Mortgage managers were traditionally the go-to market strategy of Australia’s non-bank lenders, but the growth of the broker channel, coupled with funding pressures, have led non-banks to change their business models.
Deloitte partner, financial services, James Hickey estimates non-banks account for less than 5 per cent of the home loan market.
“Funding has become harder. The other challenge is getting competitive product out to market. If you are going through the broker channel then you need to demonstrate on service and ongoing consistency to get a degree of volumes going your way, which can be difficult for non-bank lenders,” Mr Hickey said.
“Where we have seen a lot of non-bank business models suffer is because mortgage managers have been crunched in the market. Traditionally, where non-banks have supplied the funding to mortgage managers, those mortgage managers really can’t survive going forward and therefore those non-bank lenders have either had to get their own direct channels or look at other alternatives,” he said.
“It has really taken a fair chunk out of their settlement volumes... this pressure that has been on the mortgage managers.”
Late last year, Firstmac stopped providing wholesale funding to mortgage managers, with the Queensland-based non-bank lender’s founder Kim Cannon saying “the non-bank mortgage manager space has had its day”.
However, Better Mortgage Management (BMM) has found more room to move in a sector that has seen its fair share of consolidation. BMM managing director Murray Cowan told Mortgage Business that while Firstmac and ING Direct have stopped funding mortgage managers, Pepper's wholesale division and Origin have returned to the space.
“It has been made to look a bit worse with the securitisation markets this year,” Mr Cowan said.
“The extra margin that investors are wanting to get for the perceived risk at present is a bit higher than anyone expected.”
While he admitted mortgage volumes are still well below what they were seven or eight years ago, he said BMM has been able to compete in the alt doc and specialist space. Regulatory hurdles imposed on the banks’ investor mortgage books have also presented new growth opportunities for BMM over the last 12 months.
Where non-banks have been more successful is in the delivery of specialist products for areas of the market that the majors have typically shied away from, such as self-employed borrowers and small business owners.
Customers with more complex requirements have typically sought out mortgage brokers, making the non-bank proposition a good match for the third-party channel.
Liberty Financial national sales manager John Mohnacheff believes non-banks have a clearer understanding than banks of the needs of the third-party market.
“No bank has ever brought a unique product to the broker space ever,” he told Mortgage Business.
Mr Mohnacheff said non-banks are uniquely positioned to bring about innovation in the third-party channel in a way that banks are unable to.
“They will always follow and match, but they will never be a market leader in the third-party space.”
Mr Mohnacheff said non-banks tend to focus on their broker customers and offer products they can pass on to the consumer, adding that non-banks are better equipped to help people.
“Most people who have a credit issue, it’s not their choosing... it’s because of a divorce, there’s been a death in the family, it’s been the loss of a job or a disability from an accident.”
“When people have a real issue in their lives, that’s when the banks close the umbrella and the non-banks put up the umbrella. It doesn’t make one right or wrong but it’s what we specialise in.”
With non-banks holding less than 5 per cent of the mortgage market, one of the primary barriers to growth has been a reliance on securitisation funding.
However, Mr Hickey said that those who believe funding markets will return to some degree of normalisation, the capacity challenge becomes how the non-banks distribute through third-party and direct channels.