The mortgage packaging industry stands at a major regulatory crossroads. The impact of mortgage regulation on this niche sector is likely to have devastating effects for some.
In the FSA's CP98, packagers were conspicuous by their absence. But when packagers were finally recognised by the Treasury earlier this year, they were divided into four categories. Those classified as broker-packagers and correspondent lenders would be regulated, while mortgage clubs and packagers providing purely administrative lender support would escape.
And depending on who you talk to, this half-and-half approach is either a measured response to relative risk or a mis-selling scandal waiting to happen.
Ian Nelson, managing director at packager BDS Mortgage Desk, says there is no reason to register packagers that don't deal with the public. “That would be overkill,” he says, although he does concede that in some cases packagers will need careful monitoring by lenders. “After all, if the packager's service doesn't do the business, it is the lender, along with the borrower, who will suffer.”
Between each of the four regulatory definitions the permutations of modern packaging seem endless. And yet the original concept was so simple.
So just how should we define a packager? Tony Jones, managing director of Pink Home Loans, says that the original packaging concept was outsourcing administration and distribution for lenders, with brokers seeing it as adding value to the mortgage process.
“If the packager does a good job, it takes away some broker spadework, but we're not a necessary part of the process,” he says. “To be frank, some packagers don't add a tremendous amount of value and I see consolidation taking place in the industry.”
Peter Beaumont, sales and marketing director at Mortgages PLC, has a more technical definition.
“A packager is a company that has a distribution channel that can source mortgage enquiries, place them with a range of lenders then obtain the lender-specific paperwork to obtain an offer and complete the deal,” he says.
Whichever way you describe packagers, it seems that their biggest role is in market areas off the beaten track whose complexity or sheer rarity mean a little extra attention is needed.
Pink's Tony Jones says it's in niche areas such as sub-prime, buy-to-let, self-cert and “anywhere there is more complexity in the process” where packagers can fulfil a useful function.
Andy Linnett, director of specialist mortgage packager LMS, agrees. “Packagers were originally conceived as an outsourced administration service,” he says. “But, more than that, it is now about helping brokers understand niche markets, then co-ordinate completion to help the lender.
“Private Label and the original packaging firms are the role models in terms of administration and service, but it's the service at either end which is far more important to our broker and lender clients, nowadays.”
To survive in the new regulatory world, post-Mortgage Day, Linnett says packagers must develop this added value and provide a service that is not merely convenient, but something that “brokers and lenders are actually grateful to have”.
Given the current state of the packaging market, it's easy to see why some packagers – broker-packagers especially – will easily get lost in the wilderness come 2004.
Regulation has the potential to change the mortgage industry as we know it. Though, at least, the market can take comfort that there will still be some absolute bottom lines. At one end of the spectrum, there will be intermediaries who sell the merits of a mortgage and, at the other, there will be providers who will fund the deal.
So what will happen to the middlemen? Packagers are, after all, the extra links in the chain which keep their polish by regular displays of added value. But one message that is coming across from more and more lenders is that, once that added value is lost, the lock between lender and broker will snap shut and squeeze the packager out of the market altogether.
The advance of technology, in the form of sourcing systems and automated back-office systems, is one threat to complacent packagers. Another is lenders who reduce the number of packaging partners that they deal with. However, there are packagers such as TMO, Pink Home Loans and Network Data Limited's Mortgage Clearing Centre who have been able to tailor technological advances to their own advantage.
And it's the more resourceful packagers like these – and there are plenty of others – who seem to be staying on their toes. Sally Laker, managing director of broker club Mortgage Intelligence, says the role of packagers has evolved. “With new technology simplifying applications, the role of packagers has changed. Old-fashioned packagers just speeded up the process for brokers. Now, most packagers offer a wider range of services and have focussed on sub-prime where brokers need some handholding to get the right product.”
And as packagers strive to make their existence ever more worthwhile, the past months have seen plenty of genuine innovation in terms of product design and business pitch.
Some packagers are turning themselves into effective test grounds for 'difficult' products. One example is Merseyside-based The Mortgage Partnership which, earlier this year launched its “New Start” divorce mortgage. Funded by HBOS subsidiary The Mortgage Business, New Start allows applicants to maintain a loan on the matrimonial home as well as buy another property.
Packager EM Financial has also jumped on the development bandwagon, though this time with a deal that specialises in the buy-to-let market for expatriates, funded by the Bank of Scotland.
Other packagers have opted to put their marketing expertise, service efficiency and reputation on the line as correspondent lenders, taking care of front-end operations for lenders who may want to try out new markets. In doing this, these packagers are becoming 'true' lenders in all but name.
Phil Jay, operations director at BDS Mortgage Desk, says that it's innovations like these, as well as enhanced procuration fees, that mean that brokers will always want to use packagers.
“Brokers go to packagers because they get better procuration fees and better products for clients,” he says. “The minimum lenders will look at for those sort of terms is about £5m. Even the big brokers can't submit that sort of volume, so packagers still offer brokers a good deal.”
But Kevin Morgan, director of Hertfordshire-based IFA EZI UK, disagrees.
“I can't see that packagers add a great deal by way of value,” he says. “In my experience, proc fees are no greater through packagers and they only add another layer of bureaucracy.”
Birmingham Midshires Solutions is one lender that has hit the headlines recently for the somewhat controversial stance it has taken on the packager market. First off was its cull of packager partners earlier this year. Next came the launch of its 'Seal of Approval' – a moniker it attaches to packagers who the lender says offer a truly compliant and consumer-friendly service. BMS justifies both moves as a short cut to compliant business. At the moment, the lender only deals with 14 'approved' packagers – all of them with big distribution. It expects other lenders to follow suit.
Michael Bolton, director of mortgages at BMS, says that, although the original rationale for packagers in terms of supplementing lenders' own design and distribution, will still stand after N4, lenders will only want distribution that is compliant.
“The big question is whether packagers can deliver that. At the moment, I'm unsure whether they can,” he says.
Other lenders anxious to minimise risk in a regulated mortgage world could follow the BMS route, cutting back on packagers to reduce exposure.
At Pink Home Loans – one of the BMS select few – managing director Tony Jones believes that, as the market moves towards regulation, lenders will be making understandable moves to reduce their number of packager partnerships.
“Lenders are trying to pick out those that are likely to be around in 2004, because there will be a significant reduction in numbers of packagers by then,” he says.
So, is the BMS stance justified? Michael Bolton certainly seems to think so. After all, there are plenty of other lenders that only deal with selected packagers – they just don't go the Full Monty and name them.
“Post-N4 we will only deal with regulated distributors. The Treasury has its four definitions, but in a sense what they are called is irrelevant. Packagers who think they will act as unregulated lender agents are living in fantasy land,” he says.
Other lenders are satisfied their current vetting procedures are adequate protection against forming relationships with unsuitable packagers.
Kensington Mortgages currently has more than 80 packagers on its books and has no plans to decrease this number.
“To be honest, we all have a seal of approval,” says chief executive John Maltby. “As a lender, we are responsible for our outsourced partners and have to be comfortable and confident in those relationships. We go through due diligence and review the underwriting and sales procedures of every packager we deal with.”
Maltby says that the approach lenders take to packages comes down to their philosophy as an organisation. “Our philosophy is to be very supportive of the packager channel and I see it playing a evolving role as regulation comes in. Some lenders take a different view. For them, it's almost a case of only suffering packagers because they have to.”
Other sub-prime lenders agree that regulatory nerves are not the real reason for lenders pulling back on packagers. Richard Hurst, communications manager at Future Mortgages, doesn't believe that lenders are cutting back to mitigate compliance risk.
“We are seeing the 80/20 rule, whereby lenders get 80% of packaged business from 20% of their panel,” he says. “The only reason they are cutting back on numbers is because lenders set volume targets and packagers that don't meet those targets simply aren't used.”
And Hurst thinks too much is being made of the regulatory choices facing packagers. “They have a simple decision – do they want to offer advice and be regulated, or do they want to be an unregulated, third party administrator?” he asks. “In the past, many packagers may have done the odd bit of broking to add value, but unless this is a big part of the business they can simply cut it out. This isn't the massive issue people say it is.”
Hurst also believes the obituary of the packaging market is being written prematurely. “Brokers will continue to deal with packagers for the same reasons they do now,” he says. “If mortgages aren't a broker's main business, they don't want to be chasing references and bank statements. Packagers certainly aren't going to vanish overnight.”
Chris Gardner, managing partner at Southend-based packager ICMG, says it would be in everyone's best interests if the entire packaging market was regulated. “Ultimately it will be good if everyone is regulated,” he says. “If you're involved in the supply chain you should fall under regulation. It seems ludicrous you can have the front and back end regulated and nothing in the middle.”
Gardner does not believe that regulation would present the majority of packagers with too many problems. “I don't think packager regulation is going to be onerous. The FSA is looking to regulate companies that deal direct with the public. If anything, this gives broker-packagers an opportunity because they should have a lot of that infrastructure in place anyway.”
Other pundits say the impact of regulation on the broker market will have more knock-on effects for packagers than any rules imposed directly on the sector.
And Mortgages PLC's Peter Beaumont says he can even see a revival of life companies who understand distribution and have the structure in place to regulate introducers
“Come the FSA's final rules on depolarisation, many brokers who sell mortgages alongside other products are going to choose tied status over independent,” he says. “The vast majority of MCCB-registered firms have one or two advisers, and many of them will tie to networks that provide packaging, software and compliance under one roof. Some panels or networks will operate lender panels. A big threat to packagers is that, in theory, distribution will just walk away.”
Packagers could turn these threats into opportunities by forming networks themselves. They could also capitalise on the broker fallout from December's qualification deadline.
It's a point made by Pink's Tony Jones: “Packagers are buying broking arms so they can get referrals from current introducers who don't want to get CeMAP,” he says.
A lack of qualified brokers is certainly something that concerns packagers. A packager survey by SPML reveals that only 14% of packagers who rely exclusively on brokers for leads are confident their advisers will meet the December 31 deadline.
Technology also challenges packager survival, as sourcing systems and electronic applications fulfil core functions cheaply and online. But it could also be key to their success.
As BMS' Michael Bolton notes, sourcing systems and packagers are rapidly becoming one and the same.
“Looking ahead as a packager you will probably need to buy into the likes of Mortgage Brain, or have your own sourcing system,” he says.
Broker Kevin Morgan agrees. “As lenders are relaxing documentary requirements and improving online applications, technology is becoming a big challenge to packagers,” he says.
But Mortgage Intelligence's Sally Laker says technology is not an immediate danger to packagers as “a lot of brokers are simply not oriented to complete online”.
And at Pink, Tony Jones says sourcing systems will never squeeze packagers out of complex product areas.
“To a degree these systems can build in loan conditions, but it is very difficult to systemise complex underwriting criteria,” he says.
But with such threats on the horizon, it cannot ease a packager's mind to learn that some lenders think there is a lot of dead wood to be cut out of the industry, in any case. Indeed, there is a strong argument that both the packaging and lending markets are overpopulated and some degree of consolidation is inevitable.
If lenders start to shed their packaging partners, the first victims will inevitably be smaller players. But critics of the few-equals-better approach say lenders will ultimately suffer by concentrating distribution in the hands of a small number of key packagers.
Neil Moakes, director of Kent-based Hallmark Mortgages, says that if lenders only allow a few firms to package products, there is nothing stopping those firms getting together and creating a force to ensure lenders bend more towards their needs.
At LMS, Andy Linnett says size doesn't matter: “Size alone doesn't always mean bigger packagers get it right. Unfortunately, lenders have to look at volume but will focus more on quality as weeks and months unfold. That is what will make a difference to packagers surviving in the market, and some of the bigger organisations become a little faceless as service levels invariably dip.
Phil Jay, operations director at BDS Mortgage Desk, believes smaller packagers deserve a break.
“The bottom line is that there are good big packagers and good small packagers,” he says. “The issue today is that the small ones are being overlooked.”
At Kensington, John Maltby finds the same advantages of quality and knowledge in niche packagers as those associated with smaller lenders.
“There is an element of size. You've got the broad-based packagers such as Pink and The Mortgage Operation, and then those that specialise in particular niches such as self-cert and sub-prime,” he says. “The sector knowledge and service standards of these smaller packagers can make them an attractive route for brokers and lenders.”
Nonetheless, Maltby concedes that in regulatory change in any market “invariably puts the smaller businesses at most risk”.
Some mortgage brokers are happier to buy into economies of scale.
John Stewart, director of Basildon-based PMI, believes bigger packagers negotiate better deals with lenders: “They have good admin resources and you can generally get through and talk to them, which is not always the case with lenders.” But he adds that packagers need the muscle to recruit enough people to give good service. “The smaller ones leap on the supposed gravy train, but I think lenders are getting more picky about who they offer the facility to,” he says.
Stewart is more comfortable directing mortgage deals through larger packagers with bigger lender panels and better prices: “We do sometimes use packagers for placing sub-prime, in which case we approach several packagers to get a good picture of the marketplace.”
Although there is no requirement for packager registration under the Mortgage Code, brokers using packagers are expected to tell clients how restricted these panels are.
And Neil Moakes of Hallmark says packagers should have some requirement to offer best advice to brokers who rely on them. “Most professional packagers have four or five lenders on their panel and I think there needs to be some onus on packagers to tell brokers that there are other adverse lenders out there.”
But Moakes scotches the idea that bigger packagers explore all their extra lender options as routine. “The big guys have targets to meet each month,” he says. “They have to give the first however-many cases to each lender to meet volume targets, which removes the emphasis on exploring the panel.”
The fact remains that many brokers prefer the perceived reliability and choice of bigger packaging brands. After all, intermediaries often reach for packagers to handle cases outside their usual experience, and may not be connoisseurs of the market.
Pink Home Loans, for instance, operates a lender panel of 35.
“We are a sizeable player, with the systems to check a broker query through the 35 lenders,” says Tony Jones. “Dealing with an extensive panel in itself requires a lot of management and we have lender employees on site to smooth out the underwriting process.”
As attractive as the promise of personal service may be, people are not prepared to pay over the odds and packagers clearly need to attain a certain size for commercial viability.
So where does this leave broker-packagers – a sector that is proliferating but, typically, on a smaller scale?
At BMS, Michael Bolton says there is a “huge difference” between the top half-dozen brands in the market as against the great multitude that have cropped up. “The first brings added value to the mortgage market and the other doesn't,” he says.
The lack of requirements for transparent fee disclosure among broker-packagers makes them an easy target for criticism. Under the Mortgage Code, broker-packagers dealing direct with the public have to disclose their broking fees, but not their packaging fees. This leads some industry figures, notably Michael Bolton, to accuse broker-packagers of harbouring dishonourable intentions.
“Broker-packagers came about as a result of the explosion in sub-prime lending, where it was an opportunity to negotiate greater fees from sub-prime lenders desperate to get to market,” he says. “Broker-packagers are clearly in the firing line from N4 because all the free income they currently generate from undisclosed packaging fees will have to be disclosed – and customers will not tolerate it.”
Other pundits are damning too.
At Hallmark, Neil Moakes believes broker-packagers should be “outlawed”. “You should have to be one or the other,” he says. “These people are using their packager front to hide the fee. As a packager there is nobody for us to disclose to because we don't deal with the client.
“But I know for a fact there are broker-packagers receiving 3-4% in fees on adverse cases, but getting away with disclosing only £200 or so. They are trying to bypass the system and it needs to be stopped.”
There are some lenders however who defend the broker-packager corner. Stuart Aitken, director of credit at SPML, says about half of the 200 packagers SPML deals with are brokers in their own right.
“I don't see how they could declare the fee they get for packaging administration to the consumer,” he says. “If you took that to its logical conclusion, you'd have lenders who run their own administration having to declare how much it costs to 'package' that loan – that would be ridiculous,” says Aitken.
John Maltby of Kensington Mortgages says it is nigh on impossible for broker-packagers to set up on the premise of exploiting a disclosure loophole.
“Brokers can't just say 'I'm a packager now too' – if this has been a trend it will stop or reduce as a result of lender requirements for service, compliance and volume,” he says.
Broker-packagers mount a vociferous defence of their business. Simon Bucknell, business development director at London City-based Square Mile Mortgage Finance, says the firm considers itself a broker-packager in that part of its customer service is to package the mortgage application form. And he says packaging facilities are a good way to add value for clients.
“We look at packaging as a way to gain advantage over other brokers,” he says. “When you're charging fees it's important you give good value for money. Part of that is a one-stop shop – we arrange valuation on behalf of the lender, ensure that paperwork is collected – it all helps to lend credence to our service.”
Bucknell admits that non-fee disclosure reflects badly on reputable broker-packagers, but says this practice is confined to a minority.
“When you take into account the time and effort it takes to package a deal, I'm not sure people will bolster their income that much be becoming packagers,” he says.
At PMI, John Stewart agrees.
“You'd need a big administration resource to do packaging well,” he says. “I don't think many brokers have jumped on this bandwagon for extra money, and you're asking for trouble by getting away from the core of your business.”
Whatever you think of the different breeds, as a species, packagers are certainly not afraid to try new ideas. This affinity with innovation has served packagers well so far, and may well see them through whatever challenges regulation and changing distribution has to throw at the sector in future.
Love them or loathe them, packagers are unlikely to go away.
Packagers take control of their own destiny
Most packagers are used to seeing lenders in the driving seat for everything from product terms to panel members.
But with the formation of the Mortgage Distributors Co-operative, 2002 may be remembered as the year that packagers decided finally to take control of their own destiny.
The MDC was founded in October, bringing the cream of UK packaging together in an alliance that promises to find extra distribution strength in numbers.
The MDC's seven initial members include Pink Home Loans, ICMG, Genesis Home Loans and founder member, The Mortgage Operation. Together, the Co-op members bring to the table around £5bn-worth of mortgage completions per year.
Described by Mark Charlesworth, managing director of The Mortgage Operation and chairman of the MDC, as a “lender in waiting”, the Co-op should be an attractive proposition for would-be lenders. With the hard battle for distribution already won, the Co-op will present a safe way to try out high-margin, high-risk parts of the market.
Charlesworth insists the MDC will not use its strength to squeeze better product pricing or procuration fees out of lenders. But lenders will be watching the Co-op's next moves closely.
Peter Beaumont, sales and marketing director at Mortgages PLC, says: “In practice this will have some impact on lenders. There's been mention of the MDC getting its own special purchase vehicles and warehousing lines so as to become a lender. I reckon that, at some point lenders are going to say: 'hang on, you're becoming a competitor'.”
And there is some nervousness concerning the product deals the Co-op will be in a position to negotiate.
Beaumont says: “Since Co-op members will have to commit part of their volume to the MDC, those products have to be better than core or exclusive ranges. That means driving margins down, and many lenders are fairly thin on margin, right now.”
Adapt and survive, the BDS way
BDS Mortgage Desk is one of the longest serving packagers in the market, and a lesson in how an adaptable attitude can keep packagers relevant in a changing mortgage market place.
Founded in 1990 as Broker Direct Services, the company's original headquarters were in a spare room at the home of founder Ian Nelson, now managing director of BDS.
In the space of 12 years, BDS has progressed from its humble origins, charging £25 per case for paper-processing, to a national business that packages for 4,600 introducers.
With a lender panel of 27, BDS packages across the board, from adverse, self-cert and buy-to-let to full status loans.
The company has embraced the changes afoot in mortgage business, from IT to public relations. As Ian Nelson says: “Love it or loathe it, IT is now a critical part of the mix for doing the job effectively. I'm surprised by the relatively low levels of sophistication in some big businesses.
“In 2003, we'll continue to be big on IT, with every facility in place for those who want to use it. With developments such as the pre-application illustration around the corner, it's essential that we stay ahead of the game.”
In terms of broker support, BDS plans to focus on its 'Broker PR' division by taking the focus off travelling salesmen and introducing a dedicated telephone and email support service for intermediaries.
Nelson says: “They way the mortgage market is going, brokers need support at specific times, rather than a knock on the door.”
BDS has placed ever-greater emphasis on communication with lenders over the years. “It's essential that we meet our lenders' needs, especially as products become more and more complicated,” says Nelson.
As to what happens next, according to Nelson, BDS plans to go with the flow of packager regulation: “It's necessary to regulate packagers where they have contact with the general public.”
Nelson also urges brokers to move with the times. “To brokers, I would say, get CeMAP-qualified and cover all areas of the mortgage market.”
The game could be up for correspondent lending Branded set to take over
Correspondent lending is proving a popular bandwagon for lenders and packagers alike. Platform Home Loans, Southern Pacific Mortgage Limited, GMAC-RFC and Mortgages PLC are among the lenders to leap on board.
For lenders whose service systems are full to capacity, correspondent lending is a godsend. Described as 'packaging plus', it turns packagers or larger brokers into a lender in all but mortgage book.
Under its own brand name, the correspondent lender takes care of the infrastructure intensive process of mortgage application. Upon completion, the loan is transferred immediately to the book of the sponsoring lender.
Besides allowing lenders to minimise underwriting and service costs, correspondent lending enables them to dip a toe into unfamiliar markets under a different name.
For the correspondent lender – typically a packager – the advantages include the chance to negotiate exclusive products and market them under its own name.
Mark Charlesworth, managing director of The Mortgage Operation, says: “Correspondent lending gives us more control over the process all the way to drawdown.”
He adds: “Theoretically, it offers packagers more input to product design. Because the product is not going out under their name, lenders are more willing to talk variations of products since there is less potential for consumer confusion.”
Such flexibility can lead to a greater choice of mortgages for brokers and better targeted niche ranges for packagers who draw together suitable products from several lenders.
But mortgage regulation could mean the correspondent game is up for many.
Stephen Knight, chairman of GMAC-RFC, says: “Packagers acting as correspondent lenders are the legal entity that offers a mortgage. But so far, correspondent lenders have not needed a balance sheet because they pass on liability for the loan to the lender as soon as it completes.
“Under new regulation, however, if anyone presents themselves as a lender they will have to be regulated as such. That means expensive, turn-off stuff like capital adequacy and controlled risk requirements.”
If correspondent lender status promises to become a legal strait-jacket under mortgage regulation, branded lending is its slightly looser little brother.
Completed loans register briefly on the books of correspondent lenders before transfer to the funding lender. Because of this detail, the correspondents face regulation as a lender – a potentially expensive process.
Branded lending, though, allows packagers similar input to product design without taking legal responsibility for the loan.
Mark Howell, marketing manager at Pink Home Loans, says: “Branded lending is very similar to correspondent in the sense the packager completes the mortgage and takes the application from conception to completion. But, unlike correspondent lending, branded loans would not appear on the packager's books at any point.”
This detail leads some pundits to speculate that correspondent lending will have had its day with mortgage regulation, putting branded lending into the ascendant.
Stephen Knight, chairman of GMAC-RFC, says: “Branded lending always takes place in the name of GMAC-RFC, but the packager adds their brand to the association. After regulation, you'll find branded lending is going to take over.”
Private Label – the first super-packager
Founded in February 1987, Private Label can claim to be the first packaging company in the UK mortgage market.
From 1987 until its sale to GMAC – then known as RFC – in 1998, Private Label only dealt in lender exclusives under the stewardship of founder and chairman Stephen Knight, now chairman of GMAC-RFC.
Knight has seen the world of packaging change in both product and pitch over the last 15 years. He says: “Private Label specialised in the mainstream market, which is unusual these days when most packagers concentrate on sub-prime.” This change of emphasis is partly thanks to lenders that are ever more conscious of the need to fulfil intermediary expectations.
Knight says: “We started Private Label because there was a busy mortgage market. This was a time when brokers were not looked after in terms of their importance, and Private Label was born from the idea we could think up better products.
“We looked at the blandness of lender products, and felt we could look after brokers and sell them the detail of products better than lenders.”
By the time Private Label was sold in 1998, it had become the largest privately owned distributor of mortgage in the UK, responsible for £1.5bn a year.
Knight says the sale became an option because Private Label had gone as far as it could as a packager, in part limited by the service from lenders.
He says: “It had reached a glass ceiling. If you're acting between lender and intermediaries, £1.5bn turnover is as big as you can get. Intermediaries will judge you on the basis o