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Delivering value

Packagers have emerged from regulation stronger than before and can continue to add value in the mortgage chain, says David Copland

During the late 1980s and early 1990s mortgage packagers arrived as an alternative to life mortgage desks. Previously, centralised lenders had distributed mortgages via life companies. Many used less experienced employees to talk through deals on their mortgage desks, which resulted in the development of a knowledge gap.

Some brokers saw an opportunity to add value in the market and decided to plug the knowledge gap. When centralised lenders began pulling out of this market, Bristol & West CMS was the saviour and worked with packagers to offer competitive remortgages up to 95% LTV, with higher than average income multiples, thus becoming packagers’ friend.

Business levels rose for packagers and lenders but the rewards for packagers were often poor with token 100 fees. It wasn’t until the explosion of sub-prime players such as Kensington Mortgages that the face of the market changed and mortgages offering higher rewards became available. Kensington was closely followed by Southern Pacific Mortgage Limited and Moneystore (now Platform), all paying competitive fees.

A number of packagers decided to specialise in the sub-prime market due to its higher margins and better remuneration packages, and lenders and packagers began to work together.

Regulation of the mortgage market brought fresh challenges for the packaging industry, which became the subject of much speculation and had to adapt. Packagers had to review their business strategies and decide how to operate within a regulated framework.

There were a number of options. Some packagers decided to pull out or stop offering club and network facilities, instead focussing on panel app-ointments with existing IFA networks and life companies such as Sesame and Legal & General. This gave packagers short-term distribution but not closed distribution and they have become reliant on the support of a few distributors to survive.

Other packagers extended their businesses and invested in infrastructure to support brokers. With established business streams it was a natural move to set up networks and become true mortgage aggregators.

They combined packaging, mortgage club and network propositions to offer a complete service to brokers. This has allowed distributors to operate in the directly authorised market and ensure closed distribution from their network arms.

In recent months we have seen a number of packagers move up the value chain and become lenders, such as Advantage Home Loans with its Morgan Stanley-funded product range.

While many lender strategies are focussed on direct to broker distribution, the recent launch of GMAC Partners is testament to the fact that packagers still add value for brokers in niche markets through multi-lender cascading. GMAC-RFC is leading the way by offering two product ranges that allow it to compete in both direct and packaged distribution channels.

So while there are threats to packagers, including lenders’ desire to attract business on a direct basis using improving technology, packagers are evolving by developing their own systems. These include online decision in principle tools, online application forms and lender cascading tools. Combine these with expertise in product innovation and pricing, and packagers are set to continue adding value.

Packagers offer added value to brokers not only in terms of technology but also by assisting in the research process with mortgage desks manned by staff who are knowledgeable.

While technology will play an increasingly important role, personal service is still important and the packagers that will thrive are those that can support technology with knowledgeable and experienced support staff.

Diversification is also important and many packagers now offer a menu of support services including conveyancing and insurance solutions.Some packagers have taken this expertise further and turned themselves into lenders focussing on product design. This strategy has benefits but also risks as many packagers do not have experience of direct lending.This represents a double threat for packagers that decided to become lenders but have limited distribution streams.

If a packager is reliant on a network for distribution and that network decides to cull the number of packagers on its panel it could have a devastating effect on a packager’s ability to remain profitable.For new lenders and packagers to succeed it is vital for them to have sound distribution strategies, financial support and backing from third parties experienced in the mortgage market.

So the future for packagers will depend on how they add value to brokers and lenders. There will always be a place for originators in the mortgage market and packagers that continue to look for opportunities to enhance their propositions will thrive. The key to success in this area is adding tangible value to brokers, combining excellent service with innovative products.

Packagers must ensure they invest in technology and keep pace with regulation.Lenders look to packagers to provide quality and volume and brokers for certainty, speed and price.Successful packagers provide all these.

We are also seeing the emergence ofso-called super-packagers. Although their full impact is yet to be judged there is evidence of bigger companies getting bigger and smaller ones concentrating on direct to consumer strategies or disappearing altogether.

The fact that many sub-prime len-ders have cut their number of packaging partners indicates there is a future in packaging of some form, as long as companies are willing to diversify.

It is vital that lenders build stronger relationships with brokers and packagers are an important part of this.This is especially relevant in the sub-prime sector where brokers rely on sound knowledge and extensive product ranges.

At Mortgage Day there were 69 networks. Since then the market has seen steady consolidation with only 23 remaining. Successful networks have achieved growth by acquiring other networks to reach critical mass.

Government initiatives such as Home Information Packs present a fresh opportunity for networks. HIPs will allow them to move into alternative business areas but they should protect their members from any threats that may flow from this initiative.There is an opportunity to strengthen relationships and add value to brokers and many networks are developing client management systems.

By using their knowledge and experience, networks can take advantage of these sorts of market developments and continue to add value to members.

Winning networks will be good value for money, invest in both their and intermediaries’ futures and maintain the appropriate balance between automated and human support models.

When it comes to companies operating in more than one business stream, the fact that they have to invest time and effort on a number of strategies can be a strain.They may end up spreading their expertise too thinly instead of focussing on their core business. Having said that, if one income stream dries up, a true mortgage aggregator can concentrate on other areas.

Lender technology poses another threat and could, through the emerging mortgage trading platforms, eventually bypass packagers, allowing brokers to carry out their own multi-lender cascading and benefit from enhanced proc fees.

The key to success is an open relationship between lenders and brokers. This should engender loyalty and ensure future income streams. Networks should look for business development opportunities for their broker customers and build their businesses together.

The packager and network markets will continue to evolve but to be successful firms will need certain ingredients.First, they should get the basics right by offering exceptional service, developing a good range of products and services and ensuring they act compliantly. Also vital will be maintaining close working relationships with lenders to enhance the services they provide to networks and directly authorised brokers.

Diversity is important in every area of the mortgage industry and should be encouraged. We all stand to benefit from a good business mix.

David Copland is marketing director at Pink Home LoansD



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