forms and acted as the liaison with their respective home loans' departments -which are no more than factories. Then came ‘efficiency' consultants.... and all of the business school cost-cutting fraternity. The banks retrenched or allowed all of these specialists who did really good jobs to leave. That's when it got interesting because branch staff were not trained to pick up the slack."
Making originators all the more attractive for buyers, too, is the extra administrative rigmarole associated with the National Credit Act regulations and the ever-changing, fickle nature of bank credit criteria. A competent originator is invaluable for many in this era in which even self-employed professionals like conveyancing attorneys and doctors are easily shunned by banks - just ask many astute property investors who have found it incredibly hard to secure credit for obviously-good property deals of late. A top-notch originator knows, after sizing up an individual's financial position and the property under consideration, which bank is likely to agree to finance and, if there is more than one, which will give the best rate.
Some bankers argue, on the other hand, that many originators aren't particularly competent. They reckon some played a role in helping to amass the bad debts on their home-loan books.
Some ideas being discussed are that banks should pay lower commissions and also include a trailer commission, or one that sticks around for the life of the loan - with a view to ensuring originators are incentivised for helping to secure longer-term, quality business.
A much simpler approach, perhaps, would be for banks to move to a model in which buyers, rather than banks, pay for the services of the originator. This is a bit like what is expected of wealthier clients by their financial advisers these days. For R25 000 for every R1m of home loan, the buyer is likely to expect good service from the originator and will opt for an originator where his or her affairs are a bit more complicated and the originator can add value. Top originators will surely make good money, while the mediocre ones will fall by the wayside.
If an application is straightforward - for example, someone is a first-time buyer with a clean credit record and has a deposit for a property - it's quite easy, if time-consuming, to shop around on your own for a good mortgage deal and play one bank up against the other over discounts to the prime interest rate.
Maybe estate agents, who generally charge a commission of 5%-7,5%% plus VAT before they take the cream off the origination commission, should include an origination service for free on these average deals. After all, one could argue that this is part of finalising a property transaction. Without the home loan, there is no sales commission.
These won't be popular suggestions among originators who make easy money by processing the ordinary applications, the estate agencies which enjoy hassle-free referral fees from home loan commissions or market share-hungry banks. It is much easier to grease the wheel where the costs for the consumer aren't apparent, as life assurers will attest.
For now, though, these suggestions will likely remain a moot point. Until banks collectively boost their service to a level where they become known for efficiency and they treat their customers better by offering competitive discounts in return for cutting intermediaries out of the loop, consumers won't see any benefits in doing away with this relatively recent layer of mouths in the feeding chain.