Consumer groups slam mortgage broker forum

By Leith van Onselen

Consumer groups have lashed the mortgage broking industry for pretending to care about reform while vigorously lobbying politicians to protect their commissions. From SBS News:

The consumer groups that were part of a forum with the mortgage-broking industry have quit en masse, citing a lack of progress and willingness to change.

Choice, Consumer Action Law Centre, Financial Counselling Australia and Financial Rights Legal Centre pulled their representatives from from the Combined Industry Forum.

“Buying a home is one of the biggest decisions someone can make, said Fiona Guthrie, chief executive of Financial Counselling Australia.

“It’s essential that any advice is given with a consumers’ best interest in mind.

“Removing conflicts is the only way to make sure that someone buying a home gets genuine advice about the best option for them.”

The forum was initiated by the mortgage-broking industry.

The consumer groups their discussions over the years have failed to deal with concerns about commissions or calls for brokers to act in the best interests of their clients.

“Mortgage broking lobbyists continue to swarm on Parliament House in an attempt to derail crucial recommendations from the Royal Commission Final Report, showing the sector cannot be trusted to stand up for everyday home owners when it comes to reform,” the groups said in a statement.

They are urging the government to implement the recommendations of the royal commission into the financial services industry, including ending trail commission payments to brokers for the life of a home loan and phasing out commissions paid by lenders to brokers who push their loans.

Hear hear. Brokers were at the forefront of the decline in mortgage standards and the proliferation of ‘liar loans’, as noted by UBS:

“The level of factual inaccuracy in mortgage applications was highly skewed to customers who secured finance via a mortgage broker,” UBS said.

Lead analyst Jonathan Mott, along with four colleagues, wrote in a report last week that “32 per cent of customers who secured their mortgage via brokers stated they misrepresented parts of their mortgage documentation compared to 22 per cent of customers who used bank proprietary distribution.

“In each category of factual accuracy (with the exception of ‘would rather not say’) there was a statistically significantly higher level of misrepresentation for customers who secured their mortgage via a broker,” the report said.

It said 13 per cent of respondents who secured their mortgage via a bank and misrepresented their documentation “stated their banker suggested they over/under represent” their income or asset details.

For borrowers who “secured their mortgage via a broker and misrepresented their application, 41 per cent of them stated they had done this on the suggestion of their broker.”

Brokers have conflicted remunerations structures identical to those that blew up US banking system pre-GFC and the same problem of no “skin in the game”, as well creating diffused responsibility for lending standards. Allowing them to receive a percentage of the loan amount plus trailing commissions is also a strong incentive for them to oversell.

Root-and-branch reform is long overdue.

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  1. Couldnt all this be solved by regulating the commission structure so that all banks pay the same rate, and cap trailing commissions to say 5 years? Making consumers pay for broking services is not in their best interests if it results in them not even bothering to seek advice, or if it results in the failure of smaller lenders with no physical distribution thus lessening competition.

    • Strange economics of house price fallsMEMBER

      If the banks lose the plausible deniability of mortgage brokers – (or as you put it “diffused responsibility for lending standards”)

      And now they have to use 6 times actual income (which is 10 to 20% less than the misrepresented mortgage broker income, and more for some).

      Then house prices fall with loan size – another 10 to 20 % (as there are no foreign buyers).
      This is why the govt talks about those “mum and dad” mortgage brokers, giving “mums and dads” unaffordable credit…
      And “mum and dad” banker bonuses go down 20% with loan size…destroying the “mum and dad” 3 million beachside house prices on the way..

      • strange economics of mortgagesMEMBER

        At 5% interest you are still only paying 30% of your income in interest. so 6 times income is popular. See your friendly mortgage broker for details. Bank direct will only give you 4 or 5 times so need mortgage brokers to keep loan size up.
        If down to 4 or 5 times well house prices would drop 10% more..bad…
        (Remember The principal is never paid back (as houses are supposed to increase 10 % a year so who cares).
        No risk. What could go wrong. It was money for jam..

      • Given the marginal buyers set the price, and LTI loans greater than 12 were being issued, and most investors are relying on Equity, Mate! to fund additional purchases, you can see how rapidly exploitation of leverage can distort the market and is only stable on the way up. There is no way to de-risk on the way down without selling. Should more and more people choose this option into tightening credit conditions, liquidity will decrease even more, and we accelerate the crash.

      • Lol.
        Where I am coming from 3.5x income is the norm and you can’t commit more than 30% of your income on repaying all debts ( credit cards, home loans, and personal loans combined ) regardless of income.
        I guess my old country don’t want to see people getting ahead,
        ahead of the their own kids,just to clarify. Cheers.

      • Just checking in to see if you’re both OK?
        I just had one of those eery feelings.
        You are still wearing the Care Alert Smart dialler, aren’t you?

    • I still reckon the only reason there were more liar loans through brokers and second tier banks was because nobody needed to lie to a big 4 bank that was approving mortgages based on HEM. If even crappy customers were being given mortgages based on bank designed fictional expenses (HEM), then only the very crappiest of them would ever need to lie about their actual expenses.

      • Except 80% of applications submitted to Westpac during the period that ASIC went after them contained expenses lower than the HEM calculation. Given the way HEM is calculated, this is statistically impossible (in the same way that 90% of drivers are above average…) unless there are some serious errors in the calculation. More likely, as intimated by Justice Perram, consumers fraudulently or innocently under-reported their living expenses.

        I’m not defending the banks – and the over-reliance on a system resulted in some people getting larger loans than they should have – but HEM isn’t necessarily the massive problem it has been made out to be.

    • 1) Why should all consumers have to indirectly pay for someone to use a mortgage broker?

      2) If small banks were concerned about competition effects, then they’d band together and make sure their home loans rates were downloadable via an API onto a website.

      Its rubbish that mortgage brokers think that they can’t survive on a flat fee model anyway. A client will always be willing to pay if they are adding value.

  2. Jumping jack flash

    Ah yes. My good mate the mortgage broker who can hook you up with however much debt it takes to purchase your dream property. I wonder how he’s going these days?

    But thank goodness that party is over.
    Who knows what could have happened had it kept up?
    People selling properties may have started believing their properties were actually worth that much money, when as much money as they asked for was simply handed over to the buyer and then handed over to them.

  3. This is one of those “be careful what you wish for because you might just get it”
    Sure Mortgage Brokers are about as low as a snakes belly and can be trusted about as far as you can throw them but any reforming of the strangle hold that our big4 banks have on Australian Mortgage issuance relies on a “somewhat independent” widely distributed Mortgage issuance system.
    The only existing system that fulfills these requirements is our wonderful Mortgage Broker industry.
    Now imagine we could jump forward 5 years and discover that our big 4 banks had dramatically reduced their exposure to Aussie home mortgages, especially in the sub-prime borrowers segment (lets say those with less than 30% deposit)
    Wow the Australian government would be off the hook for under-writing these banks,
    Think about it: Why would the Aussie public purse be used to bail out some Japanese or US bank that wrote a bunch of sub prime Aussie mortgages?? F-em they made some stupid decisions it’s their problem.
    Ah but how to get there, that’s the question? And what happens if our only possible vector to this end position is a business that we destroyed to punish the banks (some punishment guaranteeing that alternative mortgage processes are eliminated)
    As I said Be careful what you ask for……..

  4. The combined industry forum is new and is not the main representative body for brokers. The MFAA and FBAA are.

    “Brokers have conflicted remunerations structures”

    No they don’t.

    “Allowing them to receive a percentage of the loan amount plus trailing commissions is also a strong incentive for them to oversell.”

    And what’s the difference when someone walks into a bank? Every lender has a direct incentive to lend as much as they possibly can.

    Banks are innocent and brokers are the problem?

      • Banks can’t outsource their responsibilities for a transaction via the broker.

        If a lender or a lender + a broker deliberately understate a consumers expenses, what’s the penalty?

        We are still waiting to find out, because the Westpac VS ASIC saga is still rolling on.

        After Westpac & ASIC settled, my calculation was about $350 per loan as a penalty.