Investing in the intermediary channel

This has been a difficult year for the intermediary channel and with limited capital, it needs an injection of investment from lenders. Frank Eve thinks 2006 will finally see this happen

As this is the last issue of Mortgage Strategy in 2005, I thought it appropriate to look at what I think the lender community will do to support the mortgage intermediary in 2006.

This year has been a tough one for intermediaries. The industry has had to get to grips with new regulation and the early part of the year saw a major downturn in business. However, the market now seems to be more positive, with a small sign that house prices may have stabilised and business volumes have been maintained in the last quarter. In other words, the soft landing appears to have happened.

Next year I see lenders making a decision to invest more money in the intermediary channel. They have the capital to make key technological developments that can develop the framework the industry needs. Lenders hold most of the capital invested in the industry. The challenge is to maintain or increase their return on this money to keep shareholders happy. Making any justification for further investment in the intermediary channel is difficult when returns aren’t easy to predict.

On the other hand, the intermediary sector has limited capital resources. Its business model is not geared to generate the embedded value that could be used to provide further investment. Intermediaries are paid per completion and do not receive annuity income, which would build value. Investment here is desperately needed to provide the IT structure required to cope with regulation and the market’s demands. The market itself is likely to shrink in the next few years, as consumers adjust to life with 1.1 trillion of debt, stable inflation and interest rates. Lenders injecting capital into the intermediary channel could come in a variety of ways.

First, one could see a new deal for intermediaries, where lenders focus on the loyalty of intermediaries and their clients. This can be achieved by paying a commission over the life of the loan to the introducing intermediary. Intermediaries sharing in lending’s risks and rewards is one way in which the necessary investment can be channelled in while still delivering a return.

The next prediction is for lenders to invest in a forum to discuss IT priorities with their intermediary partners. Working with other lenders to provide the data standards that would allow systems to exchange information easily would also be positive. Origo is proposing this forum, but it will take a small investment from lenders to start this process.

The final way lenders can share capital with the intermediary channel is to invest directly in distribution. This could be done by investing further in their common trading platforms, or by buying into intermediaries directly. The intermediary market, particularly the specialist sector, will get crowded next year, with at least four new lenders scheduled to launch. The US investment banks already involved in the sector want to see further expansion, and most mainstream lenders whose margins have been squeezed will also have their eyes on specialist lending. We have already seen Morgan Stanley buy Advantage – 2006 may be the year when we see much more vertical consolidation by lenders into the intermediary channel.