Brokers de-risk bank books, says Deloitte

A Deloitte Access Economics (DAE) report released earlier this week, The Value of Mortgage Broking, consulted key players that collectively make up the Mortgage Broking Industry Group (MBIG).

The MBIG consists of AFG, Astute Financial, Aussie, Choice Aggregation, Connective, FAST, the Finance Brokers Association of Australia, Loan Market, the Mortgage & Finance Association of Australia, Mortgage Choice, National Mortgage Brokers PLAN Australia and Smartline.

The DAE report noted that brokers are more geographically dispersed and have access to a wider range of consumer markets than the direct lender channel.

“Mortgage brokers can also play a role in diversifying the level of risk on a lender’s mortgage book,” the report said.

“For example, the National Australia Bank uses the broker channel to diversify the types of borrowers they have on their mortgage books, leading to a more balanced loan portfolio.

“For smaller ADI lenders, especially if regionally based, concentration of their mortgage exposures in a specific geographic region is a risk. Mortgage brokers provide them with an opportunity to diversify outside of their home territory, including interstate. This makes them less vulnerable to shocks that hit a specific region, such as the downturns in regional Western Australia and Queensland after the mining boom.”

Overexposure to certain markets can be a significant risk for banks, particularly when the market turns.

A recent Morningstar report warned that challenger bank Bendigo and Adelaide is highly exposed to the Victorian housing market, where price growth has slowed in the last 12 months. Victoria-based Bendigo Bank does not distribute through brokers but Adelaide Bank does.

DAE also noted that brokers can positively impact wholesale funding conditions for lenders.

“For lenders that use the residential mortgage-backed security (RMBS) wholesale market for funding, access to broker regional networks also reduces their cost of capital,” the company said.

“Investors demand lower returns from less risky investments, so reducing the risk of a mortgage portfolio via diversification translates into lower cost of funds to the lender.”

[Related: Broking industry contributes $2.9bn to the economy: Deloitte]