Surviving the storm

World leaders gathered for the G20 Summit in November to discuss what measures should be taken to restore financial stability and possibly prevent the current economic crisis from repeating itself in the future.

While they met in Washington, the epicentre of the financial earthquake, it's clear from the presence of both major industrial nations and emerging economies that the disaster has had far-reaching effects.

But survival in a global recession isn't just top of mind for G20 leaders; it's also on the tip of the lips of brokers around the world.

MPA has brought together brokers from around the world to get an idea of how their businesses have been affected by the credit crisis and what they're doing weather the storm.

Dubai

It seems that even Dubai, the second-largest state in the UAE and home to such notable landmarks as the world's tallest building, is not immune to the global credit crisis.

Independent Finance, one of the original mortgage brokerages in Dubai, employs eight mortgage specialist and two administrators. It was the first company to introduce rental finance for a very expensive rental market.

Despite its success, it has also been forced to layoff two staff as a result of economic downturn.
Chris Green, managing director of Independent Finance, says there has definitely been a change in the desert emirate.

"What we found so interesting was that initially everyone, especially the banks and the government, said that the UAE is not going to be affected and that we will - unlike the rest of the world - continue as normal."

But in a stunning knee-jerk reaction, banks dropped the loan to values on all loans, hiked interest rates and stopped lending on under construction developments.

The results were devastating, Green says.

"Investors and speculators, which were the people responsible for this very exciting boom, stepped back and held off. A wait and see approach. If they had focused on only lending at normal LTV's on completed properties, the message would have remained loud and clear and confidence would have been dented not buckled. The interesting thing is that the banks are still lending to true homeowners and the market, although quiet, it shows signs of a bigger resilience than elsewhere."

As a result there has been attrition within companies - mostly among employees working on salary. While smaller operations have ceased to exist altogether, Green says stalwarts such as Independent Finance, GLN and John Charcol are up and running.

"I think this shakeout will get rid of the one man bands and the companies who offer these services as secondary services will just stop offering the service. But the truth is that only the fittest will survive."

Green suggests brokers hoping to survive the downturn consolidate their businesses and relationships with their competition, property agencies, banks - their complete network.

He also recommends brokers cut costs and offer additional products and services to the markets.

"Lastly, keep a very close eye on the ground to ensure you see what's coming and react accordingly. You need to watch out for the left jab."

Brokers who adopt a survivalist mentality in the first half of 2009, should be rewarded with a clear indication of where and when the pendulum will swing back.

He predicts that the UAE will bounce back in the second half of 2009, starting with Abu Dhabi, and followed by Dubai and the rest of the emirates.

US

Working with experienced and reputable loan officers has helped Kate Crawford, a mortgage specialist from Carolina Home Mortgage maintain a steady flow of business.

But headlines from US media outlets leave little doubt that the sub-prime crisis has drastically reduced the number of brokers left in the industry. The National Association of Mortgage Brokers stated that several thousand of the nation's 53,000 brokerages closed this year. Some predicted that by early 2009 just 30,000 firms will handle fewer than half of all home loans.

Crawford, who also serves as a member of the National Mortgage Broker Magazine's editorial committee, attributes the closures to stagnant real estate sales and the difficulty borrowers are having refinancing their loans.

"Loan to values have been reduced on all prime mortgages. People who would like to get lower rates are not able to because they owe too much on their homes and the values are lower. The retail banks are lending, but not like they used to. The wholesale banks are lending but not offering the broker all the loan products that the retail banks can offer. Mortgage insurance companies are having a hard time due to huge losses." 

Crawford also says the severity of changes to guidelines is stifling the economy.

"The pendulum on mortgage underwriting has swung too far to the right and needs to loosen up a bit. People with excellent credit are being turned down. No common sense on underwriting is being used."

As a result of these changes in the market, Crawford predicts that even more brokers will leave the industry.

"You cannot survive on the type of production we are seeing."

Like Australia, the US is experiencing a consolidation of industry players.

"It started with HSBC buying Decision One (a wholesale lender) and [just recently] HSBC decided to pull out of the wholesale market. Countrywide was bought by Bank of America, Wachovia was bought by Wells Fargo and National City pulled out and JPMorgan Chase purchased Washington Mutual. Citi Mortgage decided to reduce the number of brokers they do business with by almost 90%."

According to Crawford all of these changes will drastically change the mortgage industry in the next year and a half. There will be fewer wholesale lenders, fewer brokers and poor service by wholesalers and retailers, she says.

"The victim will be the home buyer who will have to put up with bad service and probably higher rates due to lack of competition."

If US brokers want to survive this period they will need to look at different income streams, she says.

US mortgage brokers are looking at which loan types, such as reverse mortgages, which are immune to the current crisis.

Others are trying to rebuild credibility of the industry - a difficult job considering many blame shady brokers for being the root cause of the sub-prime crisis.

Industry groups such as the Upfront Mortgage Brokers Association and the National Association of Mortgage Brokers are working to improve brokers' image and shore up members' business practices. Continuing education commitments, adherence to an ethical code of conduct, and criminal background checks are voluntary, but the NAMB will make all three requirements mandatory this year.

UK

Casualties in the UK's mortgage industry are mounting as the country heads into what some experts are calling a "deep recession".

The first to feel the effects were brokers in the sub-prime sector, says David Hollingworth, head of communications for London & Country Mortgages, the largest broker in the UK. It currently employs around 300 people, more than 150 of whom are advisers. 

"Any broker specialising in [the sub-prime] sector has been left with very little to sell. However the lack of mortgage availability has worked through the market to affect all, including prime, mainstream business. That has led to a market that looks set to be at least œ100bn down this year than in 2007 and that has clearly been of consequence to all brokers."
 
Hollingworth contends that remaining players will have had to redouble their focus on the efficiency of their business and offer a full service to clients.

"In a boom period it is easy to sit back and wait for business to drop into the broker's lap. In an environment where customers are thinner on the ground it is vital to provide an all round service and ensure that they offer more value to their clients."

Similar to their broker cousins down under, UK brokers are concentrating on ancillary products such as life protection and general insurances as well as exploring alternative income streams.
 
But Hollingworth warns there's a danger in brokers moving too quickly into areas where they lack expertise in an effort to diversify.

Despite being the country's largest broker, Hollingworth predicts London & Country Mortgages' volumes this year will be reduced compared to the œ4.2bn mortgage completions of last year - however, he does think its market share will grow. 

"Our strong brand has held us in good stead and we have not made any redundancies - in fact we have even made further recruitment of advisers. We are sticking to our core strengths but focusing on improving process and customer journey to ensure we can continue to make the most of customer demand in this tougher market."
 
Speaking more holistically, he says mortgage broking will remain key in mortgage distribution. 

"In fact borrowers are learning that advice carries a value in what is an extremely fast moving marketplace where mortgages continue to be harder to come by. Whilst lenders did for a time price against brokers that position has normalised and some lenders have even offered broker exclusives in recognition of the broker's continued importance."

Canada

Mortgage broker Karin Hoehn has seen the mortgage industry go through many changes.

Hoehn, who works for Invis, one of the country's largest brokerages, started in the industry 10 years ago, at a time when the market was slow and interest rates were on a five-year fixed term at around 7-8.00%. 

"It was a difficult start in what was still a relatively new industry in Canada.  Mortgage brokers have been around for many years, but it was only about 10 years ago that we were beginning to establish ourselves in the mainstream lending arena, and began focusing on the 'A' client side of the business."

A few years ago, she says sub-prime lenders started hitting up brokers for business, suggesting that mortgage professionals were going to see a marked increase in this type of client and financing. 

"I had a hard time believing it, and chose not to emphasise this, but rather to stay the course and continue to focus on 'A' clients and lenders. Sub-prime lenders have been exiting the business now as they see there is little to no opportunity for them here as there had been in the US," she says.
 
Unlike Australian lenders, Canadian banks have not cut commissions, however, Hoehn says several have chosen to combine their efforts through the broker channels and opt out of the former volume bonus schemes paid to large broker houses. Instead they are rewarding individual brokers for their volumes and patronage. 

"This leaves many of us wondering how large brokerage firms such as Invis can sustain their business models. That said Invis has recently bought out and merged with another industry leader - Mortgage Intelligence - and as such, has increased its market share and position in the industry. I personally believe we will see this trend continue as firms strive to regain any realized loss of economies in terms of head count."
 
The competition between major banks and brokers for mortgages is fierce and Hoehn predicts it will only intensify as volumes decrease in the coming months.

"My feeling is we will see the independents originating mortgage business with only a few select lenders that will continue to compensate for volume and remain competitive with the major banks. This is unfortunate as one of our strengths has always been to have the wide array of lenders to chose from and offer a 'shopping of your mortgage' service to the consumer."

Despite increased competition, Hoehn is confident consumers will still find value in the service brokers provide.

Like many brokers in Australia, our Canadian counterparts are focusing on ancillary services and cross-selling opportunities.