The mortgage broker locusts continue to swarm politicians over the Hayne Royal Commission’s recommendation to overhaul mortgage broking from a commission-based to a user-pays system.
The head of the country’s biggest retail mortgage broker, Aussie Home Loans chief James Symond, is mobilising brokers across Australia to lobby politicians to retain the current conflicted remuneration structure. From The AFR:
Banks currently pay mortgage brokers more than $1.5 billion a year in upfront, and about $1 billion in trailing commissions… On the day the final report was released, the government said it would legislate to ban trailing commissions by mid-2020…
Aussie Home Loans, with more than 1000 brokers in 220 branches, is mobilising its brokers to lobby local MPs to their cause…
“The average mortgage broker earns around $85,000 a year,” he said. “If you take away the trail fee, purportedly around half the earnings a broker would earn on the loan, that means the average broker will earn $40,000 to $45,000 a year. Human nature says they will choose another business or career”…
Shifting to a customer-paid fee would inflict even more damage, because most customers would not pay a fee big enough to keep the industry sustainable.
As we noted last time, 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 a strong incentive for them to oversell.
Consumer groups have also lashed the mortgage broking industry, and have urged the government to implement the Royal Commission’s reforms:
Choice, Consumer Action Law Centre, Financial Counselling Australia and Financial Rights Legal Centre… 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…
“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”…
“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.
In other words, root-and-branch reform is long overdue.