The recent Mortgage Strategy cover feature, ‘Survivors – packagers defy death by regulation’ offered an accurate analysis of the packager market, outlining half a dozen benefits including providing added value, creating business efficiencies because lenders won’t be increasing fees and the provision of access to exclusive products. I won’t quarrel with any of that but further useful insight can be gained by looking at the topic in its wider context including the developing nature of distribution chains, the theory of the survival of the fittest and the differences between middle men and an entrepreneurs.The fundamental changes taking place in the mortgage supply chain are just one part of a distribution revolution that is affecting every service sector. Internet shopping has transformed the process of buying everything from airline tickets to office stationery. In financial services, the disappearance of bank branches and the option of 24/7 internet and telephone banking has changed the way consumers think about banking. And who now would believe that just a few decades ago insurance premiums were collected in cash by a friendly chap who visited your home once a week? Yet shopping malls continue to thrive, presumably because many shoppers like to look at the real thing before they buy, and speak to a well-informed and friendly shop assistant. In the same way, some brokers will quickly adapt to submitting cases direct to lenders via the internet, while others will continue to submit their cases through a packager that can supply them with the sort of feel-good factor that still drives people to the shops. On the subject of evolution, no industry can support businesses that do not offer first class service and good value for money. Just like the finches that inspired Darwin’s theory of survival of the fittest, the smartest and best equipped operators in any sector will adapt to survive while the most unfit will die out. In the era when mortgage packaging evolved to meet the needs of the new breed of sub-prime lenders, brokers were the only route to customers. The development of high street branches could not be justified for such a niche market in its infancy. Indeed, this distribution route has never become a viable option in the sub-prime sector. Most lenders in this market have been specialist with centralised operations, thus reducing overheads but limiting space-greedy administration functions. Such lenders have little appetite for inhouse loan packaging and are willing to pay attractive fees to outsource the function, at the same time creating an effective distribution route. Certain packaging operations may once have been able to make good profits despite offering indifferent service purely because they were such a vital link in the supply chain. This is no longer possible. Now web-based technology is enabling the rapid growth of automated decisioning and straight-though processing, paper-based mortgage cases are edging their way into history and packagers must quickly develop better ways of offering an indispensable service to lenders and brokers. This brings me to the dichotomy of middle man versus entrepreneur – both of which descriptions could be applied to mortgage packagers. If packagers are middle men, they are simply clinging on to their historic place in the mortgage distribution chain, expecting a financial reward merely for sitting in the middle. On the other hand, if they are entrepreneurs they will not stand still waiting for evolution to boot them into extinction. Instead they will use their skills to find new ways to offer services both lenders and brokers will find it hard to do without. As entrepreneurs rather than middle men, the packagers of tomorrow will not simply slice off some profit for themselves before the lender’s fee reaches the originating broker, they will be creating real added value for lenders, brokers and consumers. Technology can always replace the unskilled human element, but packagers are the knowledge workers in one of the fastest moving financial services sectors. As some lenders are already finding, electronic decisioning is not as straightforward as it sounds. It gives an instant decision but this is a black and white scenario. If the borrower passes the credit score, the advance is granted, if not it is declined. This seems obvious but our experience is that electronic decisions decline a good proportion of cases a lender underwriter would have accepted. In other words, the case fits the lender’s criteria but the system throws it out. You may argue this makes the cost of acquisition cheaper which is a good thing, but there is no guarantee this loan will perform any better than one underwritten manually. Arguably, it is less likely to as an underwriter would have looked at all the factors in a case when making their assessment. The important point here is that if you ask a sub-prime lender in what area they would like to increase their market share they will say heavy adverse mortgages that perform. Electronic decisioning is least suited to this type of deal. Lenders currently striving to put together a sub-prime sourcing system are finding out for themselves how difficult it is to take into account all defaults, County Court judgements, arrears and bankruptcy, not only because there are many categories but also because the risk is related to factors including the age of the adverse, whether it is settled, and who the creditor is. The broker can go to several lenders and get electronic decisions in principle that may or may not be binding, then compare. But if the information they have given slightly differs from the real situation, or a relevant detail has been missed out, the deal will not go with that lender. Why go through all that when a packager can give you an answer straight away and ensure the correct information is collected to enable the lender to offer? While we operate in a sector where unusual borrowers offer the best returns to lenders and brokers, packagers will not disappear.
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