WE’VE COME A LONG WAY, BABY

And

In the year 1975, the vast majority of home mortgages - a whopping 86% - were held by non-banks: solicitors’ nominee companies, the government, building societies and life insurance companies, in that order.

Banks were either trading banks, which held only 2% of home mortgages, or trustee savings banks, which held 12%.

Interest rates that year averaged 6.6%.

Lenders and their lawyers prepared and registered paper mortgages, and moneys were advanced only after documents were physically exchanged at the offices of the lawyer who acted for the lender, or at the local office of the State Advances Corporation.

Borrowers paid the fees of both sets of lawyers according to the Law Society scale of charges - even if one lawyer acted for lender and borrower, which was often the case with solicitors’ nominee companies.

Scale fees were based on the value of the mortgage.

Mortgages were fixed-sum paper mortgages, and one document contained all the financial and security terms.

Borrowers often had two or three mortgages secured against the one property. Consumer credit regulation was almost non-existent.

Mortgage advisers did not exist.

Most borrowers remained with the same institutional lender until they sold the property.

Refinancing with another institution occurred only if the mortgage was short-term, from a private lender, and the borrower qualified under the new institution’s rules.

These usually involved winning a ballot from a terminating building society, or being with the savings bank for the qualifying period, or taking out a life policy.

Credit criteria was very simple and often ranked in importance behind other criteria.

In the year 2000

In the year 2000, registered banks held approximately 90% of all mortgages; building societies and solicitors’ nominee companies were becoming things of the past.

The Law Society no longer required lawyers to charge scale fees for conveyancing, and lawyers were free to charge whatever they could justify for the transaction.

Settlements were still between lawyers but were unattended and relied on undertakings.

In September 2000, my firm sent out and settled the first SwitchMe-style mortgage for a refinance.

A fixed fee was charged, lower than other lawyers usually charged.

Borrowers did not need to employ their own lawyers but instructed us on a limited brief to act for them - to attend to the settlement and registration of the refinance.

The process was the forerunner of what is now called Switchme and could be used only if the mortgage was arranged via a broker, who met the borrower and provided financial advice.

Non-bank lenders, funded by securitisations, were growing.

Interest rates averaged 8.5%, down from a high of 21% in the mid-1980s.

Consumer credit regulation existed for contracts, but not for the growing constituency of unlicensed mortgage advisers and brokers.

Qualifying criteria was now based on credit, and new customers to the bank were encouraged.

Mortgages were still on paper, but the financial terms were now generally in a loan agreement, and the security terms in a paper mortgage instrument which incorporated the general terms set out in a mortgage memorandum registered by the lender.

The registered mortgage secured all obligations owed by the customer to the bank.

Banks prepared the loan agreement and instructed the borrower’s lawyer to act for them to prepare a mortgage on the bank’s standard forms.

It was designed to be faster, better and more cost-effective than the traditional processes.

In the year 2023

In the year 2023, big, registered banks now maintain a major hold on the home mortgage market (approximately 86%) against smaller banks and non-banks.

Mortgage advisers are a mature part of the market now and must be registered financial advisers – and the NZ mortgage advisers’ share of the market is approximately 50% of new originations.

Interest rates are rising rapidly from historic lows of under 3%.

Consumer credit law has developed, and with it a focus on responsible lending and regulatory compliance, including adviser training and education.

One paper document has been replaced by a virtual mortgage, comprising:

(a) a loan agreement;

(b) an electronic mortgage incorporating the lenders memorandum of terms; and

(c) a paper client authority and instruction.

Generally, the loan agreement is still prepared by the bank, and one lawyer acts for the bank and the borrower to arrange for signing, certification, settlement and registration.

Borrowers are rightly treating their mortgages as portable, moving their mortgages like they move their energy utilities, from one supplier to another.

The Government has been talking about open banking for many years but really only giving lip service to the concept.

Certainly, it is now more open than it was, but it has still a long way to go. Mortgage portability is a part of open banking. The impediment to date has been the cost and process of switching.

Changes bring opportunities

Over the last 50 years, the main changes in the residential mortgage environment have been:

• the banks’ share of mortgages has increased from 14% to approximately 90%;

• a paper mortgage has been replaced by a virtual mortgage;

• financial advice formerly given to borrowers by lawyers is now given in at least 50% of cases by registered financial advisers;

• the lawyer’s role has reduced to providing legal advice and settling and registering the mortgage;

• mortgage portability has increased.

With change come opportunities. The challenge for those involved in the industry is to keep up with change, understand it and take advantage of the opportunities change brings.

Refinancing change

In 1975, I was a “baby lawyer,” newly qualified and on my feet but still needing to learn how to walk.

By the year 2000, I had seen the developments in the mortgage industry, and the takeover by the banks of the dominant role as the provider of residential mortgages.

I was a banking partner in a large, national law firm and was acting for non-bank lenders, mainly Australian, and was acting similar to an Australian panel lawyer for non-bank lenders.

The mortgage industry was changing. The introduction of advisers meant that financial advice to borrowers was no longer the preserve of lawyers.

I became aware of a refinancing system used in Australia where lawyers played a reduced role in mortgages.

I redesigned the Australian system, the forerunner of Switchme, so it worked in New Zealand and provided benefits for lenders and borrowers.

I haven’t kept count of the number of mortgages my firm has registered in the 22 years since the process began, but it would be well in excess of 50,000.

All of these have resulted in valid, binding, registered mortgages.

Each has been arranged through either an independent or bankemployed mortgage adviser, and each adviser has been trained and accredited by us to participate.

Switchme has matured well and has been tweaked and refined to cope with electronic registration, but it is still, in concept, the same now as it was when it started.

Initially, we encountered pushback from a minority of lawyers, but this soon faded away.

The process is legally compliant, so banks and regulators are happy. Importantly, brokers and borrowers are happy with a fast and cost-effective refinance service.

Refinancing transactions are a significant part of the mortgage market. If you don’t already use it, introducing a client to Switchme for a simple refinance may be a change to consider.

Sanderson Weir makes the process available to advisers who have been trained and accredited by it and wish to become part of the process of change.

Feedback from some of our accredited brokers concludes that being part of the Switchme process enhances their reputation in the eyes of their clients.

They are providing an efficient, economic service that many of their colleagues do not.

Switchme is usually better, faster, and more cost effective for simple refinances.

For more complex refinancing situations, where it is part of a wider transaction, or where the client’s circumstances require detailed legal as well as financial advice, Switchme may not be appropriate, and the client should take advice from his or her own lawyer. ✚