December 16, 2010
The CEO of Australia's largest independently-owned mortgage broker yesterday responded to the proposed Competitive and Sustainable Banking System reform package by sending a lengthy response to, and offering to meet with, Treasurer Wayne Swan.
With a loan book of over $40 billion and a lender panel of 25 large, medium and small banks, non-banks, building societies and a credit union, Mortgage Choice is well placed to comment on the initiatives.
CEO Michael Russell said, "Although Mortgage Choice is a mortgage broker and not a mortgage originator, we feel strongly about the needs of the non-bank lenders and second tier banks. Anything that dilutes their ability to compete with the major banks will impact home loan choices and service available to our customers."
"While we welcome an inquiry into mortgage market competition, it is apparent some proposals have not been thought through. We are deeply concerned that the unintended consequences of some of these proposed reforms look very much like disadvantaging the very people they are designed to assist - Australian mortgage holders."
Excerpts from Mr Russell's letter follow.
1. A short term unintended consequence is that existing mortgage holders will now defer refinancing ('switching') until 1 July 2011 to ensure they can refinance into a product with no exit fee. With interest rates likely to rise in the first half of 2011, such a delay may prove costly to mortgage holders.
2. Non-bank lenders, so vital to the health of a competitive lender market, are forced to raise funds at a higher cost to their banking counterparts, and as such must impose an exit fee to recover their reasonable costs should a loan be discharged early.
3. ASIC recognises this and made it very clear last month in RG220 what it regards as a reasonable exit fee and what it regards as unconscionable. Why is there now a reform package at odds with this recommendation?
4. This anticipated decline in competition will hit mortgage holders hard where it counts most - interest rates and fees and, most importantly, future product innovation and customer service.
5. It is widely accepted that should the banks be forced to forego charging exit fees, they would simply look to recoup these fees elsewhere from their customers or wait until the non-banks suffocated.
6. Previous governments (Fraser and Hawke) who sought to smash the cartelisation of the banks by deregulating the financial services industry would certainly view this reform as further unwinding what they worked hard to establish.
7. Mortgage Choice opposes the intervention of government regulation of the financial services industry and supports continued deregulation that allows market forces to drive competition.
1. With the mortgage industry presently writing c.$250 billion annually, an additional $4 billion is excellent news, however, it is a drop in the ocean that will be quickly utilised. While smaller lenders will naturally be appreciative, the big question left unanswered in the reforms is "what then?"
2. The lack of reliable funding remains the core roadblock to unlocking the return to exciting and sustainable competition.
3. The reforms have failed to address the fundamental reason why our non-bank lenders have given up so much ground to the banks since the onset of the GFC and that is they no longer have access to reliable cost effective funding. The local and institutional investor community remains cautious and still lacks the confidence to return the securitisation sector to anywhere near normal levels.
4. Until this is confronted head-on, reforms such as these are piecemeal at best and will only serve to delay the inevitable by further strengthening banks' competitive positions.
5. While the investment in the secondary market by the AOFM has undeniably provided some much needed temporary relief, Mortgage Choice would like to see the Gillard Government look to underpin a form of longer term reliable funding for our non-bank lenders at rates comparable to the major banks.
1. Covered bonds will undoubtedly serve to strengthen the long term safety and sustainability of the banks. However, given they could not possibly be issued at the same rate to non-banks they must be deemed as counter-productive to the reforms aimed at stimulating competition by looking to create a genuine fifth pillar.
2. Mortgage Choice is very concerned that the rating of the banks will allow them to issue covered bonds at a significant price advantage to credit unions, building societies and non-bank lenders. This will only serve to strengthen their competitive advantage over these organisations.
3. There is also the concern that if capped at, say, 5% of a non-bank lender's asset base, the quantum available for issue would be insignificant in the context of providing a genuine and viable fifth pillar.
Key facts sheet
1. While [the key facts sheet proposal] is sound in principle, the Gillard Government needs to review the documentation already provided to mortgage holders by bank and non-bank lenders and their intermediaries. By and large our customers feel swamped by the volume of paperwork they are required to receive to satisfy the many and varied legislative obligations.
2. Of most concern is that the banking reforms make no mention as to the future of the Mandatory Comparison Rate ('MCR'). Given it fails to account for exit fees and other costs contingent by nature (eg. redraw fees), the 'true cost' of a credit product can only be fully ascertainable once the loan has been repaid and all the actual costs realised. While welcoming an easy to use loan/lender comparison tool for mortgage holders, Mortgage Choice can only support the introduction of a one page 'key facts sheet' with the simultaneous sunset of the MCR.
1. Mortgage Choice welcomes the intended plans to promote and support our credit unions and building societies with the introduction of a 'Government Protected Deposits' symbol but:
(i) Unless credit unions and building societies can source additional funding, they will remain volume constrained and be unlikely to have material impact from a competitive perspective;
(ii) A ban on exit fees will hit credit unions and building societies hard and force them to seek front end relief, which will only serve to dilute their competitive positioning.
2. Of our panel of 25 lenders, Mortgage Choice presently has arrangements with four building societies - Heritage, Newcastle Permanent, IMB and The Rock - and one credit union, being Credit Union Australia. All offer their members an exceptional value proposition, however, their funding constraints need to be overcome. These reforms have failed to address this.
Full account number portability
1. The concept is sound in principle providing the implementation costs, which most certainly will be passed on to consumers, do not outweigh the benefits. Mortgage Choice is pleased that a comprehensive feasibility study is to be undertaken prior to any next step, and will wait with much anticipation to review the findings.
For further information or to arrange an interview, please contact:
(02) 8907 0472