Australian Broker magazine Issue 6.13

$4.95 POST APPROVED PP255003/06906

ISSUE 6.13 July 2009

CBA reasons The US home for rate rise loan crisis hold water explained page 22 page 24

Unfair contract terms page 18

■ 4: Count MD on Mortgage Choice ■ 10: Commissions to go? ■ 14: Stamp duty

Raymond back in favour

RAMS mascot ‘Raymond’ with Federal Housing Minister Tanya Plibersek

RAMS has been resurrected.

The quintessential Aussie brand is back in favour with consumers and with brokers, according to Melos Sulicich, CEO of RAMS Home Loans.

“The market thinks we are there, and we want to continue to be there,” Sulicich told journalists in Sydney at a media gathering.

Coming 18 months after the relaunch of the business in January 2008 and following its success at the Money Magazine awards (where it won best non-bank lender) Sulicich said the brand was now back at levels last seen in August 2007.

“In January 2008 we didn’t have a customer base. Just 18 months later and we have over 15,000 customers,” he said.

Latest research carried out by RAMS, he said, found that nine out of ten people would now use the non-bank lender.

The research also found that 80% of people do not know that RAMS is owned

by Westpac.

“We are continuing to differentiate RAMS in the market place – it has its own management, marketing and offices,” Sulicich said.

“We are still advertising our standard variable loan as lower than that of the major banks, plus we have good solid liquidity with Westpac behind us.”

Mark Hewitt, general manager of sales and operations at AFG, said he thought most brokers have been able to see the distinction between the old RAMS (RHG) and the new RAMS. “Their major niche was always at the low-doc and high-LVR end but this has changed recently and they appear to be trying to work out where they now want to sit in the broker market. Our biggest issue is that they still make 95% LVR loans available via their franchisees after having removed them from brokers,” he said.

Much of the success has been put down to the strength of the ‘quirky’ RAMS brand and its mascot, Raymond. Page 28

No tea or sympathy as Whittingham business wound up If controversial figure Mark Whittingham was hoping for sympathy and support after e-mailing clients to tell them that his Lead Search business was about to wound up – his judgement appeared completely off the mark.

In a long and rambling e-mail, in which he denied he was operating a scam, Whittingham said the business would be wound up in the Supreme Court on 23 June “for unpaid advertising accounts”.

“For many months now we have been trying to avoid this from occurring, however with well over 140K outstanding from past agents

in the group over the past year, the constant attacks on the business from a small number of brokers, The Australian Broker Magazine & Broker News. It’s made it impossible to trade as we did in the previous three years,” he said.

Whittingham asked recipients to e-mail the MFAA, FBAA or Brokernews if they had benefited from the leads he provided, and indeed e-mails did start pouring in – but nearly all of them had nothing good to say.

Brokers claimed they had paid for leads and never received them, had been promised refunds and never received them or had been given bogus leads.

Other complaints were that Whittingham did not return phone calls or e-mails or that he could not be contacted for weeks at a time.

Page 28

2 News

Kapow! Vanilla Loans forced into wardrobe change

Geoff Brieger

Blog: Vanilla offering sparks huge fee-forservice debate The launch of the Vanilla Loans website was initially the sole topic as brokers voiced their opinions on the controversial business model on the Brokernews blog. However, it soon became just an entrée as readers filled the blog with intensive commentary arguing both for and against ‘fee-for-service’.

Indeed one reader even provided an entire step-by-step approach to charging a fee.

To follow the debate and add your own thoughts, direct your browser to: http://www. brokernews.com.au/forum/ vanilla-loans-batman-vs-thejoker/35669

www.brokernews.com.au

The launch of the website for fee-for-service mortgage manager, Vanilla Loans, sparked an outpouring of responses from brokers – particularly after it used images of ‘Batman’ and ‘The Joker’ to distinguish between ‘true brokers’ and ‘commission chasers’.

However, these images – along with those of boxing great Muhammad Ali and ‘Eddy’ and ‘Patsy’ from cult British sitcom Absolutely Fabulous – disappeared ‘faster than a speeding bullet’ after one Brokernews reader asked if the site had permission to use these images.

Founder of the business, Geoff Brieger, was adamant at first that concerns over copyright was merely a side issue, telling Australian Broker: “The designer reports that good deeds were done on the side of right – Kapow!

That’s it for the side-show, let’s talk ‘fee for service.’ ” Unfortunately for Brieger, that wasn’t ‘it’ for the sideshow.

Just two days after launching the website, amid concerns that he may have overstepped the mark, the images were all replaced with blander offerings.

While clearly aiming to stir up interest in his venture by being somewhat controversial, Brieger decided that perhaps it was not such a great idea to refer to the majority of the industry as jokers.

“I have also taken the decision to abandon the Batman v Joker theme because we really don’t seek to offend people – just to promote our cause by provoking passionate discussion of ‘fee-for-service’,” he said in an email.

The decision to change the images followed a furious debate which erupted when the website was launched on 22 June.

In its original form, the Vanilla Home Loans website depicted fee-for service brokers as Batman, or the ‘true broker’, while illustrating ‘commission chasers’ as batman’s nemesis ‘The Joker’ According to the provocative language on the website (which Brieger has not changed), “the ‘true broker’ or ‘fee-for-service’ business model is built upon the premise that a mortgage broker is acting for his or her customers – and not for lenders”.

Comments from readers on Brokernews were divided broadly into three camps: those who took offence at being labelled “jokers” and “commission chasers”; those who questioned the viability of the business model as well as the introductory rate offered; and those who thought it was a good idea or had merit.

Vanilla’s suite of mortgage products has been priced at a rate of 5.19%. Brieger said the rate was 0.3% lower

www.brokernews.com.au regional managing editor

George Walmsley editor

Larry Schlesinger journalists

Tim Neary

contributors

Sam Benjamin Jen Harwood David Marriott Doug Mathlin Matthew Nolan

production editor

Tim Stewart

design manager

Jacqui Alexander designer

Ruby Alvarez

sales director

Justin Kennedy hr manager

Julia Bookallil

marketing manager

Danielle Tan

marketing coordinator

Jessica Lee

traffic manager

Stacey Rudd

advertising sales

Simon Kerslake t: 02 8437 4786 f: 02 9439 4599 simon.kerslake@keymedia.com.au Rajan Khatak t: 02 84374772 f: 02 9439 4599 rajan.khatak@keymedia.com.au editorial enquiries

Larry Schlesinger t: 02 8437 4790 f: 02 9439 4599 larry.schlesinger@keymedia.com.au distribution

Australian Broker is available by subscription.

E-mail all subscriptions and mailing enquiries to: subscriptions@keymedia.com.au t: 02 8437 4731 or f: 02 8437 4753

Copyright is reserved throughout.

No part of this publication can be reproduced in whole or part without the express permission of the editor.

Contributions are invited, but copies of work should be kept, as Australian Broker can accept no responsibility for loss. © Key Media 2009

Australian Broker is the most often read industry publication, according to independent research carried out by the Ehrenberg-Bass Institute for Marketing Science at the University of South Australia in December 2008.

The research also found that brokers rate Australian Broker as the best for both news content and feature articles, followed by sister publication MPA. Overall, on all categories, Australian Broker ranks top followed by MPA. The results were based on a sample of 405 respondents who were the subject of telephone interviews.

than it would otherwise be delivered if standard broker commission was included.

But some readers said the rate was not low enough.

“Riddle me this,” asked ‘The Riddler’, “why would a customer pay 1% or more in fees to a broker to get a loan at a moderate rate of 5.19% when the customer can go to another broker, pay no fee and get 4.82%? If you are going to be no-frills, your rate has to be market-leading.”

Despite the controversy, Vanilla was all set to kick off with its distribution via brokers on 1 July with a product matrix downloadable from its website and accreditation offered to independent mortgage brokers. Brieger said ‘round two’ would commence on the 1 September when Vanilla launches as its own broker and retail brand.

News 3

www.brokernews.com.au

4 News

Count in “no hurry” to acquire Mortgage Choice Barry Lambert, managing director of Count Financial, has warned analysts and investors not to read too much into his company’s decision to up its stake in Mortgage Choice.

On 15 June, the ASX-listed financial planning group bought an additional 1.5 million shares in the franchise operator, pushing its minority shareholding from 15.27% to 16.48%.

Lambert told Australian Broker that according to market rules, Count could only take its ownership up to 20% before being required to make a takeover offer.

But he said Count was in “no hurry” to make a fresh offer. Its initial approach to acquire Mortgage Choice in July last year was rebuffed because it was deemed not high enough by the franchise group.

“If I was an investor, I would not expect an offer [from Count] any time soon,” he said.

Asked for a response to the latest investment by Count, Mortgage Choice senior corporate affairs manager Kristy Sheppard said: “We are not surprised Count has bought more Mortgage Choice shares. We are a healthy company with a bright future.” Sheppard added there was no update on discussions between the two listed companies: “It is business as usual for Mortgage Choice, and we are enjoying moving the company forward to a stage where it is building stronger value for all stakeholders.”

www.brokernews.com.au

Count Financial and Mortgage Choice timeline: Mid-June 2008 Mortgage Choice’s shares fall to 76c low point 28 July 2008 Count acquires 4.9% stake in Mortgage Choice 30 July 2008 Mortgage Choice declines Count $1.05 per share merger offer 29 Aug 2008 Count acquires additional 10.3% stake in Mortgage Choice taking its total stake to 15.2% 16 June 2009 Count ups stake in Mortgage Choice from 15.27% to 16.48%

Talking more broadly about the market, Lambert said he was growing increasingly concerned about state of mortgage broking in Australia. He pointed to the loss of trail commission in New Zealand as significant, since it was initiated by NAB-owned Bank of New Zealand.

He said he feared similar moves were being planned by the banks in Australia.

“Banks are making it very hard for brokers, and the marginal brokers will disappear,” he said. Lambert also noted the drop in the standards of service from banks.

Despite the problems facing the industry, Lambert said Count was very pleased with the contribution made by its wholesale aggregator Finconnect, which, he said, provided a very valuable service to its network of accounting firms.

“We have a big network and we need more loan writers – that’s one reason why we are interested in Mortgage Choice.

“We see lots synergies,” he said, pointing to things like combining listing costs as well as being able to put Finconnect into the Mortgage Choice network.

Besides upping its stake in Mortgage Choice, Count has forged closer personal ties with the broker.

In May Lambert met up with Mortgage Choice CEO Michael Russell in a meeting both said was aimed at getting to know one another.

Broker Poll: Giving nonbanks a leg up Mortgage Choice is running workshops for brokers presented by non-bank lenders and second-tier banks in an effort to raise awareness about lenders outside the Big Four banks. We asked brokers:

Q1. Do you support the non-bank workshops launched

by Mortgage Choice?

Yes: 90% No: 10% “This is the first step to freedom from the Big Four which currently occupy the majority of the lending space in regards to brokers.” – Adam “It’s disappointing to see that MC are only now starting to promote this to their members. Why does it take six months for anyone in our industry to actually do anything?” – OzBoy

Q2. Should the other aggregators and franchise groups be doing more to encourage brokers to consider nonbanks and the second-tier banks?

Yes: 90% No: 10% “Absolutely they should all do this and should have done it long ago!” – Mick “We are all sick of the shoddy service provided by the big banks. One can only hope that one day they will have some real competition to wake them up.” – Perth Broker “As brokers in good times or bad we need to have a balanced loan book ie, have our loans spread across lenders that are providing the best products and services for customers.” – Rosemary McKenzie To read all the responses go to: http://www. brokernews.com.au/news/breaking-news/ broker-poll-should-aggregators-promotenon-banks/35493

News 5

www.brokernews.com.au

6 News

BoQ defends its distribution strategy David Liddy

Key points • franchisees taking legal action against Bank of Queensland • seeking damages for alleged misrepresentation • bank says action won’t change its distribution strategy • no plans to use reintroduce mortgage broking channel

In a move which might easily be interpreted as an unintended consequence of its earlier decision to cut mortgage brokers from its home loan channel, the Bank of Queensland (BoQ ) is facing legal action from a number of former franchisees of its owner-managed branches (OMB) in NSW. BoQ only deals with brokers in its equipment finance lending business. It stopped selling mortgages via brokers in 2004.

The franchise owners are seeking damages from the bank for misrepresentation, and a hearing on the matter is expected in the NSW Supreme Court next month.

But a spokeswoman for BoQ denied that this action was the result of a backlash, and added that it had not prompted plans to recommence using mortgage brokers.

“The Bank continues to outperform the market in lending growth and believes its current distribution model, the OwnerManaged Branch Network, is the key to this growth,” she told AB. Although the news stories on this matter published on Brokernews.com.au attracted robust debate, all attempts by AB to talk directly to franchisees, as well as their legal council, fell over.

But Barry Palmer, who ran the BoQ Rhodes branch between January 2006 and July last year, told The Australian Financial Review recently that there was a “crisis” among branches around Sydney.

However, the crisis claim was dismissed as a “gross overstatement” by a spokeswoman at BoQ , who added that deposits had grown by more than 60% across the state.

Chief executive David Liddy revealed at the bank’s 2009 half year results that a number of NSW OMBs were performing below expectations, and said that the number of branches in the state would be reduced.

Meanwhile, a report leaked to AFR revealed that franchisees had attacked the bank with an extensive range of complaints about poor services, high costs, low commissions, and uncompetitive lending practices.

“Owner managers are in general highly experienced bankers but we are not given the respect we would be afforded in another institution,” it said.

In particular, the franchisees are reported to have criticised commission payments for not covering rising costs, while IT and shop-fitting costs have come under fire for being too high.

Strong support for govt non-bank initiatives News that the government is looking at a range of new initiatives to support the non-bank sector has received enthusiastic support from both the MFAA and the FBAA. A report in the AFR said the government was “weighing up dramatic intervention” in the mortgage industry by lifting its support for non-banks and regional banks.

Among the measures being looked at are plans to extend the AOFM’s $8bn RMBS buying program to $30bn, as well as giving a government guarantee to mortgage securities with an AAA rating.

The MFAA welcomed news that the Federal Government was examining ways to help make nonbank lenders more competitive in the mortgage market.

“The possibility of Federal Government support is appropriate and welcome,” said Phil Naylor, CEO of the MFAA. “Australian consumers have, over the last decade or so, benefited from the competition provided by non-bank lenders in the mortgage market. Interest rates were probably two percentage points or more lower than they would have otherwise been, and a far wider range of products was available for borrowers,” he said.

However, Naylor said this had “all but disappeared with the collapse of securitisation”.

“I appreciate the government’s recognition that more needs to be done. Government intervention in the market is not ordinarily welcome or appropriate.

“But in such extraordinary times – when it’s clear that the Australian lending market is no longer operating

www.brokernews.com.au

competitively – it’s appropriate for the government to intervene with steps to improve competition,” he said.

FBAA national president Peter White was also very pleased at the news of further government support for non-banks. “Its fantastic news – the more support for non-banks the better,” he said.

He reiterated Naylor’s point that non-banks had helped foster competition in the market and bring down interest rates. He was also optimistic that non-banks would re-emerge from the crisis stronger.

“In the early 1990s, the likes of Aussie, RAMS, Resi, and Wizard created a fantastic arena of options in the market place. Non-banks drove competitiveness and product diversification. Brokers need to be 150% behind the non-banks – we can’t just be order takers. If we are skilled professionals, we must look at non-bank options.

They might not have been competitive in last 12 months, but they are getting there,” Naylor said.

The AFR report quoted Challenger chief executive Dominic Stevens as saying mortgage customers were in effect paying for the losses that banks were making on loans written during the boom as happened in the early 1990s before the arrival of the non-banks.

Latest data provided by the RBA has revealed that margins on mortgages have started to widen for the first in 20 years, at a time when banks have more than 90% of the mortgage market and non-banks and regional banks have been all but forced out because they are unable to source funding via securitisation.

Key points • AFR reports government looking to extend help for non-banks • MFAA says news is very welcome; government intervention needed • FBAA also very supportive of any help for non-banks • Peter White says he believes the sector will return stronger from crisis

Phil Naylor

News 7

www.brokernews.com.au

8 News

CBA implements new accreditation policy What is the new policy?

• from 1 July CBA reaccreditation policy kicks in • bank will review brokers over a six-month period • to keep accreditation, a broker must submit a minimum of four home loan applications and settle a minimum of three over that time • first six-month review period from 1 July–31 Dec 2009 • brokers who don’t meet submission requirements may lose accreditation or be asked to undertake three-hour workshop at a cost of $500

The Commonwealth Bank has become the first major lender to charge brokers a re-accreditation fee if they don’t achieve minimum submission benchmarks.

The move had been anticipated for some time, following Westpac revealing in May that it had has entered into discussions to set a broker “re-accreditation fee”.

From the 1 July, the bank’s new accreditation policy requires brokers to submit a minimum of four home loan applications and settle a minimum of three home loans in a six-month period, as well as meet current benchmarks around submission, quality, conversion rate and arrears rate to keep their accreditation.

The bank will undertake a review every six months to identify brokers who do not meet performance benchmarks.

As a result of the review brokers may either have their accreditation terminated (if no loans were lodged in the six-month period and none are in progress) or be invited to attend a re-accreditation workshop (where brokers have not lodged the minimum of four loans and settled a minimum of three in

www.brokernews.com.au

the past six months). The reaccreditation workshop will be a three-hour session focusing on CBA home loan products, credit policy and processes that will set the broker back $500 (incl. GST).

Brokers who fail to attend the workshop will have their ‘Authority to Act’ terminated.

The first review period will be 1 July 09 to 31 December 09.

In addition to the reaccreditation fee from 1 July the bank will only accept application lodged electronically.

Kathy Cummings, executive general manager, third party banking at the CBA, said the changes had been made in an environment that has changed significantly over the last year and also in light of the Federal Government’s recently drafted national legislation. “These developments make it critical that the industry continues to develop its professionalism to meet customer expectations,” she said.

She said introducing a minimum of four loans lodged and a minimum of three loans settled in a six-month period to maintain accreditation would ensure “brokers stay relevant and aware of the bank’s policies and processes”.

She had consulted with key broker head groups on the accreditation criteria.

Choice members were informed of the new policy in an email from CEO Brendan O’Donnell.

In the email, O’Donnell said advanced reporting would be provided to Choice to identify members who may not have met the accreditation criteria so that it could work with members and the CBA to manage the most appropriate outcomes.

ASIC busts broker for deceptive calculator

In spite of Sydney broker Gavin Whyte’s vehement defence of his EquityExcel Plan mortgage calculator, the Federal Court has ruled that Whyte Corporation had indeed engaged in misleading and deceptive conduct by claiming that it allowed borrowers to pay off their mortgage sooner and make substantial savings with no increase in their monthly payments or changes in their lifestyle.

ASIC first took action in November 2008 against the Whyte Corporation and Gavin Whyte, its director, alleging they contravened the ASIC Act. At the time Whyte told Brokernews.com.au that he was standing by what he said. In addition, he had claimed that all statements made on his website about the calculator were “mathematically correct”, and that he had “no plans” to remove them.

But ASIC held a different view. It contended this representation was “misleading, or likely to mislead”, as a borrower could only pay off their mortgage sooner or make substantial savings using the EquityExcel Plan if they made “considerable additional repayments” over and above the minimum monthly repayment.

In its ruling, the court declared that both Whyte Corporation and Gavin Whyte had contravened the ASIC Act, and restrained them from continuing to make the same claims.

In addition, the court ordered them to write to their customers explaining the terms of the Court Orders and to notify ASIC if they considered that they had been misled by Whyte Corporation and, consequently, had suffered a loss.

Despite several attempts, AB was unsuccessful in contacting Whyte for a comment on the court ruling.

However, making the point that this was the second action ASIC has had to take in relation to this type of misleading claim, Greg Kirk, senior executive leader for deposit takers, credit and insurance, said people making important decisions about their home loans were entitled to believe that the information they are provided with, and are relying on, is accurate.

“Mortgage brokers, who are often called upon to facilitate and help people through this process, have important responsibilities to ensure that the information they provide is accurate and truthful,” he said.

On the significance of the court’s orders, Kirk said: “For consumers, the key message is that the only way to pay off your loan sooner is by moving to a loan with a cheaper interest rate or by making extra repayments.”

Steven Anderson, content and database manager at financial calculator supplier GBST Financial Services, said this ruling should reinforce to people the importance of having accurate calculators, as well the need to consider having them actuarially reviewed and signed off on.

“It’s also a good idea to make sure they are hosted on a secure server too, to prevent potential invasion by hackers as well,” he said.

At the time of going to press, the Whyte Corporation website carried an “Important Notice to Whyte Corporation Customers” on its “Misleading and Deceptive Conduct” in accordance with the courts order.

News 9

www.brokernews.com.au

10 News

Planners abandon commissions – will brokers follow?

The fee-for-service model has been a major talking point in the industry for some time now, but it gained further momentum with news that the financial planning industry is abandoning commission payments altogether.

Following on from the Financial Planning Association’s (FPA) recommendation to the government of a fee-for service model rather than a commission-based regime, the Investment and Financial Services Association (IFSA), which represents retail and wholesale superannuation as well as funds management and life insurance industries, said its members had agreed to stop receiving commissions from July next year.

The pledge was including in the IFSA’s consumer charter with chief executive Richard Gilbert saying its members would adopt a “fresh approach to the payment for financial advice in superannuation”.

“This will boost consumer confidence in superannuation at a time when it is most needed,” he said.

Gilbert said that under the new regime consumers will be empowered by knowing exactly how much they are paying for financial advice in their superannuation.

Readers on Brokernews.com.au hotly debated the issue on a number of blogs with arguments both for and against. Some argued that trail commissions were “designed as a ongoing service payment so brokers can manage their businesses and assist clients” while others said very few brokers looked after clients post-settlement.

Other doubted whether borrowers would be willing to pay brokers a fee for arranging a mortgage, with a reader writing: “Ask anyone if they will pay $1,500 or $2,000 to a broker to find the right loan for them and you will find

As brokers debate the issue of fee-forservice, consumer advocacy group CHOICE has clarified that its new campaign to ban commission payments to financial advisors does not extend to mortgage brokers.

This follows CHOICE launching a campaign to end what it called “perverse incentives that lead financial advisers to push products on their clients”.

In the video and online campaign, it warned that consumers were likely to face “certain types of fees” when they sought professional advice, which would make the advice they receive “less trustworthy and less reliable”.

These fees included commission on financial products that can “skew advice towards high fee-paying products” and trail commissions, which erode a client’s wealth “but without any guarantee of advice services along the way”.

Rather than earn a commission, CHOICE said honest advisors should charge a “fixed

dollar fee for a fixed service” as charged by doctors and accountants.

However, Elissa Freeman, senior policy officer at CHOICE, said the scope of its campaign was “currently limited to personal financial advice provided under the Corporations Act, that is personal or general financial product advice provided under an Australian Financial Service Licence (AFSL) issued by ASIC”. “Mortgage brokers do not, generally speaking, provide personal financial advice when they provide individuals with information about mortgages. Even after the new credit laws are introduced brokers will not be subject to the same provisions,” she added.

In light of this, Freeman said the intent of the campaign was not target mortgage brokers: “I have adjusted the information on our website to make this clear.”

The launch of the campaign was sparked by the recent collapse of Storm Financial and the

Get involved in the debate

The topic of fee for service has been hotly debated on a number of blogs on Brokernews. To view some of these direct your mouse to the following URLs and submit your own thoughts: • http://www.brokernews.com.au/site-search/ financial-planners-to-scrap-commissions/35 640?keyword=commissions • http://www.brokernews.com.au/site-search/ vanilla-loans-batman-vs-thejoker/35669?keyword=vanilla

that the majority of people won’t be able to afford it, and will therefore go directly to the banks/lenders.

But some saw no other way: “This industry is going down the road of financial planning, and where in a short amount of time there will be no commission paid by the funders.”

Peter White, president of the FBAA, was certain that fee-for-service would be a feature of the industry in the future and said it was something he felt “strongly about”.

“It’s here already in the commercial sector, but not so prevalent in residential lending,” White said he would be surprised if the industry did not down go such a path. “You cannot be held to be governed by ‘he who pays you the highest dollar.’”

He warned though that there were “traps to be cautious of ” and that it was “not cut-anddried as to how fee-for service it will look”.

White said there was space in the industry for both commissions and fee for service.

A recent report by Rice Warner Actuaries found that clients could pay up to 13 times more to a commission-based financial planner than a fee-only financial planner.

Anti-commission campaign limited to advisors

www.brokernews.com.au

2006 collapse of the Westpoint Group. “Both involved remuneration models that created moral hazards for advisers.” CHOICE said.

View the CHOICE video at: http://www.choice. com.au/viewArticle.aspx?id=106876&catId=100 385&tid=100008&p=1&title=Financial+advice %3a+Is+it+in+your+interest%3f

industry

NewsinBrief Affordable Home Loans and William Curry – name clarification

Australian Broker would like to clarify that the full name of Affordable Home Loans and its director William Curry, which we reported on in AB 6.11 (page 12 – ‘Broker embroiled in caveat law suit) is Affordable Home Loans & Mortgage Advice Pty Ltd, which has the following website: http://affordablehomeloans.net.au/.

We would like to point out that this business is in now way connected to Affordable Home Loans & Conveyancing P/L, run by director Mark Duggan and which has the following email address: http://www. affordablehomeloans.com.au/ Australian Broker would like to apologise to Mark Duggan for any inconvenience this may have caused.

Expect more rate hikes warns Loan Market Group

The CBA’s decision to increase its variable rate by 10 bps on 12 June is a warning sign to home owners, according to Loan Market Group.

The mortgage broker expects further increases, and recommends that mortgage holders prepare for them by trying to repay more than the minimum amount required on their loan each month.

The decision by the CBA indicated an inclination by the major banks to move rates upwards in the future - or at least hold back on RBA cuts, according to John Kolenda, executive director at Loan Market Group.

He added that mortgage holders who were ahead in their repayments should aim now to build up an equity buffer.

“It is very tempting to be using the savings from the lower rates now to boost the household’s spending power, but people are better off making as big a mortgage payment as they can afford,” he said.

Lahiff changes gears

Former Mortgage Choice managing director Paul Lahiff has been appointed as CEO of WD Scott Global.

The consulting company works with financial institutions, particularly in the area of business process improvement and has operations in Australia, Asia and the UK/Europe.

Lahiff’s role is based in Sydney and his core focus will be on growing the business and raising its profile.

Lahiff resigned from his post at Mortgage Choice in April after six years with the company.

Victoria: stamp duty bill passes

A bill designed to close a stamp duty loophole in Victoria has been passed.

The Victorian government pushed through the Duties Amendment Bill, legislation which stops commercial property deals from being restructured as long-term leases in order to avoid paying stamp duty.

A key provision of the controversial bill, which reduced the deadline for stamp duty payments from 90 days to 14 days, was cut in order to win the support of the Greens and pass it through the upper house.

Demand for cash flow finance rises

The latest quarterly analysis of the debtor finance market from the Institute for Factors and Discounters (IFD) shows the provision of cash flow finance grew by 5% over the same period last year.

Debtor finance remained an attractive alternative for eligible SMEs, according to non-bank provider of debtor finance Scottish Pacific Benchmark CEO Peter Langham.

“We have no shortage of funds for new clients who need cash flow finance and who meet our standard criteria,” he said.

Debtor finance allows small businesses to draw down against the value of their invoices within 24 hours of the invoices being issued.

It works in much the same way as a bank overdraft, but is flexible enough to grow with the business.

IFD statistics for the Australian market for March quarter 2009 showed total factoring and discounting turnover to be $14.9bn, an increase of $720m (5%) on the same quarter last year.

Total turnover for the 12 months to the end of March was $66bn.

BIS Shrapnel: house prices rising

First homebuyers have provided the first green shoots of housing market recovery, but it will be investors that carry the torch in the coming year, predicts BIS Shrapnel.

BIS Shrapnel’s Residential Property Prospects report indicates activity from first homebuyers has kick-started a slow recovery to the housing market. According to the report, average house prices in most capital cities from 11 to 19% over the next three years (inflation adjusted percentage growth is about half).

BIS Shrapnel’s Angie Zigomanis said there’s enough activity in the market to become self-sustaining once the First Home Owner Grant expires at the end of this year.

“From here, the recovery in housing demand is expected to broaden and deepen,” said Zigomanis. “By the end of 2009, strong turnover of the most affordable properties will be flowing through into the bulk of households positioned towards the middle of the market, as people who have sold their existing dwellings to first-home buyers upgrade to their next home.

News

12 News

Mover of the issue

Name: Paul Lahiff From: Mortgage Choice To: WD Scott Global Title: Chief Executive Officer Paul Lahiff resigned from his post as Mortgage Choice managing director in April after six-years with the company. He takes on a new role at WE Scott Global on 13 July. The company focuses on consulting to financial institutions, particularly in business process improvement, and has operations in Australia, Asia and the UK/Europe. The role is based in Sydney and will emphasise growing the business and raising its profile.

Name: Will Keall From: KPMG To: Homeloans Ltd Title: National Marketing Manager In his new role Will Keall will be based in Perth and will have responsibility for marketing strategy, planning and implementation across corporate, retail and broker channels as Homeloans seeks to build its national brand presence. Mr Keall was most recently a Business Development Manager at KPMG. Name: Chris Lackey From: WBP Property Group To: WBP Property Group Title: NSW branch manager Chris Lackey is a senior valuer with 25 years’ valuation experience. He joined WBP in April 2008 following its merger with Lackey & Associates, where he had held the position of co-director for 11 years. As NSW state manager he will be responsible for the needs of corporate and private clients across both residential and commercial property divisions.

Name: Iain Keddie From: Espreon To: Cuscal Title: Chief financial Officer Iain Keddie brings relevant strategic and M&A experience to his new role at Cuscal. Keddie’s experience as a CFO spans across a range of public and private companies. He has also worked in an advisory capacity to the financial services sector during time at Ernst & Young and at PricewaterhouseCoopers.

www.brokernews.com.au

Aussie stretches brand further with insurance offer

Armed with the new slogan ‘put yourself in a better place’ and a relaunched brand, Aussie John has promised to “shake up” the $30bn Australian insurance industry via a new suite of products.

The move will fire up further competition among the third party market, following soon after Macquarie’s entry back into the broker market via its risk insurance product called MortgageGuard. The market is already well saturated with insurance offerings via brokers including those from ALI, Mortgage Shield and other bank-distributed products.

Aussie’s move into insurance comes as national research it commissioned showed that seven in 10 Australians already believed their families would not have enough money and would face financial ruin if they died.

Yet, only four in 10 carry life or disability cover.

Symond felt this was because Australians either didn’t understand life insurance, or, incorrectly, believed their superannuation afforded them some cover.

“I was shocked to learn the penetration rate of life insurance in Australia is so low. We often take things for granted and we don’t plan for the future. Young Australian families should think about what would happen if the worst were to happen to one of the breadwinners,” he said.

Consequently, Symond felt this was not just a logical product for Aussie Home Loans to put out, but one that was obviously needed by customers and consumers.

“Aussie has been helping Australians to get into home ownership for years, and with our brand evolving into products beyond home loans the new product is designed to help people keep their homes,” he said.

Under a brand like Aussie, Symond felt that this life insurance “could well take off” – and change the way other insurers approach the life insurance industry.

“The bottom line is that awareness is a great thing. When we kicked off Aussie people weren’t aware that they could shop around for home loans. We are going to kick off by making the public aware of what is available in a simple and straightforward manner,” he said The launch of the life products broadens the range of financial products and services available through Aussie, including home loans, mortgage broking, personal loans and credit cards.

Later in the year, customers will be able to access home, contents and motor insurance. The Aussie Life Plan comes with a range of options including recovery insurance, which pays a benefit for heart attack, malignant cancer, stroke or coronary artery bypass surgery.

Little benefit in ‘state of origin’ budgets While the Maroons smashed the Blues on the rugby field, the state governments of NSW and Queensland appeared to battle out a dull draw when they released their annual budgets – neither of which offered too much for brokers to get excited about.

The 2009/2010 Queensland state budget delivered some stimulus for first home buyers as well as a trainee initiative which may benefit brokers looking to grow their businesses.

Most notably, the government increased the transfer duty exemption threshold for first homebuyers purchasing vacant land from $150,000 to $250,000. It also extended the concession for first homebuyers purchasing vacant land valued at up to $400,000.

These measures were on top of the transfer duty exemption threshold for first homebuyers purchasing established homes being increased to $500,000 in last year’s state budget.

For brokers looking to take on trainees and apprentices, the government announced it would provide a 25% payroll tax rebate on the eligible wages of apprentices and trainees in addition to these wages being exempt from payroll tax.

Rian Kratze, of Nexus Lending in Queensland, said increasing the exemption threshold on land purchases would help a little bit, but said the main constraint on growth in purchasing and constructing was the genuine savings requirement.

“I don’t think the government measures are going to have a great influence,” he said.

Kratze said he didn’t think stimulating activity

in the local market was a government issue anymore – “it is a mortgage insurance and lender issue with the savings requirements.”

“It was clear the no stamp duty under $500,000 and FHOG boost worked extremely well until the lenders changed requirements and increased deposit levels. It would be good to see the lenders look at things like a rental ledger as a form of genuine savings, since being up-to-date with rent for a year or more seems reasonable proof a new borrower has the capacity to repay.”

South of the border, the NSW budget provided some stimulus to the state’s property sector.

Noteworthy measures included a 50% reduction in stamp duty until the end of the year on all newly completed homes below $600,000 and an extension of the $3,000 NSW first homeowners bonus until 30 June 2010.

Mark Rogan, from Financial Decisions in Manly, said it was hard to gauge what impact this would have on the market. “If this were announced in another state that wasn’t in such a diabolical state economically it probably

would have provided a nice fillip to the property market. But given the growing level of unemployment and uncertainty in this state I’m not sure how much it will help.

“From a mortgage broker’s perspective, it could actually work out well for those brokers in other states. Their clients are operating in stronger economies and see opportunities buying into NSW given still relatively strong rental yields, the reduced stamp duty (for a limited time) and continuing volatility in the stock market,” he added.

Rogan said it could even prompt those struggling under mortgage stress in the pre-$600,000 price bracket to put their properties on the market believing they will be easier to sell. “If this happened in significant enough numbers an over supply could push prices down,” he said.

As to measures that might help in the future, Rogan listed the following: “Remove stamp duty on all loans, residential, business related or otherwise. Remove property stamp duty all together. Get the economy moving.”

14 News

Gadens keeps Aussie job despite lawsuit Key points

• John Symond suing Gadens Lawyers over tax advice • alleges advice given in 2003 and 2004 was “misleading or deceptive” • John Denovan says claim “an ordinary incidence of doing business” • says Gadens remains as Aussie’s principal lawyers • friendship between Denovan and Symond remains strong

Despite facing a multi-million dollar lawsuit from Aussie Home Loan over allegations of negligent tax advice, Gadens chief operation officer, Jon Denovan, says Gadens will remain the principal lawyers for the mortgage broker.

In addition Denovan said he remained a close friend and confidant of John Symond.

A statement issued by Bruce Hambrett, partner at the firm of Baker & McKenzie, confirmed that “John Symond of Aussie Home Loans has commenced proceedings against Gadens Lawyers in relation to advice given by Gadens Lawyers to Mr Symond in 2003 and 2004.”

“Mr Symond alleges in the proceedings that the advice was given negligently and was misleading or deceptive, and he seeks damages from Gadens Lawyers for the loss and damage suffered by him as a result.”

The statement said Gadens has provided legal advice to John Symond and Aussie Home Loans since the company’s establishment in 1992 and advised on the re-structure of the company – and its tax implications – during 2003 and 2004.

“Subsequent to an audit of Aussie Home Loans and Mr Symond in 2007, the Australian Tax Office has advised Mr Symond that there has been ‘no finding of dishonesty or intention to avoid tax’ with respect to him or Aussie Home Loans,” it read.

“The Australian Tax Office has also informed Aussie Home Loans and Mr Symond that all issues raised in the audit have been resolved and there are no continuing issues” it concluded.

Denovan told Australian Broker the claim by Aussie was not new, and had been on the table for some period.

“The event occurred many years ago and the lawyer involved left the firm many years ago,” he said.

“Gadens Lawyers has and continues to have an enviable record of very few negligence claims compared to industry standards. This is reflected by the low premiums offered to us by our insurers,” he added.

Denovan said the claim was “just an ordinary incidence of business and is no different to any other negligence claim against law firms – of which there are many”.

“We carry insurance of $100m so the claim has no impact on our business.”

He offered the following analogy in relation to the matter: “If you drive a car, it’s most likely at some time you will have an accident. This claim arises from such an event – but no one broke their legs!”

www.brokernews.com.au

MFAA proposes laying stamp duty to rest The MFAA says it would back a recommendation in the Henry Review to abolish stamp duty.

“Stamp duty on home loans is a tax that doesn’t serve a useful purpose to the economy. It is an inefficient and unproductive cost that discourages home ownership and home transfers of ownership,” said MFAA president Phil Naylor.

The wide-ranging tax review by Treasury Secretary Ken Henry is reportedly considering proposals to remove the stamp duty charged by state governments on housing loans.

Tax experts are reported to have told the Henry review that home loan stamp duty acts a barrier to moving house and creates inefficiencies in the wider economy by, for example, discouraging labour mobility.

“Removing the stamp duty on home loans is a simple measure that would boost activity in the housing and lending market and help drive the economy forward,” Naylor said.

Resi’s head of marketing and consumer advocacy, Lisa Montgomery, welcomed the move and said that she believed getting rid of stamp duty would stimulate activity in the housing market.

But she added that she was concerned at how the revenue would be made up by the states if that were to be the case in the wake of the Henry report.

“Revenue received by state governments from stamp duty is really significant. I am just concerned that state governments might return to a land tax to substitute for the lost revenue, which would really stifle the investment market,” she said.

In a similar vein, Mortgage Choice’s senior corporate affairs manager Kristy Sheppard said that as long as the states could find a reliable replacement source for funds lost, doing away with the stamp duty would “almost certainly” stimulate the housing market.

Still, she welcomed the move: “Any initiative that stimulates the property market is a great move for mortgage brokers but is just as important for all Australians, because it contributes to a healthy economy.”

AFG’s general manger Mark Hewitt said that if the government was looking

Lisa Montgomery

Key points • the Henry review is considering abolishing stamp duty • MFAA to support the recommendation • stamp duty found to be inefficient • leading market commentators united in saying doing away with it would stimulate economy • suitable replacement is required

to abolish stamp duty there might be a couple of impacts they would want to consider first.

“One of the benefits – if there are any – of stamp duty is that for the building game it has really seen a boost in home extensions. When people want to upgrade they take into account the cost of moving house and stamp duty and real estate fees are the biggest costs. So a lot of people will tend to look at extending to a second story or a few extra rooms as a result,” he said.

But even though its removal would result in a big shake up of the market dynamics in general, he was in favour of “a more efficient system that focused on an outcome where it was all on consumption or all on income.”

News 15

Nothing silly about IDR proposal – FBAA The FBAA has hit back at suggestions by rival industry body, the MFAA, that proposals regarding internal dispute resolutions (IDR) requirements for brokers contained in the draft National Consumer Credit Protection Bill are “silly” and not practical for one-man brokers and small firms.

On the day the draft package was introduced into the lower house of parliament, Peter White, national president of the FBAA, said he believed the IDR requirements were “appropriate to both one-man broker businesses and small broking firms”.

White said FBAA members had included IDR procedures in their practices since its inception, and said they worked fine “so long as they’re run in the right format”.

“For anyone to say it is silly – they don’t have the right,” White said, responding directly to comments made by MFAA CEO Phil Naylor that IDR requirement is “bit of a nonsense if you are a one-man broker”.

Naylor’s remarks formed part of the MFAA’s presentation to its members about the key elements of the bill.

Under the draft rules, any broker looking to obtain an Australian Credit Licence (ACL) will need to have “an internal dispute resolution (IDR) procedure” in place.

According to the legislation, an IDR procedure must comply with “standards and requirements made or approved by ASIC in accordance with the regulations. It must also cover disputes in relation to the credit activities

engaged in by the licensee or its representatives”.

“We are happy with the proposal in bill. We lobbied both ASIC and Treasury and gave them our IDR process for review. We have been liaising with them on this since February,” White said. “It’s silly for them [the MFAA] to come out now if they have known about it as long as we have.”

White said the reason for Naylor’s remarks were that the MFAA did not have an IDR scheme in place itself – “they flick it all to COSL”, he said.

According to White, an IDR process is available for all FBAA members, who he says “try and resolve issues internally”.

If the dispute cannot be resolved in this manner, it is then escalated to a peer review by an FBAA committee. If it still cannot be resolved, White said the FBAA could then bring in a mediator to resolve the issue.

“After that there is still the external dispute resolution process and the courts,” he added.

White said it all boiled down to communication with the borrower. “It depends on what the dispute is. You need to lay down both sides of the equation and be as impartial as possible.” But he admitted that was hard to do.

White said the FBAA had extending its IDR platform. “We realise they [brokers] have limited capability. Year in and year out it gets used, though we have not had many complaints.”

Peter White

Key points • FBAA disagrees with MFAA over IDR proposals in draft bill • Says it is happy with IDR requirements placed on brokers • FBAA has IDR processes in place for members • Comments came as bill entered lower house

www.brokernews.com.au

16 News

Wanted! Franchisees that can also write loans

Clive Kirkpatrick

RAMS has set itself the goal of doubling its franchise network over the next few years, and brokers may make good candidates under its recently revamped franchise model.

Under its new model, the non-bank lender is looking for franchise owners that are also loan writers – rather than just business owners.

This was the message from Clive Kirkpatrick, head of franchising at RAMS, as he sets his sights on an ambitious expansion program to double the existing RAMS network of 44 franchise owners and 80+ stores.

Speaking at a media lunch in Sydney, Kirkpatrick said RAMS was looking to expand into states where it is “traditionally strong (NSW, Victoria, Queensland and WA), but also to grow into new markets, with plans or five franchises in South Australia and two in Tasmania.

“We have done a lot of work to determine the size of the markets for new franchisees,” he explained.

At the lunch, Kirkpatrick said RAMS had just signed up its first franchisee under its revamped model. “We will have a new franchisee on board in mid-July,” he said, adding that he was in the process (at the time) of interviewing another three.

The new franchise model is built around the concept of “branded home loan centres and branded cars”.

Other enhancements to the model include support provided by both state managers – to help franchise owners grow their business – and sales managers, to help individual loan writers develop their sales skills and product knowledge.

To apply for a franchise, brokers must submit an application along with a $3,000 application fee (refunded if the application is unsuccessful).

If successful, the cost of the franchise is $20,000, though Kirkpatrick said RAMS also expected franchisees to have access to between $170,000 and $200,000 in working capital.

The new model also incorporates minimum marketing spending in the franchisee’s local area, while RAMS has also developed a new IT model that utilises Westpac’s economies of scale. “This allows us to provide IT equipment at a low cost and enhance profits.”

Kirkpatrick said RAMS viewed each franchise as a small business as “they employ their own staff and own their own store, and they build their own referral networks and services”.

“They are very passionate and energetic,” he added.

Bank service problems Property investors holding off until boost expires felt at top end too Service problems experienced by brokers from major banks in residential lending appear to have filtered through to commercial finance as well, according to the latest TNS Business Finance Monitor.

Its May report found that service levels to business customers seeking finance from the major banks appear to be falling.

Overall, the report found that the steady climb in satisfaction levels enjoyed by the banks appeared to have slowed over the last six to twelve months, with 74% of business banking customers satisfied with their relationship with their main financial institution (MFI).

However, each of the Big Four banks has seen decreased satisfaction, and the combined Big Four rating is down by 5.2% (to 72.1%).

The biggest decrease was recorded by the CBA, which saw satisfaction levels fall by 5.7% to 70.5%.

ANZ’s customer satisfaction remains the highest (at 76.7%) among the four major banks, with Westpac remaining in second position (72.1%). NAB remains at the bottom with a rating of 70.2%.

The top satisfaction rating went to the Bank of Queensland (up by 0.5% to 91.4%) followed by Bendigo Bank with (down 3.7% to 90%) and Suncorp, a distant third at 80.7%.

Pete Dossett, business lending manager at Zobel Finance, said he was not surprised that client satisfaction in general had fallen at the banks.

This, he said, was the result of the current turbulent business financing environment with banks experiencing a greater level of delinquency and arrears in their portfolios resulting in increased workloads and requirements on their personnel.

“A number of banks have dedicated channels to work with us. These channels are focused on attracting new business rather than being weighed down with other workloads. As a result, our relationships with the banks have generally remained the same,” Dossett said.

Asked if he was surprised at the high satisfaction ratings given to regional banks, Dossett said he believed a clear factor was supply and demand. “Due to their size and structure they usually have a better ability to be closer to their clients and needs,” he said.

Commenting on the results of the report, Horizon Financial’s Mark Turnbull said that if he were to generalise, the smaller, community banks offered a more personalised service than big banks. www.brokernews.com.au

Brokers wondering why property investors are staying away from the market may find the answer in research carried out by Mortgage Choice.

The franchise group surveyed 1,038 people in its 2009 Property Investors Survey and found that more than threequarters of them (76%) were delaying their upcoming investment property purchase until the boost to the First Home Owner Grant finishes on 31 December 2009.

The survey indicated that investor attitudes had changed since the extension of the boost was announced in the May Federal Budget. Before this announcement, only 26% were delaying their purchase until the initial completion date of 30 June 2009 had been reached.

Mortgage Choice senior corporate affairs manager, Kristy Sheppard, said the survey highlighted an observation made recently by many of its franchisees “We have been hearing from a number of corners that property investors are all set and ready to go once the Boost has had its day. Competition from first homebuyers has been so intense since late last year that most investors seem to have stepped back for the moment.

“A large number are calling our loan consultants to see how much money they can borrow from the various lenders on our panel. They are getting their finances in order so they can hit the ground running and purchase in 2010 or 2011,” she said.

The survey found that 64% of respondents already own a home, yet plan to add to their portfolio by buying an investment property in the next two years.

While the May AFG Mortgage Index did not show a massive influx in property investor activity, it did suggest that more property investors were returning to the market.

The index recorded that mortgages advanced to investors came off an all time

Australia’s top ten investment property areas

➊ 15% – Within 15km of Melbourne metropolitan area ➋ 14% – Within 15–50km of Sydney metropolitan area ➌ 13% – Within 15km of Sydney metropolitan area ➍ 12% – Within 15–50km of Melbourne metropolitan area ➎ 8% – Within 15–50km of Brisbane metropolitan area ➏ 7% – Within 15km of Brisbane metropolitan area ➐ 4% – Outside 51km of Sydney metropolitan area ➑ 4% – Within 15km of Perth metropolitan area ➒ 3% – Within 15–50km of Perth metropolitan area ➓ 3% – Within 15km of Darwin metropolitan area

low of 24.5% in March to rise to 28.0% in May. AFG said the uptick indicated that “low rates, good rental yields and the relatively strong performance of property over equities may be contributing to growing investor confidence”.

Indeed, the Mortgage Choice survey also found investors saw better returns in property than shares with three quarters viewing property investment as a better bet than investing in the stock market.

The survey also found that one fifth of respondents plan to buy both a home and investment property in the next two years, while 13% were planning on entering the property market for the very first time forgoing their First Home Owner Grant to buy an investment property before a home.

The survey also threw out some interesting statistics with nearly half of all respondents (44%) looking at are purchasing an investment property in the next two years being Gen Xers, with 27% from Gen Y. Just one percent were Baby Boomers.

Top

10 tips

News 17

The Sydney property market

As 2009 starts to gather momentum, real estate guru, John McGrath, provides his observations on the state of the Sydney property market 1. Bottom-up residential recovery continues The first homebuyer surge is unprecedented, with a rapid increase in buyer activity below $500,000.

2. Boost for second home buyer market There is no doubt that the Boost is having a knock-on effect – directly impacting the second homebuyer market too. This has been driven by the record low interest rates, a shortage of available listings, an overall housing shortage across NSW and rapidly rising rents.

3. Slight dilution in demand after 1 October With the exception of the First Home Owner Grant boost, which will reduce from October 1st and cease at the end of the year, the other drivers are likely to continue for some time yet. There may be a slight dilution in demand over the next six months.

3. Strength cascading up the market The strength in the sub-$500,000 market has cascaded up to the $500,000–$1,500,000 range.

4. Increase in sales in inner CBD ring There have been relatively few mortgagee sales conducted in the inner ring of Sydney (within 15km radius of CBD and on the coast).

5. Trophy properties still highly sort after The luxury market (over $5m) is harder to gauge as the volume is limited and with a small sample base. There remains a shortage of “trophy” properties that will always be highly sought after.

6. Top end price falls regained next year I suspect the top end is about 15% off its highs, although we have found on a number of occasions individual instances of properties selling well above their 2007 sale price. If the market remains tight, with no great increase in luxury listings sold, I predict that most of the price falls will be regained in 2010.

7. Rental vacancy shortage to remain for a minimum of 12 months The vacancy factor in Sydney rental property has been hovering around 1.3% which is about half the ideal balance of 3.0%. This shortage will continue for at least a further 12 months due to the long lead time of new property being built. I expect rents in most areas will rise between 7%–10% in FY10.

8. New listings will take urgency out of the market RP Data has flagged through their internal indicators that there is likely to be an increase in new listings hitting the market between now and Christmas. I see prices increasing by 2.5–5.0% in the next six months with a stabilising economy.

9. Buyers sticking with variable rate mortgages Buyers are now starting to wonder whether they should lock in these record low rates. Our mortgage broking company, Oxygen Home Loans, has recently seen a spike in variable rate enquiries due to continued speculation that rates will go even lower in the short term.

10. More sales in the $1m plus range While the majority of the strength has centered on the lower end of the market, I’m also seeing sale results more regularly in the $1m+ range significantly exceeding expectations.

This is an extract from John McGrath’s Winter Market Review 2009. John McGrath is the chief executive of McGrath Estate Agents. www.brokernews.com.au

18 News Analysis

Less protection for brokers in revised contracts bill L

ast-minute concessions made to business groups by the government mean broker agreements with aggregators and lenders will not fall under the contentious ‘unfair contract terms’ legislation.

The bill now excludes terms contained in business-to-business contracts, with the change of heart announced by consumer affairs and small business minister Craig Emerson on 25 June – the day the new national consumer law bill was introduced into parliament.

It follows lobbying by business groups who were concerned that businesses would be exposed to the changes, both with customers using standard contracts and suppliers offering standard contracts.

The unfair contract terms legislation is set to become law on 1 January next year.

Jon Denovan, principal at Gadens Lawyers, said the proposal would not make a significant change to the current laws – aggrieved parties can still complain in court if they believe the contract is unconscionable and get it varied – but it would allow ASIC to ‘help the underdog’ bring such cases to the fore if the injustice is widespread.

“ASIC probably does that already – but this makes their power clearer,” he said.

Denovan said the legislation had arisen from complaints over terms in telco contracts.

In its newsletter, lawyers Makinson & d’Apice said the implications for lenders if this legislation is enacted included the need to review all loan and security documents; the need to review early termination fees and pricing structures; and the need to restrict powers to vary agreements without the consent of the borrower.

The law firm listed one of the criticisms of the new law being that it extends to businesses as well as consumers. “This is in consistent with

the approach adopted in other countries and may impose an additional unnecessary cost on doing business for companies who in general do not need the protection,” the firm said.

Another criticism the firm highlighted was “the many contracts which contain onerous terms because of the risk attached to the deal”.

“A business may choose to accept onerous terms to get a deal done, and it would be undesirable if the supplier was unable to protect itself properly,” it said.

The Australian Bankers Association is already lobbying against the proposal.

It warned the government that the proposed unfair contracts regime would create uncertainty for the banking sector and result in higher costs for consumers.

Among the ABA’s concerns outlined in its submission to the government is that the draft provisions inhibit a bank’s ability to access credit risk.

“If the application of the proposed regime creates contractual uncertainty, this could lead to additional costs through the re-pricing of risk that will inevitably be passed on to end users of the credit markets – the very consumers this law is designed to protect – in the form of higher borrowing costs that build new economic inefficiencies and inflationary pressures into the system,” said David Bell, ABA chief executive.

“If this draft legislation is intended to indirectly regulate prices of banks’ products and services, then there is a risk to bank revenue streams. There could be impacts on profitability, shareholder returns as well as possible capital management issues.”

Under the proposed regime, customers could agree to terms and conditions for a banking service, and later try to avoid their obligations by claiming a particular term is unfair, the ABA said.

Details of the federal unfair contract terms legislation:

• Intended to be sufficiently wide to cover banking and financial services including credit agreements.

• Detail contained in a Consultation Paper to be released on 11 May 2009.

• Will apply to all sectors including financial services and credit. It will not apply to existing contracts unless they are renewed or varied after the commencement of the legislation.

• Under the proposed legislation an unfair contract term in a standard form contract will be void if the contract is a financial product or for the supply or possible supply of a financial service.

• It is intended that the text of the proposed legislation be finalised, and introduced into parliament by June 2009 and passed as law by 31 December 2009 as a schedule to the Trade Practices Act – which will be renamed the Australian Consumer Law. • It will also be mirrored in the investor protection provisions of the ASIC Act to maintain consistency between the new Law and the ASIC Act.

“This regulatory approach is completely at odds with the government’s and the financial services industry’s efforts to raise the financial literacy of Australian consumers, because there is little or no incentive for consumers to familiarise themselves with their contractual responsibilities,” Bell said Denovan said he could understand why the ABA took this view: “It’s a bit unnecessary – the GFC is a bit more important.”

“Its additional regulation being heaped on financial services that is unnecessary at a time when it has a dose of the swine flu,” he added.

Which terms may be deemed unfair?

Terms that might be ‘unfair contract terms’ under the new legislation, some of which will have significant impact when applied to credit agreements, are as follows: • clauses which permit a supplier to unilaterally vary the terms of a contract. However, such clauses will not be banned where they are reasonably necessary to protect the legitimate business interests of the party advantaged by the term. The consultation draft also states that the provisions are not intended to allow customers to challenge interest rate variations on the basis that they are unfair; • clauses that prevent a consumer from cancelling a contract; • clauses that require payment of fees when the service is not provided; • clauses that only let the supplier decide whether or not to renew a contract; • clauses that penalise only the consumer for breaches of the terms of a contract or for termination of a contract; • clauses that permit the supplier to change the price of the goods or services contracted for without allowing the consumer to terminate a contract; • clauses that permit the supplier to unilaterally determine whether a breach of a contract has occurred or to interpret the contract’s meaning; • clauses that allow the supplier to assign a contract www.brokernews.com.au

without the consumer’s consent. It should be noted that the consultation paper specifically states that it is not intended that this should impact on the ability to securitise loans.

There are certain terms which are to be specifically excluded from the unfair terms test. These are terms which: • concern the main subject matter of a standard form contract; • set the upfront price payable; or • is a term required of expressly permitted in other legislation.

The unfair contract provisions will ban the use of some unfair contract terms. These may include: • terms that deny the validity of pre- or post-contractual representations; • terms that state the written document contains the entire agreement between the parties; • terms under which consumers acknowledge that they have read or understood the contract; • flat/ fixed early termination fees and those requiring the paying out of the contract ( the rationale for this is that early termination fees should be a genuine pre-estimate of loss and not a penalty); and • terms that restrict the lender’s ability to cover more than reasonable enforcement costs, reasonably incurred.

Source: Nancy Bramley-Moore, Makinson & d’Apice, Lawyers

News 19

Brokers warned on ‘spotter fees’ Clients are likely to see through brokers that just pass on their contact details to a bank, reckons Andrew Zobel, general manager of the South Australian franchise group, Zobel.

Zobel was referring particularly to the practice where a broker is paid a fee in exchange for referring on a client looking for a commercial loan.

He said he was “staggered” by the ongoing practice of residential loan writers referring commercial enquiries direct to the banks for a ‘spotters fees’ or one-off commission payments.

“We have enquired around a number of residential brokers. When they get a commercial enquiry, they just refer it on to the bank which then takes the phone number and details.”

Zobel said he could understand why a broker might refer on a client if it were a servicing issue, but said it was “dangerous” just to be handing on business cards to a bank.

“If you do that, what are you saying to the client? What are you being paid for?”

Zobel said a client would “see through that” and were then more likely to just deal directly with the bank.

Horizon Financial’s Mark Turnbull, Australia’s top commercial broker (according to MPA magazine) agreed with Zobel.

“Once a client has a direct introduction to the bank, all future business will go straight to the bank,” he said.

Horizon offers a referral program to residential brokers but includes in its

agreement a guarantee that all residential enquiries will be sent back to the broker.

Turnbull gave an example of a finance arranged for a Subway franchisee.

“The franchisee wanted to finance another franchise and also wanted a home loan. We referred them back to the broker for the home loan – the broker was wrapped.

“If that were a bank, they would done the loan themselves and the broker would have received no commission,” says Turnbull.

He added that he felt a broker was not doing their job properly if they didn’t at least provide their customer with a choice of lender.

Zobel said brokers need to build businesses that allow them to hold on to their clients.

“Our model is built around protecting the client, so when they come in you can look after all their financial services needs,” Zobel said.

In addition to mortgages, Zobel, which aggregates through PLAN, provides financial planning and business lending services through specialist arms within the business, while it also has an arrangement with Alliance to provide insurance products.

Andrew Zobel said there were currently seven franchises in SA, but he was looking to expand that to 14 state wide.

In addition, Zobel is also looking to take on loan writers who do not need to own a franchise.

“If you are writing loans in a franchise territory you will get support from that franchise,” he said.

Andrew Zobel

Key points • brokers vulnerable if they pass on client details to banks in exchange for fee • Andrew Zobel says clients will see through the arrangement • rather than deal with broker, will go directly to the bank • top commercial broker, Mark Turnbull agrees • says broker is not doing his job if just refers customer to the bank

Over service, over deliver Coaching Clinic

O

ne of the challenging things about being a mortgage broker or loan writer is that most of your competitors provide exactly the same products at exactly the same price that you do. This includes other brokers, banks, accountants, financial planners – to name a few. Some providers have exclusive loan products that are only available through them, but they make up such a small proportion of the market that they exclude most potential new clients.

Most brokers tell us that their business relies on repeat and referral business, but very few have a clear strategy to promote this. This is proved by the consumer ‘set and forget’ attitude to mortgages which has been adopted by many of the providers.

Don’t sell on price

To grow your loan book and business through recommendations by strategic partners and loyal clients, you need to give them something to talk about. There are still many providers (brokers and lenders) promoting their products on price alone. The problem with this is that price leadership has always been shortterm – so when your clients think about the cheap rate product that you got for them, they are probably now aware of the expensive exit fees, lack of flexibility or now-increased

If you want to add an additional 100 loans onto your book this financial year, you need to tailor exceptional service to the needs of your client and avoid selling on price. Doug Mathlin explains

rate that presently exists. This turns positive ambassadors of your business to negative ones in no time.

Also, despite the fact that all consumers want a competitive price for their product, they really want value. They want a product that suits their needs, someone to help them for the life of the debt (not just the application to settlement) and someone who will be there to help them for the next one.

One of the reasons that our channel (third party) has grown to nearly 50% over the last 15 years is that bank branches closed and the people in the open ones moved on. The personalised service of the ‘bank manager’ (the trusted advisor) no longer exists. Brokers fill that gap perfectly and have the ability to provide all the services of the bank manager and more.

Exceed expectations

It has to be more than just about you (your personality) and the loan you wrote for them.

Your clients came to you expecting to get a competitive product and good friendly service.

If that is all you provided, about 5–10% of your clients will recommend you to others (if asked). If you over-service your clients, find a way to over-deliver on their expectations and do more than they expect, you could have 20–

40% or more of your clients recommending your services to others and using you again.

For many in the industry, that could be as many as 100 extra loans written per year.

Find out exactly what your clients want and exceed their expectations by 20%. Make sure you can deliver this consistently. Seek feedback from your clients during and after the process and fix any problems that arise immediately.

Once you know that your client is happy with the service that you provided, tell them about your referral program. Ask them if they know anyone who is looking to buy property or selling a property (because they will probably buy again), or just wants a debt review that you can assist them with.

Finally, after you have completed a transaction with a client, meet with them again to tell them exactly what you have done for them, review your service again, restate the benefits of the products that you have arranged and tell them what to expect from you next (ie, your marketing campaign). Keep your door open to your new clients so that you can be their lender for life!

Doug Mathlin is the founder of Front Runner Consulting Group, a company specialising in the development of mortgage broking businesses.

Contact him at dmathlin@frcg.com.au www.brokernews.com.au

industry

NewsinBrief

20 News

Mortgage jobs to go at Suncorp

Troubled Queensland bank, Suncorp-Metway may cut up to 500 jobs in its mortgage business, according to a report in The Sydney Morning Herald.

An announcement about job cuts is expected in September, though a spokesperson for the bank told the SMH that it was too early to specify numbers.

This is on the back of a ten-fold increase in bad debts of $71m being forecast by analysts due to the amount of money owed by property developers in Queensland and NSW. The newspaper said the lender was looking to restructure its banking division “as bad debts mount in the commercial property sector”.

The bank has divided up its loan book into $38bn worth of loans it wants to keep and $16.8bn of poorly performing borrowings in run-off.

A hiring freeze at Suncorp has been in place for the past year.

RBA: further rate cuts still possible

While the major banks have begun pushing up rates, the RBA has not closed the door on further rate cuts this year, according to the minutes of its Monetary Policy Meeting held on 2 June.

Explaining its decision to leave rates unchanged at 3%, the board “did not see a pressing case for any further action ...though they viewed the inflation outlook as affording scope for some further easing of monetary policy, if that were to be needed to support demand at a later stage”.

“Monetary policy had been eased significantly, and budgetary measures were also providing significant support to demand.

Indications were that these policies were having some impact, though the full effects would take time yet to be seen,” it said.

“Accordingly, members judged that maintaining the current stance of monetary policy for the time being would be consistent with fostering sustainable growth and low inflation, and would leave adequate flexibility to respond to developments as needed over the period ahead.”

The minutes indicated some optimism over the state of the world’s finances, particularly in the Asian-Pacific region.

Westpac wins first homebuyer awards

Westpac took back-to-back honours in the Canstar Cannex First Home Buyer Awards.

Canstar Cannex looked at 403 loans from 115 lenders to determine which provider offered the most holistic homebuying experience.

It evaluated printed and web-based educational material, the processes involved, level of access to a real person to provide guidance, and product features. Westpac came out ahead in every state and territory, with the exception of ACT and SA. St.George took the honours in Canberra, while BankSA was the winner in that state.

“We were particularly impressed by Westpac’s loan products designed for first homebuyers and incorporating discounted application fee,” said Steve Mickenbecker, head of research.

Canstar Cannex also noted Westpac offers a higher loan-to-value ratio (LVR) to first homebuyers.

The report also looked at non-banks.

“Although the major banks have the edge when it comes to state and national coverage, non-bank lenders play an important role by providing healthy competition in the lending market,” Mickenbecker said.

Canstar Cannex added that this was apparent in the study where non-bank lenders performed well in their own states.

“These lenders tend not to have a national presence and therefore the awards have been state based,” Canstar Cannex said.

New home development set take off in NSW

Developers are gearing up for a surge of investor activity in the NSW property market thanks to the states budget’s provision for stamp duty relief, reports The Australian Financial Review.

On Tuesday the NSW government announced that stamp duty will be temporarily halved on new dwellings priced below $600,000 for all comers in NSW, except first homebuyers.

The treasury estimates that the measure will contribute to an additional 10,000 new starts in 2009–10.

State government support for residential construction has been heralded as ‘unprecedented’ by the industry – but also as ‘essential’ after ABS figures released yesterday showed that in the three months to March fewer homes were built in NSW than in any other quarter on record.

“A further fall in home construction levels couldn’t be tolerated by any government so action was clearly essential,” said Aaron Gadiel, chief executive at Urban Taskforce.

Property investors have largely avoided NSW since the unpopular 2004 exit tax, and the flat to negative price growth in the past few years.

The concession will apply to off-the-plan contracts entered into by December 31, as long as the building is completed by June 30, 2011. www.brokernews.com.au

CBA quick to close valuation loophole

On the eve of new credit regulations being ushered in to tighten regulation in the mortgage industry, an already convicted fraudster found a way through the CBA’s property valuation requirements to perpetrate a $2m mortgage fraud.

Thirty-nine-year-old Nasser Kalache, a trained real estate agent from Sydney’s western suburbs, has been locked up behind bars until at least August 2013 following a six-year police investigation codenamed Strike Force Jacobi.

“The essential scheme was that the accused and his colleagues would take advantage of what they knew to be lax practices on the part of the bank in its lending arrangements,” said Judge Woods in passing sentence.

The CBA acknowledged that a loophole existed in its valuation procedure at the time Kalache committed the crime.

“The loophole that was in place at the time of this fraud has been closed and the Bank’s policies changed to ensure that similar fraud could not recur,” a spokesperson for the bank told AB. Kalache is already in jail for a previous mortgage fraud.

During the trial the District Court heard that Kalache was the ringleader of a fraud conducted in 2003-2004 in which Kalache’s syndicate bought low-value eastern suburbs units.

At the time properties were apparently bought by at grossly inflated prices with mortgages secured by false documentation. The buyers defaulted on the loans and the lender was left out of pocket.

Lower house deliberates new credit laws

After much anticipation, the draft National Consumer Credit Reform Package was introduced into the lower house on 25 June and was expected to pass through relatively unscathed.

The Reform Package included the National Consumer Credit Protection Bill as well as the Transitional Bill and Fees Bill.

The legislation, which will establish a single national law for the regulation of consumer credit, has faced much scrutiny by industry in the months leading up.

Key features of the legislation include a licensing regime for all credit providers and credit service providers, and responsible lending laws for mortgage brokers and lenders.

In response to concerns from industry, the government reduced jail term penalties from five years to two years, and removed areas where there was potential for ‘doubling up’ of compliance obligations.

The government is also proposing a one-year delay in responsible lending conduct rules from January 2010 to January 2011.

In addition, the government will be considering whether point-of-sale retailers such as car dealers should be included in the law over the next 12 months.

FBAA president Peter White said while some concessions had been made to certain parts in the industry, other aspects of the bill also need to be thought through.

“Banks are concerned at the time frame to swap things over – it’s a lot of fluff and bubble in certain respects, he said. “For an organisation making billions, spending a few million to sort this out should not be too big a deal.”

Lenders and brokers can start registering with ASIC November this year. All participants must apply for a licence by June 30, 2010 to continue practicing.

Technology 21

www.brokernews.com.au

22 News Analysis

CBA offers valid reasons for rate rise – industry

W

hile the CBA’s decision to push up its variable mortgage rate by 10 basis on 12 June drew an angry response from the Rudd Government, as well as many raised eyebrow from other commentators, those inside the industry have been significantly more understanding of the controversial decision.

The increase pushed CBA’s standard variable rate to 5.74% and reversed its earlier 0.1% cut, made in the wake of the RBA’s April 0.25% basis point rate drop.

While deftly qualifying that its variable mortgage rate remained the lowest amongst any other major bank on offer, the CBA pointed to rising wholesale funding costs as the primary reason for the increase.

Consumer response, was, as to be expected, not sympathetic – urged on by grandstanding responses from both the prime minister and Treasurer Wayne Swan, who accused the bank of hindering efforts to stimulate the economy during this global recession.

Ralph Norris – CBA Ceo

Gerald Foley

Explanation holds water

Steve Weston

www.brokernews.com.au

However, Steve Weston, Challenger’s head of third party distribution, found the increased cost of wholesale funding argument – raised by not only the CBA but by ‘all banks and all lenders’ – to be entirely valid.

He pointed out that both business loan and credit card borrowers had been cross subsidising home loan borrowers since the onset of the GFC. However, Weston believed the time would soon come that all banks would need to increase the margin on their mortgage products as well to ‘remain as profitable as they already are’.

“But as we’ve seen with CBA just doing a 0.1% increase, you’re going to cop a lot of backlash when you do it,” he said.

John Kolenda executive director at Loan Market Group also felt the CBA was justified in ‘making the necessary adjustments’ to cover rising funding costs.

And being somewhat circumspect in his view of the market he had this to say: “Sooner or later interest rates are going to go up, so consumers should get used to paying a certain amount now, and adjust their lifestyle accordingly.”

Noting that this sort of event will happen “more often in less competitive markets” National Mortgage Brokers managing director, Gerald Foley, put the CBA’s aggressive action down to the increased power held currently by the majors.

“The emergence of the broker in recent years has shielded people from how dominant the big banks can actually be,” said Foley.

However, he felt markets would free up again, just as they had when Aussie first appeared on the scene in the early 1990s.

“It might be different company with a slightly different model, but fundamentally it’s all part of the same cycle,” he said.

News 23

Online chatter AB’s live broker forum gets tens of thousands of visits a month. As we went to press, these are the topics that were most interesting to brokers.

Techie talk

Recent input from brokers in relation to the Q&A column indicated there is a real interest in online marketing issues. As a result this column focuses on email marketing issues. Future columns will address such topics as e-surveys, websites, public relations and copywriting plus much more.

HTML v plain text newsletters

Question: What is the difference between an HTML newsletter and a

plain text newsletter?

Answer: The easiest way to explain the difference is to say that plain text e-newsletters actually look plain, whereas HTML e-newsletters look like a web page. Plain text e-newsletters are easy to create, are written in standard fonts and have no special formatting attributes such as bold, underline etc. They are easy for recipients to access because they are easily recognised by different e-mail software programs such as Outlook.

HTML e-newsletters are more attractive to the recipient and easier for the reader to scan as they feature visual information such as different font types, sizes and colours, logos, and images. The information contained in an HTML e-newsletter is able to be presented in different layouts such as columns and present in much the same way as any webpage.

You are able to include links to other web pages in an HTML e-newsletter which has the advantage of leading your reader to the places on your website that you want them to see. You are also able to track different statistics associated with your e-mail campaign such as open rates, click-through rates and bounce or unsubscribe details and so on, provided you use e-mail marketing software to create the HTML e-newsletter campaigns.

E-newsletters v printed newsletters

Question: I want to use e-newsletters to market to my clients, but I

Have your say Do you have a strong view that is not being heard?

Brokernews is by far the most popular place for thought-provoking industry discussion with readers constantly exchanging ideas and opinions on the most pertinent topics. To start your own discussion or to comment on any industry developments, visit Brokernews and follow the instructions at the bottom of each story. Have your say – and be heard! www.brokernews.com.au/forum/

have been using printed newsletters for so long. What are the benefits of using e-newsletters and why should I switch?

Answer: If you have some clients that do not have e-mail addresses or perhaps are ‘old school’ and prefer to have a hard copy newsletter you may prefer to do two newsletters – a print version as well as an e-newsletter. You are also able to leave the printed version of your newsletter with your referral partners for them to pass on to their clients for you. However, there are many good reasons to include an e-newsletter in your marketing arsenal. Here are just a few: • With e-mail marketing you can distribute information to both your existing and potential clients at a relatively low cost.

• Delivery time of an e-newsletter campaign is much shorter than conventional marketing and will allow you to get your time sensitive messages out instantly.

• An e-newsletter effectively pushes the message to the recipient, as opposed to website-based advertising that relies on clients or prospects to visit your website by chance. So in effect, an e-newsletter complements and increases traffic to your website.

• E-newsletter campaigns are easy to follow and track. You can track users via bounce messages, unsubscribe requests, read receipts, click-throughs, etc.

• E-mail marketing is paper-free and therefore better for the environment!

If you have any questions on online marketing, please email them to asksam@ financetools.com.au.

To view previous Q & A columns please visit www.financetools.com.au and click on the Q & A link. www.brokernews.com.au

24 Opinion

Architect of its own nightmare

Chris Joye explains how America’s over-reliance on securitisation resulted in the calamitous collapse of its mortgage industry and why Australia has managed to avoid similar government-led bank bailouts

W

hile in New York, I was overcome by the unearthly feeling that the world I perceived was conspicuously different to the one my US colleagues could see.

Why were the financial systems of Canada, New Zealand and Australia in such better shape than their US cousin?

I began to realise that there is a fundamental frailty responsible for both precipitating the crisis and propagating it around the rest of our increasingly interconnected world, that rests at the heart of the US financial architecture.

I have heard no discussion of this far-reaching flaw embedded within the foundations of the US credit creation system: that about 70% of all home loans in the US are not funded using the balance sheets of large transnational banks, or the retail deposits of their customers, but via the far more complex, unstable and, in its US incarnation, inherently conflicted process of ‘securitisation’.

In contrast with the rest of the world, this process dominates US home-loan funding.

It is a system that evolved from the parochial designs of competing states within the highly fragmented US federation, distorted further by the Federal Government’s responses to banking failures during the Great Depression.

That, and the continued missteps of US policymakers since – including the 1968 privatisation of Fannie Mae, which allowed it to retain “public” privileges, and the misplaced creation of Freddie Mac in 1970 purely to compete with it – has seen the effective removal of deposit-taking organisations as a permanent source of housing finance in favour of the nebulous mission of the

Securitisation, however, only ever accounted for about 20% of all mortgage funding in Australia and Canada www.brokernews.com.au

Government Sponsored Enterprises (GSEs). The two GSEs (Fannie Mae and Freddie Mac) became a surrogate for the nationally integrated banking systems that serve as the foundation for housing finance in most other countries (such as Australia, Canada, and New Zealand), which have avoided virtually all of the extreme dysfunctions that emerged in the US (but, of course, were nevertheless casualties of the ensuing crisis).

The result of this taxpayer-subsidised “fire-and-forget” funding foundation was the crisis that has been transmitted around the world by integrated wholesale capital markets.

The liquidity of credit markets in countries that share none of the US problems have been eviscerated with savage real-economy consequences.

Securitisation makes sense

When a mortgage is securitised, the whole point is to take assets ‘off balance sheet’ and sell them to thirdparty investors – thus enabling the lender to recycle the original capital and embark on a new round of financing.

This process makes sense if managed with the right controls. Most regulators around the world have commented approvingly that securitisation allows lenders to alleviate balance-sheet stresses and share some risks with third parties, such as pension funds, which get exposure to low-volatility ‘mortgage-backed securities’ that yield higher returns than other investments.

The low-risk and robust long-term performance of securitised home loans in countries such as Australia and Canada before and throughout the credit crisis has been testament to the merits of this diversification medium for consumers, lenders, and investors. Securitisation, however, only ever accounted for about 20% of all mortgage funding in Australia and Canada.

Australia’s and Canada’s housing finance markets are dominated by highly successful national banks whose balance sheets are the principal providers of mortgage credit to households. Australia now lays claim to four of only 11 AA-rated banks in the world (three of Canada’s banks have AA ratings).

Opinion 25 Mortgage default rates in both countries remain extremely low (less than 15% of US levels), and there has been no credit rationing, bank failures or nationalisations – and housing markets have avoided any material price falls.

Destabilising conflicts

Trouble arises when you create artificially strong incentives and subsidies, as US governments repeatedly did, to predicate your entire housing finance edifice on securitised forms of funding. Synthetic incentives expose the financial system to potentially destabilising conflicts.

The most obvious is that the organisations that source new home loans (and are responsible for assessing their credit risk) are removed from the institutions that ultimately own the assets (and bear the risk). Also, in contrast with sticky bank deposits from millions of individual customers, securitisation is funded by a small number of large, and sometimes fickle, institutional investors that can withdraw on a whim.

Because the quasi-private GSEs had an artificial capital-raising advantage wherein investors imputed to them the US Government’s AAA-rated credit rating (on the assumption they were backed by the state), they could source funds much more cheaply than their competitors.

They also had other crucial advantages such as substantially lower capital requirements that allowed them to assume spectacularly higher levels of leverage.

Before the crisis, the two GSEs funded or guaranteed about half of all US housing finance, with total on and off balance-sheet liabilities of about $US5trn ($A6.15trn). This is terrifying when compared with the $9.5trn of US Government debt at the time of its ‘conservatorship’ (a weasel word for nationalisation).

Early this decade the GSEs were asked by the Bush administration to increase financing for low to moderate

income regions with high minority populations – which resulted in them using their AAA-ratings to invest in higher risk “alt-A” loans.

Private lenders crowded out

That crowded non-AAA rated private lenders out of their traditional domain, shunting them further down the credit curve into even riskier (sub-prime) lending – which doubled from 10–20% of new home loan origination between 2001 and 2005.

An OECD study on the drivers of the global financial crisis argued that these effects were exacerbated by two other related factors: the Basel II accord on international bank regulation that encouraged banks to accelerate their off balance sheet mortgage securitisation activity; and changes in US Securities Exchange Commission (SEC) regulations that allowed investment banks to increase their debt to net equity ratios from 15:1 to up to 40:1.

The net result was, said the OECD, that banks started creating “Fannie and Freddie lookalikes” – such as collateralised debt obligations (CDOs). In almost all other countries traditional banks account for 80–90% of all mortgage credit, with most of these assets retained on the lenders’ balance sheets. Lenders in these nations usually apply the same credit-assessment standards to the loans that are securitised as those they retain.

In most Western economies, banks control the credit assessment process, service the assets, and bear the risk if borrowers default on loans. In the US, all three critical functions – origination, servicing, and funding – are often separated.

Christopher Joye is founder and managing director of Rismark International. This is an extract of an article in the US journal Strategic Economic Decisions.

Chris Joye

www.brokernews.com.au

26 Opinion

Inside economics

The myths and mistakes of investing Given the complexity of investment markets and investing, along with the massive amount of information available to investors, many people rely on logic based on ‘common sense’ or simple ‘rules of thumb’ in making investment decisions. AMP economist Shane Oliver debunks these myths Myth #1: High unemployment will prevent an economic recovery (Refer to table below)

This argument is wheeled out every time there is a recession – like now. If it were correct then economies would never recover from recession, but simply spiral down into the sort of crises that Karl Marx predicted would ultimately lead to the demise of capitalism. Of course no such thing happens. Rather, the boost to household discretionary income from lower mortgage bills (as interest rates fall) and tax cuts or stimulus payments to households during recessions eventually offsets the fear of unemployment for the bulk of people still employed. As a result they eventually start to spend more which in turn gets the economy going again. In fact, it is normal for unemployment to keep rising during the initial phases of an economic recovery as businesses are slow to start employing again – fearing the recovery won’t last. Since share markets normally lead economic recoveries, the peak in unemployment often comes a long time after shares have bottomed. In Australia, the average lag from a bottom in shares following a bear market to a peak in the unemployment rate has been twelve and a half months.

Myth #2: Business won’t invest when capacity utilisation is low

This argument is also rolled out during recessions.

The problem with this myth is to ignore the fact that capacity utilisation is low in a recession simply because spending – including business investment – is weak. So when demand turns up, profits improve and this drives Shares normally lead the peak in unemployment around recessions Australian recessions

Peak in Aust.

Share mkt low vs unemployment rate unemployment peak.

Months before (+) Early 1930s Jul 29-Aug 31 June 32 +10 Early 1950s May 51-Dec 52 June 53 +6 Early 1960s Sep 60-Nov 60 Sep 61 +10 Mid 1960s Feb 64-Jun 65 Sep 67 +15 Early 1970s Jan 70-Nov 71 Sep 72 +10 Mid 1970s Jan 73-Sep 74 Dec 75 +15 Early 1980s Nov 80-Jul 82 Jul 83 +12 Early 1990s Aug 89-Jan 91 Dec 92 +23 +12.5 Average Table only shows those episodes where a recession was associated with a bear market in shares and vice versa. Based on All Ords. Source: Bloomberg, Thomson Financial, AMP Capital Investors www.brokernews.com.au

Associated bear market in Australian shares

a pick-up in business investment which in turn drives up capacity utilisation. So while business investment in key countries right now is poor, providing there will be a pick up in demand – and several indicators are pointing to such later this year – then business investment will start to improve even though many factories are still idle.

Myth #3: Corporate CEOs, being close to the ground, should provide a good guide to where the economy is going

Again this myth sounds like good common sense. However, senior business people are often overwhelmingly influenced by their own sales figures but have no particular lead on the future. In the late stages of the early 1980s and early 1990s recessions, anecdotal comments from Australian CEOs were generally bearish – just as recovery was about to take hold. Note this is not to say that CEO comments are of no value; but they should be seen as telling us where we are rather than where we are going.

Myth #4: The economic cycle is suspended

A common mistake investors make at business cycle extremes is to assume that the business cycle won’t turn back the other way. After several years of good times it is common to hear talk of “a new era of prosperity”.

Similarly, during bad times it is common to hear talk of “continued tough times”. But history tells us the business cycle is likely to remain alive and well.

Myth #5: Crowd support for a particular investment indicates a sure thing

This “safety in numbers” concept has its origin in crowd psychology. Put simply, individual investors often feel safest investing in a particular asset when their neighbours and friends are doing so, and the positive message is reinforced via media commentary. The only problem with it is that while it may work for a while, it is usually doomed to failure. The reason is that if everyone is bullish and has bought into the asset there is no one left to buy in the face of any more good news, but plenty of people who can sell if some bad news comes along. Of course the opposite applies when everyone is bearish and has sold – it only takes a bit of good news to turn the market up. And as we saw in March this can be quite rapid as investors have to close out short (or underweight) positions in shares. The trick for smart investors is to be sceptical of crowds rather than drawing comfort from them.

Opinion 27

Myth #6: Recent past returns are a guide to the future

This is another classic mistake that investors make which is again clearly rooted in investor psychology. Reflecting the difficulty in processing information, short memories and wishful thinking, recent poor returns are assumed to continue and vice versa for strong returns. The problem with this is that combined with the “safety in numbers” myth it results in investors getting into an investment at the wrong time (when it is peaking) and getting out of it at the wrong time (when it is bottoming).

Myth #7: Strong economic growth and strong profit growth are good for stocks and poor economic growth and falling profits are bad

This is generally true over the long term and at various points in the economic cycle, but at cyclical extremes it is usually very wrong and constitutes another big mistake investors make. The big problem is that share markets are forward looking, so when economic data is really strong – measured by strong economic growth, low unemployment – the market has already factored it in. In fact the share market may then start to fret about rising cost pressures and rising short-term interest rates. As an example, when global share markets peaked in October/ November 2007 global economic growth and profit indicators looked good.

Of course the opposite occurs at market lows. For example, at the bottom of the last bear market in shares back in March 2003, global economic indicators were very poor and the general fear was off a ‘double dip’ back into global recession. As it turned out despite this “bad news” stocks turned around, with better economic and profit news only coming along later in the year to confirm the rally. A similar situation may be occurring right now with GDP figures worldwide confirming the worst global recession since the 1930s. Unemployment is also spiralling higher, and yet share markets have been moving higher for the last three months. History indicates time and again that the best gains in stocks are usually made when the economic news is poor and economic recovery is just beginning or not even evident.

Myth #8: Strong demand for a particular product produced by a stock market sector (eg, housing) should see stocks in the sector do well and vice versa While this might work over the long term, it suffers from the same weakness as Myth #7. By the time housing construction is really strong, for example, it should already be factored into the share prices for building material and home building stocks – and thus they might even start to start to anticipate a downturn.

Myth #9: Budget deficits drive bond yields higher

The logic behind this is simple supply and demand.

If the government is borrowing more (higher budget deficits) then this should push up interest rates (the cost of debt) and vice versa.

But it often doesn’t turn out this way because periods of rising budget deficits are usually associated with recession – and hence weak private sector borrowing and falling inflation and interest rates – so that bond yields actually fall, not rise. This was evident in both the US and Australia in the early 1990s recessions and evident in Japan right through the 1990s. While currently surging public sector borrowing around the world has contributed to a rise in bond yields so far this year, reduced ‘safe haven’ demand as investor confidence has stabilised may be the main factor. It remains to be seen how bond yields will behave as the rising level of excess capacity globally puts further downwards pressure on inflation, as normally occurs in the aftermath of a recession. History suggests bond yields might actually head a bit lower again.

Myth #10: Having a well-diversified portfolio means that an investor is free to take on more risk

This mistake has been clearly evident in recent years.

A common strategy has been to build up more diverse portfolios of investments less dependent on equities and with greater exposure to alternatives such as hedge funds, commodities, direct property, credit, infrastructure, timber, etc. This generally led to a reduced exposure to truly defensive asset classes like government bonds. So in effect, investors have actually been taking on more risk helped by the ‘comfort’ provided by greater diversification. Yes, there is a case for alternative assets. But unfortunately the events of the last two years have exposed the danger in allowing such an approach to drive an increased exposure to risky assets overall. Apart from government bonds and cash, virtually all assets have felt the blow torch of the global financial crisis, with agricultural investments being the latest victim in Australia.

Myth #11: Tax should be the key driver of investment decisions

For many the motivation to reduce tax is a key investment driver. But there is no point negatively gearing into an investment so as to get a tax refund if it always makes a loss. Similarly, the recent experience with Managed Investment Schemes also highlights the danger in relying too much on tax considerations to drive investments. The first priority is to make sure that an investment stacks up well in its own right – without relying on tax considerations.

Myth #12: Experts can tell you where the market is going

Economic and investment forecasts are often seen as central to investing. But, at the risk of being thrown out of both the ‘economists club’ and the ‘market strategists club’, no one has a perfect crystal ball. And sometimes they are badly flawed. It is well known that when the consensus of experts’ forecasts for key economic or investment indicators are compared to actual outcomes they are often out by a wide margin. This was particularly the case last year. Forecasts for economic and investment indicators are useful, but need to be treated with care. Like everyone, market forecasters suffer from numerous psychological biases and quantitative point forecasts depend upon information available when the forecast is made – but need adjustment as new facts come to light.

If forecasting the investment markets was so easy then everyone would be rich and would have stopped doing it.

The key value in investment experts’ analysis and forecasts is to get a handle on all the issues surrounding an investment market and to understand what the consensus is. Experts are also useful in placing current events in their historical context, and this can provide valuable insights for investors in terms of the potential for the market going forward. This is far more valuable than simple forecasts as to where the ASX 200 will be in a year’s time.

Conclusion

The myths cited here might appear logical and consistent with common sense, but they all suffer often fatal flaws which can lead investors into making the wrong decisions. The trick to successful investing is to recognise that markets (and economies) are highly complex, that they don’t go in the same direction indefinitely, that markets are usually forward looking and that avoiding crowds is healthy.

Dr Shane Oliver is head of investment strategy and chief economist at AMP Capital Investors www.brokernews.com.au

28 News

No tea or sympathy as Whittingham business wound up From page 1 The words “bogus” and “scam” littered e-mails with some brokers indicating they would pursue the matter further.

In his e-mail, Whittingham sought to justify his recent actions: “I have kept very quite [sic] over the past six months regarding allegations against myself personally and the business as I thought that the matter would just blow over and we would get back to normal trading. But I was very wrong and owe you all an explanation of what took place.

Whittingham claimed that his troubles began “when we were providing accounts to brokers and a number failed or could not pay them”.

“So we started taking them to the small claims court of Victoria.

But that did not work as the brokers either claimed that they did not receive the leads or they were rubbish,” he said.

He then went on to defend himself in five cases he said were brought against him by brokers who purchased leads from him and concluded by saying: “There are many more cases but we just wanted to point out a few individuals that assisted the magazine (Australian Broker) and the website (Brokernews) for the slander.”

How clients responded to the e-mail…

“Words can not express how disappointed I am with your service and this e-mail, which you may think justifies what has occurred, it does not” – David Smithers, Gemstone Finance “I cannot consider you an honest person and would not support you in the future in any way whatsoever” – Colin Kelly, Prime Australia Financial Services “Is this a scam? I don’t know about that, what I do know is we have paid you $900 and have never received one lead, not one. What I also know is that you seem to be very good at not returning e-mails or phone calls” – Paul Birch, director, BFT Group Financial Services “I fail to see how silence is ever anything other than an acknowledgement of guilt. I and many other brokers will see no loss to this industry when you leave,” – Scott Beattie, Cube Home Loans.

The e-mail ended with an admission of sorts: “Some of you may that that [sic] the whole matter could have been better sorted out, I would agree and if I had to do it all over again I would change a lot of things. I would like to thank all of you within the group for everything over the past three years and wish all of you the very best of luck in the future.”

Raymond back in favour

From page 1 Lynne Wyatt, head of brand and marketing at RAMS, said Raymond has “all the elements of the great Australian brand”.

“The brand has great stretch quality. It stretches quite well into country areas.”

She added that the response from Westpac people when they go into a RAMS branch was “it’s so different here” – an indication of how much it has differentiated itself from its parent company.

Sulicich said RAMS valued both its broker channel and franchise network with business evenly split between the two channels.

“Where the business comes from is determined by the market,” he said.

“We are confident of our strategic approach to the market – we are in a strong position going forward.”

Off the cuff Tanya Sale – General Manager, Finconnect Australia What was the last book you read? It was a crime book called Jack and Jill by James Patterson. I like murder mysteries.

If you did not live in Australia, where would you like to live?

Why? Praiano, in splendido Northern Italy. Because it is so laid back and it would just be a nice change.

If you could sit down to lunch with anyone you like, who would it be? Why him/ her/them? Dr Chris O’Brien – he was such an amazing man. He gave so much, even in the end he was still giving. He was so inspirational.

What was the first job you ever had? I made a business deal with my father. I would mow the lawn when required. And he would pay me a pittance. I soon learned the value of money and myself.

What do you do to unwind? I love going to the ocean. The salt water seems to just wash away everything.

What’s the most extravagant gift you ever bought yourself? A weekend away. On a yacht, sailing around the Whitsundays.

Which CD is currently playing in your car stereo? Having two children that are 11 and 9, Pink is constantly playing in my car. And, if I hear one more Pink song…

If you could give anyone starting out in business one piece of advice, what would it be? Work hard. But surround yourself with good people who share the same ethics. And also don’t forget to have a balance.

If I was not working in the mortgage industry, I would like to be…? In partnership with my good mate Josette Loge, running a funky bar right on the beach.

Where was the last place you went on holiday? Sardinia, Italy.

Can you see the pattern developing here?

What’s the one thing most people would not know about you? I’m not as big a rat bag as everyone thinks I am. In fact, I am very family orientated.

www.brokernews.com.au

News 29

eMagazine

ONLINE NOW AT

www.brokernews.com.au Live news feeds Directly link to industry websites

Easy to read format

Each fortnightly issue of Australian Broker is available online, giving you the chance to read topical news stories, directly link to industry websites and view live news feeds straight from your desktop!

www.brokernews.com.au/ab www.brokernews.com.au

30 Final word

Insider

Be very careful what you say – and who you say it to. Insider is on the prowl and leaves no stone unturned.

In your workplace, at your party, sitting in on a press conference… ready to take a jibe at brokers, have a go at lenders, and taunt the odd mortgage manager and non-bank lender as well. And be warned, because the joke’s definitely on you Raymond wiggles his booty…

‘Raymond’, the ubiquitous woolly mascot for RAMS Home Loans, could be seen jiggling his booty all about town recently when RAMS was named non-bank lender of the year by Money magazine.

The award was a great success for the lender, especially given its efforts to promote itself as a separate entity from parent company Westpac, and it certainly went to town on its triumph putting together a video featuring a very jubilant Raymond.

Besides causing a stir in the Sydney CBD by getting out of limos, wearing groovy Hollywood-style sunglasses and being surrounded by his entourage, Raymond could be seen cheekily dancing away (and showing his rear end) in front of BankWest, ANZ and CBA branches in a clever (and very funny) dig at its banking competitors

Spot the similarities…

Insider could not help but notice the parallels with the broking industry in a bitter spat involving Flight Centre and Singapore Airlines.

For those of you who may have missed it, a very nasty war of words has erupted between the travel agency and the airline over what The Australian called a “few percentage points of commission” (sound familiar?).

In the same way that lenders pay brokers a commission for introducing loans to them, airlines pay travel agents a commission for every ticket they sell on their flights.

And in the same way that the major banks cut broker commissions last year, Singapore Airlines has apparently proposed cutting the commission it pays to travel agents and is instead encouraging customers to book online.

In response Flight Centre has ordering its staff to stop selling customers tickets on

www.brokernews.com.au

Singapore Airlines or its subsidiary airline and warned other airlines of a similar response if they try to undercut them on the web.

Of course if this is not already giving you a distinct feeling of déjà vu, then consider the response of the airline, which claims that sales have not been affected by the Flight Centre boycott.

Now Insider know there is a world of difference between selling airplane tickets and originating loans (we doubt any airline is taking 60 days to process ticket requests) but we suspect some valuable tips might come out of this ‘case study’.

Got any juicy gossip, or a funny story that you’d like to share with Insider? Drop us a line at insider@ausbroker.com

Liberty Financial 13 11 80 www.liberty.com.au page 3

Other services

Non-conforming

Choice Aggregation 1300 135 389 www.choiceaggregationservices.com.au

RP Data www.rpdata.com page 22

Symmetry 1300 723 613 page 11

Scottish Pacific Benchmark 1300 332 867 www.spbgroup.com.au enquires@spbgroup.com.au page 10

Pepper Homeloans 1800 737 737 www.pepperhomeloans.com.au page 14

Trailerhomes 0417 392 132 page 28

CSL Money 1300 361 883 page 8

GBST 07 3331 5829 www.financialservices.gbst.com steven.anderson@gbst.com page 4

Short term lender

Oasis 1800 426 747 www.oasiscapital.com.au page 12

Other services

PLAN Australia 1300 78 78 14 www.planaustralia.com.au mail@planaustralia.com.au page 5

Crown & Gleeson 1800 735 626 www.crownandgleeson.com.au page 2

Eurofinance 02 9252 8311 www.eurofinance.com.au page 17

Property Match Up 1800 463 462 www.propertymatchup.com.au page 25

Interim Finance 02 9971 6650 www.interimfinance.com.au page 6

Better Mortgage Management 1300 662 661 www.bettermm.com.au info@bettermm.com.au page 32

Residential Mortgage Fund 1300632737 www.residentialmortgagefund.com.au page 9

NCF Financial Services Pty Ltd 1300 550 707 www.ncf1.com.au page 13

Mango Media 02 9555 7073 www.mangomedia.com.au page 1

Residex 1300 139 775 www.residex.com.au page 30

www.residex.com.au The House Price Information People

Training Services

Mortgage Manager/ Non-bank

Lender

Debtor Finance

Aggregator/ wholesale broker

Services

Institute of Financial Services 02 9283 5999 www.ifs-inc.com.au IFSoffice@ifs-inc.com.au page 31