Australia's top non-bank lenders 2008

Analysis of results from Mortgage Professional Australia's annual survey

Non-bank lenders have managed to become a major force on the Australian mortgage scene since their introduction and the role of brokers have grown along with them. Here is an analysis of the results from Mortgage Professional Australia's annual survey to find out which non-bank lenders are the best to deal with

When non-bank lenders first emerged on the Australian scene in the mid-1990s, few could have predicted how quickly they would impact the home lending scene in the country. Formerly the reserve of the big banks, non-bank lenders democratised the lending industry and brought with them cheap and flexible loans.

In the decade that followed the major banks saw their market share slip away to the likes of RAMS, Pepper, Bluestone and a host of other non-bank lenders that developed their own products and were often able to say 'yes' when a traditional lender would have declined. The introduction of non-bank lenders completely reshaped the Australian mortgage landscape and the players in the industry continued going from strength to strength.

That upward trend hit a sticky patch in the middle of last year when the US market found out that brokers and lenders had been over-extending themselves and lending money to high-risk borrowers. These decisions, made on the other side of the Pacific, had a significant impact back home despite the fact that there was not such recklessness in the domestic market.

As the major international investment institutions were left counting the cost of sub-prime loans that were not worth the paper they were written on, funding on international markets dried up, prompting central banks around the world to pump in billions of dollars to ensure some semblance of liquidity.

Many Australian non-bank lenders were hit as funding lines dried up and consumers became wary of where the money to buy their homes was coming from. By the end of last year, non-bank lenders in Australia were facing their biggest challenge so far. The party was over, cheap funding had dried up, consumer confidence had waned and RAMS (winner of best rates and best product range last year) had collapsed spectacularly.

However, the canny businessperson sees opportunity in the most hostile of markets and many non-bank lenders were able to take advantage of turmoil in the industry to increase their loan book size as well as gain market share and increase broker loyalty.

The rise of non-bank lenders coincided with an increase in business conducted through mortgage brokers, to a point where more than half of new residential loans now go through a broker. This is hardly surprising given that non-bank lenders brought with them an array of new products and choices for consumers.

Gone are the days of a young couple sitting nervously across from their bank manager waiting to see if they are able to buy their first home. People can buy homes with a small deposit, not much documentation or impaired credit, but they need to find an impartial voice to guide them through the maze of products. That is where their friendly local broker comes in, together with and the usually accommodating non-bank lender.

The survey

Brokers ultimately determine how successful a non-bank lender will be, which is why MPA's annual broker survey is an important industry tool for tracking trends and discovering who the emerging champions of their sector are.

The survey consisted of 11 questions aimed at finding out which non-bank lenders were performing best in six categories as well as finding out more information about the amount of business being put through non-bank lenders. Brokers from every corner of the country took part in the survey, either through our online form, a faxed-in form or were contacted by telephone to make sure the results were as comprehensive as possible.

Brokers were asked to nominate just one non-bank lender for each of the six categories to signify which company they thought is performing the best in each area. These key areas of business included interest rates, product range, approval/turnaround time, BDM support, broker support and IT and customer service.

As in previous years, we did not give brokers a list to choose from because of the number of players there are now in the field. Because of this, some responses were thrown out where they nominated a company that was an Approved Deposit-Taking Institution (ADI) and regulated by the Australian Prudential Regulatory Authority (APRA) unless the lender was a building society or credit union.

MPA tallied the results and came up with a list of winners as per brokers' choices for 2008. The non-bank lenders with the most votes came top of the list with the next three recognised as highly recommended in the six areas.

It is worth noting that, despite the fact that only six different non-bank lenders made it into the rankings, each category saw at least 30 different non-bank lenders nominated. It is natural in a survey of this nature that the larger non-bank lenders will feature higher on lists as they will have accredited more brokers than the smaller niche players.

Smaller non-bank lenders and new entrants to the market may well be restrained by geographic area serviced and a smaller accreditation base. This means that while there are brokers that selected them as being the best in one or more areas, they were unable to challenge for the top spots.

Identifying trends

On the whole, trends for non-bank lenders were not overwhelmingly positive as consumers that have been reading doom and gloom headlines are requesting loans from more traditional lending institutions, especially in the wake of the RAMS collapse.

Some 42% of respondents in the survey said that less than a fifth of their business was being given to non-bank lenders. Of those, 81% said this proportion was either the same or down on the previous 12 months.

However, for those brokers putting more than 20% of their business through non-bank lenders, 45% said they were now sending even more business the way of the non-bank lenders than they were last year.

Overall, two-thirds of respondents said they were either doing the same amount or more business with non-bank lenders than they were previously. So, despite the news reports and the nervousness in the markets, non-bank lenders are managing to continue to grow their loan books by differentiating themselves from banks by way of innovative products and dedicated service.

Likes and dislikes

Brokers said that there were many reasons why they often preferred to use non-bank lenders over the traditional lending institutions, including their ability to get deals done that the banks shy away from, and flexibility in working on a deal.

Many brokers liked the fact that non-bank lenders tended not to work with a 'tick-the-box mentality'. Others said that they go to non-bank lenders because their clients are sick of having to deal with the banks in their everyday dealings.

"Customers don't want to deal with the big banks," said one respondent. "They believe the banks don't do them any favours, they don't have the personal interest in them."

However, other respondents said that location and local offices played a big part of who their customers wanted to work with. There is also much to be said for name recognition when a client is choosing which institution to borrow money from.

"Being regional, most of our clients prefer to deal with 'big five' banks where they can see and deal with a local branch," says another respondent. "Nothing will really change this and the recent funding issues will make it even harder to go non-bank."

Funding issues certainly played heavily on many brokers' minds with a number of respondents saying that their customers were more interested in finding out how their loans would be funded, and wanted to be educated more on the whole system. Other brokers steered clear of certain non-bank lenders altogether.

"As a broker, I don't recommend certain lenders purely because of the uncertainty regarding their funding lines."

When you are in a business like loan writing, you know that time is money. Perhaps that is why non-bank lenders remain a vastly popular choice among brokers, with a number of respondents hailing non-bank lenders' ability to get deals turned around quickly, which makes everyone happy.

One broker says that they are most impressed with the support received throughout the approval process and the willingness that non-bank lenders show to get the deal done. He also says that he is not afraid that a non-bank lender will poach his client.

Others come out with a list of qualities that make them prefer non-bank lenders, including personal service to clients, excellent turnaround, innovative products and flexible solutions. Non-bank lenders are 'value-based rather than price-based' was a sentiment expressed by one respondent.

The rest of 2008 promises to be very eventful for non-bank lenders (and the whole mortgage industry) as everyone involved tries to get a grip on an increasingly turbulent global economy, a likely recession in the US, and interest rate hikes aimed at dampening inflation being supported by record oil prices.

The companies that came out on top in our annual survey all have one thing in common: they are operating off a sound business plan that will allow them to ride out the tough times as well as enabling them to flourish in the good times.

Congratulations to the non-bank lenders that topped our survey and thank you to all that participated.

Interest rates

Winner: National Mortgage Company

Highly recommended
Homeloans Ltd
Bluestone Mortgages
Heritage Building Society

National Mortgage Company (NMC) is the non-bank lender that stood out in our survey as being best in taking advantage of a tough funding environment to secure good rates for its brokers. Chief executive Steve Dover says that his company's relationship with several major funders including ING, Bendigo and Adelaide allows NMC to offer competitive rates.

"It's not a priority, it's a mixture," he says. We've got great rates - we're very competitive on our rates but we'll never chase the cheap rate scenario."

Dover says that the competition in the non-bank sector means that it is impossible to compete on rates alone because there is always someone making a special offer. Instead, it is important to have consistently good rates coupled with a good business model.

"You can never be the cheapest because there's always someone coming out with a discount for a particular month," he says. "The non-bank lenders that have got themselves in trouble are the ones that have chased the cheapest rate. Look what happened to RAMS when they did it. They were lending short term to fund long term and it was a disaster waiting to happen."

The fallout of the US sub-prime collapse hit all lenders hard globally including NMC but the company's business model was set up so that it could weather the storm. After an initial 20% hit in September when the losses became apparent, NMC bounced back and had record months in October and November. Dover says that NMC saw the inherent risks involved with that lending model and worked to let their brokers know what was coming up.

"We were trying to get that message out into the market place for the last couple of years and some of the brokers listened to that and are happy that they did," he says. "It's a slippery slope if you're just concentrating on rate - there's not much you can do to secure business. If you look at all the surveys that have been done, rates to brokers and particularly ones that have been around for a while are never on the top of their list. They're within the top, but they're never the top."

According to the brokers we polled, Dover is right, with brokers saying that price was only the fifth most important reason that they used non-bank lenders over banks.


 

Product range

Winner: National Mortgage Company

Highly recommended
Homeloans Ltd
Bluestone Mortgages
GE Money

These days, having the full set of fixed and variable mortgages is just the beginning of offering a comprehensive range of home loan products. Innovation is the name of the game now, with savvy clients wanting more than just their mum and dad's mortgage.

National Mortgage Company has several products that distances themselves enough from the competition to be voted by brokers as the non-bank lender with the best product range. These include an equity finance mortgage, high LVR low-doc loans and a unique product called the cash flow equaliser.

"We've launched that to a few introducers, and it's starting to get a bit of traction - about $10m a month," chief executive Steve Dover says. "It's basically a home loan that allows borrowers to choose their own repayments and it offers a protected way of doing it."

With this product, part of the repayment of the loan comes from the normal monthly payments with the other portion coming from the client's borrowings. Dover says people are using it when they take time off work for maternity leave, a sabbatical or to further their education.

Another reason that NMC scored high in the product range category was because it has been willing to tailor packages specifically for a brokerage company to serve their unique clients in a unique way. Not only do they arrange the products but they also arrange the funding.

"If we believe in a brokerage company and we like their business model, we'll create specific funding packages for them, and will continue to do so," Dover says. "The reason we can do that is because we've got $1.6bn under management."

Dover says that the company is very careful when it rolls out a new product to make sure that it is not just a headline grabbing flash in the pan but that it will be around for the long haul. New products are introduced to a select number of brokers and monitored for popularity and sustainability.

"We trialled a few non-conforming products and it took us a while to get that product right but, because we got that right, now we're lending where most others are pulling back," he says.

There are new products on the horizon for NMC with the non-bank lender always looking to be a market leader in product innovation. Dover expects to roll out at least a couple more this year as the company looks to take advantage of trends in the industry.

Homeloans Ltd was highly commended in this category. Managing director Brian Jones says the non-bank looks to see what is working in Europe and the US and "certainly keeps track of trends in our own backyard".

"It's hard to be truly innovative - most new products are deviations of what's already out there," Jones adds.


#pb#

Approval and turnaround times

Winner: National Mortgage Company

Highly recommended
Bluestone Mortgages
Homeloans Ltd
Heritage Building Society

NMC took the crown for best approval and turnaround times for the second year running. This accolade means a great deal to chief executive Steve Dover, who says this is the differentiator that most allows non-bank lenders to compete against the bigger traditional lending institutions.

"The only way that we exist in the market place today is by creating solutions and getting them done quickly," Dover says. "And if we can't do the job, we tell the brokers quickly. A lot of other mortgage management companies think that if they say no to a broker on a deal then they won't ever get another deal from them again."

Dover says that brokers are much more understanding than that and the ones they deal with appreciate a speedy 'no' almost as much as a speedy 'yes'. Non-bank lenders can get so wrapped up in 'being the lender that always says yes' that they become hesitant to let a broker know when they cannot do a deal, which costs the broker both time and money . . . and potentially his client.

"If we say 'no', they know that we've done everything we can but we let them know quickly so they can go back and get on with their lives," he says. "I think that's why we're respected when we talk about our turnaround times."

Dover says that approval and turnaround times are the most important category that his company focuses on because it, unlike many other things, is completely under the company's control. NMC invests in systems, staff and training to ensure that the deals that can be done are done quickly. He says this can eat into the bottom-line but it is so important that it is worth sacrificing a bit of profit to keep the brokers, and ultimately the customers, happy.

"It's good to know that we're still on track because the only currency we have in the marketplace is doing a good job today, not yesterday," he says. "As a non-bank lender this is probably the best award to win because it's something we have complete control of."

NMC actively reviews its processing procedure to eliminate redundancies and unnecessary delays and make sure that it keeps ahead of the game when it comes to turnaround times.

"We don't sit on our laurels but we're always trying to perfect the speed at which we're processing our loans," Dover says.

That includes stopping the process a couple of times throughout the day to look at any applications that can be approved at that time and to put them through. NMC's speed of service is one reason why they seem to be so popular with the brokers.


 

Broker support and IT

Winner: National Mortgage Company

Highly recommended:
Homeloans Ltd
Bluestone Mortgages
Australian First Mortgage

National Mortgage company (NMC) chief executive Steve Dover prides himself on his company's support to the broker network. In order to maintain good service and support, NMC vets the brokers it does business with to make sure they have a sound business model and will provide good service to the customer.

"We've spent a lot of time, money, effort and technology getting our back-end right and that's why the front-end of our website looks pretty ordinary," he says. "To be honest, we don't accept everyone as brokers or introducers for NMC - we're quite particular about who we accredit. We want to know what their business model is and what the company's like and we like to go out and train them and really get to know that business."

Dover says that NMC strives to be a leader in IT solutions and that the company plans to become completely paperless by the end of March. Brokers will be able to use NMC's systems to submit and track deals. He says that the only way a non-bank lender like NMC can survive against big banks is by delivering solutions.

"The emphasis on NMC to be the best in creating solutions really came from the fact that when I first started the business I started it as a broker," he says. "I was absolutely messed around by the banks I was introducing business to, and I couldn't stand it anymore. I thought if I can't stand it there must be plenty of others who can't stand it also."

Dover describes the recent spike in business being sent NMC's way by brokers as 'a flight to quality' as brokers and borrowers seek to find security in the wake of the market turbulence. This comes from the close relationship NMC has with its brokers and its investment to make its computer systems cutting edge.

Homeloans Ltd was highly commended in this category, and managing director Brian Jones says that in the past decade there has been a huge emphasis on technology and the non-bank will certainly continue to develop its systems. "It has become apparent that sales people are dealing with a wealth of information from all different sources, so a good IT system is very important to them," Jones says.


 

BDM support

Winner: National Mortgage Company

Highly recommended:
Homeloans Ltd
Bluestone Mortgages
Heritage Building Society

Business development managers help brokers better understand the products that they are offering to clients. The importance of working with a good BDM cannot be overestimated, with many brokers saying that they would follow a trustworthy BDM to a different lender rather than lose that relationship.

Despite topping the poll for BDM support, National Mortgage Company does not have BDMs in the traditional sense. Chief executive Steve Dover says, instead, they have mobile credit teams that are able to go further to help the broker. The decision to replace the traditional BDM with account and relationship managers who have credit experience was made a couple of years ago and NMC has not looked back.

"Unlike a broker who goes to a bank all to speak to their BDM, who doesn't really know where the deal is anyway, we have what we call our account managers, most of whom are credit trained," Dover says.

NMC's credit team have their own non-recourse delegated lending authorities which can go up to $2m. Dover says that makes them 'on-the-road credit people', not BDMs. He says that is the key to providing good support and helps the business be proactive with its brokers.

"What happens from that perspective is that we can pick up any training issues that might crop up," he says. "If they see the same kind of things coming in from their broker, they can set up a training session for whatever keeps tripping up their deals."

He says the set-up fosters stronger relationships between the brokers and his staff. He finds that brokers are happy that they are not 'out there fighting the battle on their own.'

NMC has actually gone into brokers' offices and put deals together for them, Dover says. While it is not something the company wants to do on a regular basis for the same person, they have even written loans for them when they are caught short due to an unanticipated spike in business.

"That's something a bank can't do," he says. "Broker solutions are paramount for us because we know that's where our bread's buttered."

Listed non-bank Homeloans Ltd, highly commended in this category, says that when it comes to finding a good BDM, it places a strong emphasis on character.

"It's important that BDMs have a cultural fit with Homeloans and can be integrated into the team. Should they require skills training, we can work on that; however, if they're fundamentally not the right character or fit I believe they won't prove to be an effective BDM," managing director Brian Jones says.

He adds: "Sales skills and administrative ability is also key - they need to want to be out there on the front line dealing with our customers, not pushed."

Jones says Homeloans Ltd has put considerable effort into recruiting a solid team: "With a good sales manager - which we have in Troy Phillips (GM for sales) - we're able to motivate and inspire; they can then achieve the results."


 

Customer support

Winner: National Mortgage Company

Highly recommended:
Bluestone Mortgages
Homeloans Ltd
Heritage Building Society

When it comes down to it, there is one party that everybody in the mortgage industry is in the business for: the customers. The brokers polled selected National Mortgage Company as the best in the non-bank lending business when it comes to providing customer support.

This completes a clean sweep for NMC, after taking this new category of customer support, something that no doubt pleased chief executive Steve Dover. NMC's commitment to customers was demonstrated when low-doc rates went up across the board.

"When the low-doc rates went up across the board we phoned every one of our customers - it was a mammoth task, and we told them we have other initiatives to get your rates lowered and these are your options," he says. "We spoke to thousands of customers."

Having a single point of contact, an honest approach and good communication is the cornerstone of NMC's customer-centred strategy. Dover says that customers appreciate being kept in the loop whether there is good news or bad.

"We're not afraid to phone customers when we have bad news like a rate increase. We're not the good news company, but when we do have bad news we always come with options," he says. "I know why most companies can't do it - you need people on the phones, you have to write letters, you have to follow up, and it's costly."

Dover says that NMC has a very low runoff on its loan book because of the relationship it has with the customers. He says that he receives letters and phone calls from happy customers who are surprised with the contact they receive, having previously been with a bank for so long and never having any type of personal correspondence.

Anticipating a rate rise from the Federal Bank of Australia, NMC contacted all of its customers to give them a chance to lock in rates and got a 34% uptake from them. Although these tactics are expensive, Dover says it is a matter of balancing what is too expensive with what is just bad service.

He is confident that the business model NMC has in place and the strong relationships that the company has with both customers and brokers alike will allow it to further increase its business and its widespread popularity.