Once again, the death of the mortgage club is being enthusiastically predicted. This time, if you believe the rumours, they will be bloodily dispatched by Concordia, a conspiracy of five London mortgage brokers with market domination on their minds. It’s time to pen the obituaries.
The only problem is that mortgage clubs don’t see it that way. In fact, some of them are annoyed by the way people keep cheerfully forecasting their demise. It isn’t only distracting, when you have billions of pounds in mortgage business to place, it’s rude.
So what’s the latest threat all about? In late November, brokers Alexander Hall, Chase de Vere Mortgage Management, Cobalt Capital Group, Hamptons Mortgages and Savills Private Finance, responsible for writing 10bn worth of mortgage business per year, clubbed together to form Concordia.
This unprecedented collaboration of directly authorised heavyweights swiftly led to speculation that it could use its combined distribution power to demand higher proc fees from lenders in the same way as mortgage clubs. And it was said if Concordia’s model proved a winner, major DA brokers outside London could be tempted to follow its lead, sucking membership from existing clubs.
The process is already happening. All five members of Concordia use club Premier Mortgage Service but it seems unlikely they will do so once their own collaboration gets off the ground.
They also believe they offer a superior model by having more influence over the quality of distribution than a traditional club or network. And they can save lenders money because instead of five product suites for Concordia’s members, they can now negotiate just one.
So are the knives out for mortgage clubs? Simon Tyler, managing director of Chase de Vere, doesn’t think so. He is keen to reassure clubs that Concordia isn’t after their blood, claiming “we do not wish to be a club or to be seen as a club”.
Any business that clubs lose as the big five push their deals through Concordia will be negligible.
“We put less than 2% of our business through existing clubs so I don’t think they will miss us if we don’t place business with them in the future,” says Tyler. “But this isn’t the end of the relationships we have because if the correct procedures are available, we will use club products where appropriate.”
Nor does he believe Concordia poses a mortal challenge to rival brokers.
“Our impact on our competitors will be inconsequential,” he says. “Most brokers have strong connections with their clients and the fact that I have a better product or relationship with underwriters won’t affect that relationship in the future any more than it does today.”
Tyler believes that Chase de Vere’s higher public profile will continue to catch the eye of new clients. “But I don’t see smaller brokers losing existing clients to us or our colleagues, simply because we are operating a more efficient business through this collaborative association,” he adds.
The main benefits will be to “capitalise on the power of five parallel businesses” to negotiate superior products. “Our clients will continue to receive the finest exclusive products while our advisers will improve their excellent communications with the top underwriters,” he says. “We also hope to make savings in areas such as IT, compliance and general insurance.
Melanie Bien, associate director at Savills, also denies that Concordia is a threat to clubs.
“We will be different,” she says. “We are individually authorised by the Financial Services Authority. We employ our own staff and only come together to work on some deals.”
Rather than strike fear into other broker firms, this could inspire them to either join Concordia or form a rival.
“I suspect they will look at what we are doing, see what impact we have and if it works, consider doing the same themselves,” Bien says.
Despite going out of its way to assure mortgage clubs, networks and brokers that Concordia means them no harm it has attracted its share of barbs. For example, society Kent Reliance swiftly labelled it a cartel.
John Malone, managing director of PMS, is also happy to use the C-word.
“However you describe it, Concordia is a cartel,” he says. “You’ve got five companies coming together to achieve something that’s unnatural in our industry. That makes it an aggregated cartel which will have serious implications for lenders and consumers if it succeeds in driving proc fees upwards because of the perceived dominance of the London market.”
On the potential for investigation Malone says: “If I was a director of one of the five companies I would be worried about that possibility, and not just those directly involved but every director.”
Malone is also sceptical about reports that the five brokers turn over 10bn of mortgage business each year.
“I dispute that 10bn figure,” he says. “And even if it is correct it isn’t just residential business but commercial, semi-commercial and buy-to-let as well. And is this completed business? I can’t believe it is. We do 36bn of completed business each year.”
He likens Concordia to London Premiership football managers Jos矍ourinho, Arsene Wenger, Martin Jol and Alan Pardew, until recently boss at West Ham and now at Charlton in place of Les Reed, clubbing together to boost their efficiency.
“I call it the Hilarious League,” he says. “I wonder how long it will be before one of the group follows Pardew and gets knocked out.”
Malone is equally scathing about the rumour-mongers, including the media, who have been touting Concordia as a threat to clubs, whose business model is as robust as ever.
“Are these big London names a threat to intermediaries in Preston, Bolton or Barrow-in-Furness? Of course not,” he says. “Our members’ average mortgage is 140,000. That’s Mr and Mrs Average. It’s a completely different field.”
Established businesses such as PMS, Openworks and Mortgage Promotions aren’t going to fall prey to “a handful of guys throwing regular press conferences”, says Malone.
“Will it affect our business? No. Will it impact the market? No. Am I bored with having to answer questions on this subject? Yes.”
Sally Laker, managing director at Mortgage Intelligence, says it more than matches Concordia’s combined annual distribution, doing more than 10bn worth of business across 60 lenders.
“Our buying power is therefore identical,” she says. “I see Concordia as being able to work alongside existing networks as we do with Legal & General Mortgage Club, Pink Home Loans and Mortgage Next. We have worked as healthy competitors for 10 years, trying to gain commercial advantage through marketing and product offerings, and I expect this to continue.”
Asked whether MI has any plans to fight back against Concordia, Laker adds that is it not at war with Concordia. She also points out that the large London broker market is different to a nationwide network.
“Their client base is primarily high net worth with an average loan size of more than 250,000, often with complicated client earnings,” she says. “They still access the same products but may look for a tweak, say a lower LTV with a higher minimum loan size. This type of deal wouldn’t sell well outside London where property prices and salaries are lower.”
MI will retain its broker members by offering access to a wide range of lenders and exclusive deals with enhanced proc fees.
“We also offer access to a free broker help desk and speedy payment, which our members tell us is unusual,” Laker says.
So if Concordia isn’t a threat is it an opportunity? Some have suggested it could boost proc fees across the board.
“That’s for lenders to decide but I doubt there will be anyone complaining if everybody’s fees are nudged upwards,” Laker says.
John Cupis, mortgages and propositions director at Legal & General Mortgage Club, says competition is a good thing as it keeps existing players on their toes.
“Nobody has a right to business, so if a group of market participants compete on their overall offer we should welcome them,” he says.
Traditional clubs have thrived by offering members benefits such as access to lenders, exclusive products, higher proc fees, payment on exchange of contracts and other services such as packaging and help desks.
“We specialise in exclusive products and it will be interesting to see how we measure up against Concordia, particularly in the large loans sector,” Cupis says.
Clubs can survive by continuing to boost member benefits, he adds. “We delivered more than 4bn worth of exclusive products in 2006, more than many mortgage clubs’ entire business. And this will grow in 2007. We lead in areas such as payment on exchange of contracts, which improves cash flow for brokers, and is particularly useful for house purchase and new-business. And we plan to add new propositions.”
Concordia members aren’t the only ones with big plans for 2007.
“We have plans for growth for both appointed representatives and directly authorised firms and don’t see Concordia having much impact on that,” Cupis says. “We delivered more than 25bn worth of mortgages in 2006 and should deliver even more in 2007.”
Nick Baxter, managing director of Mortgage Promotions, says Concordia won’t tread on the toes of its members, which are mostly small and medium-sized brokers.
“The five members of Concordia are big enough to negotiate their own deals with lenders and don’t need our services,” he says. “We target firms with three members or less because they need the most help. I don’t see any overlap whatsoever.”
Nor is he worried about any future threat from brokers outside London who may try to emulate the Concordia model.
“Some local brokers have already tried clubbing together to negotiate better deals with lenders but they lack the resources to deal with every single lender. They might strike deals with half a dozen but they still use us for the remainder.”
Baxter is confident about the future. “We are where we want to be. We will never be a packager or a network,” he says. “We simply aim to be a good mortgage club that helps DA brokers run successful businesses and I don’t see how the new consortium can threaten that.”
Concordia isn’t the only arrival singled out as a threat to the future of clubs. One recent threat emerged from within the ranks of the broker community, the Mosaic Mortgage Club – an online community representing directly authorised firms – launched in August with 400 pledges of support.
Baxter dismisses the challenge. “Mosaic was meant to take the market by storm but I haven’t heard much about it lately,” he says. “This shows how hard it is to set up a worthwhile club.
“Mortgage Promotions has been going since 1993 and PMS since 1997. You simply can’t build relationships overnight, as Mosaic has discovered,” he says.
But Mosaic spokesman Alan Howle says that far from being defeated, it feels the challenge has only just begun.
“Mosaic was deliberately launched by stealth but is now making significant progress, and we are looking to build up a critical mass of support for our plans,” he says.
Howle says Mosaic will share almost its entire gross mortgage fees with its DA member firms rather than lining the pockets of privately or institutionally-owned clubsMosaic has started building relationships with lenders although Howle admits many are waiting to see whether the competition will sign up.
“So far, we have 12 lenders with another three set to join shortly,” he says. “We want a lot more and are hopeful that will come. Mosaic is a unique proposition. It is a model that poses a great threat to existing clubs and I believe they will soon realise that fact.”
Clubs remain bullishly confident about their future and believe they can fight off even the swankiest big city conspiracy. When the five members of Concordia’s mortgage conspiracy come knocking, they won’t be crying, Julius Caesar-style, “Et tu, Brut砠(or Tyler, Duffy or Harris – insert as appropriate). They are more likely to ask them to wait until they have quietly finished placing billions of pounds worth of mortgages.lOIt’s unlikely lenders will favour one groupingJon O’Brien is operations director at the Professional Mortgage Packagers Alliance The history of mortgage clubs goes back to the roots of intermediary-based mortgage lending, to the days when the major life companies first established mortgage desks to give their agents access to mortgage products.
The reasoning behind establishing mortgage desks was that if life company agents could supply the mortgage needs of a customer, the chances of selling them ancillary insurance products were enhanced. The size and scope of these life office sales forces were vast and the bulk distribution channels they offered to lenders were attractive. Hence the mortgage desks could negotiate better proc fees for their members than were the norm for others. This drove business through mortgage desks rather than direct to lenders.
The mechanism was simple and it remains so – submission via mortgage desks was identified by way of a sticker on the application form, with lenders paying brokers enhanced proc fees direct for larger mortgage clubs only.
As these desks metamorphosed into standalone clubs, bulk distribution power remained attractive to lenders and exclusive products began to be negotiated as well as enhanced fees, thus making the use of clubs even more beneficial to intermediaries and their customers.
Clubs operate extensively in the prime lending sector, distributing mortgage products from the big high street lenders. Perhaps the most eminent example of this mortgage club model is Premier Mortgage Services, which can trace its lineage to the original Scottish Amicable mortgage desk.
This model of offering lenders bulk distribution in return for enhanced fees and exclusive products was too good not to be extended into other applications and the Professional Packagers Mortgage Alliance was founded on this sound business principle. The difference was that PMPA used the existing favoured distribution channel of the new breed of niche and sub-prime lenders – the major packagers – to combine into a trading cooperative that was powerful enough to win member benefits. Happily, other packager associations have followed our lead and set up similar beneficial arrangements for their members.
Now we have a variation on the theme – five of the largest mortgage brokers in London and the South-East, together reportedly responsible for 10bn of mortgage business annually, combining to form a bulk distribution cooperative called Concordia.
The opinion has been expressed that this alliance will be able to command the highest proc fees and that the model will be taken up by other powerful broker firms forming similar cooperatives, resulting in the decline and demise of the good old mortgage clubs that started all this business activity off in the first place.
Does this theory hold any water? I think it’s highly unlikely that lenders will give a competitive advantage to any single purchasing cooperative. One or two lenders might do so, but not all. The vast majority will continue to woo whichever distribution route can deliver bulk sales for their products and so will keep their options open. Only time will tell, but my money is on the traditional mortgage clubs evolving to meet the fresh challenges of surviving and thriving into the future, especially on their home ground of prime business.
Clubs will have to start earning their keep
by Martin Reynolds, director of corporate accounts at edeus
The first thing to say about mortgage clubs – or ‘multi-lender programmes’ or whatever the marketing team has decided to call them this week – is don’t believe the spin. For a couple of months the industry zeitgeist has buzzed with talk of the end of mortgage clubs. People were going to bypass mortgage clubs; they were on the way out; they were already dead.
Wake up and smell the coffee. Mortgage clubs are still here and they are thriving. Mortgage Next has been around since 1996, and the Legal & General club longer than that. Premier Mortgage Service opened for business 10 years ago and 2006 saw business volumes increase each year. Mortgage clubs aren’t about to give up and go home. We’ve just seen the launch of Concordia. Five of the UK’s largest brokers have come together to form a syndicate to give them more influence with lenders. The five brokers involved clearly think the mortgage club model still has a role to play in our industry.
But that won’t always be the case. Clubs can’t rest on their laurels. They can’t keep offering their members products from a selection of lenders, a programme of exclusive deals, and decent proc fees. If that’s the size of it, they’re for the chop. In the future, clubs are going to have to start earning their keep.
The mortgage industry is hugely competitive. Increasingly, it won’t be good enough for clubs to negotiate a few exclusives and slap on a sticker to every application that comes their way, then skim off the cream from the fee. Providing access to exclusives and competitive fees only qualifies clubs to compete – these offers are not, by themselves, special. Screaming “my proc fee is bigger than yours” is no longer enough.
Club propositions have to go further if they hope to win the loyalty of brokers. They should be updating and upgrading their business model. Brokers are looking for added value, as are lenders. And there’s more to adding value than some of the clubs would have you believe. It’s having a wide range of additional services. It’s bringing something else to the party. Clubs should be providing support with lead generation, with IT, with compliance and with marketing.
Who will be the losers as clubs get better at doing this? As pioneering clubs win business and move out of their traditional prime market arena the clubs and packagers that fail to innovate will lose out. More agile clubs will come in and take their place. The situation is the same for lenders. If they stop innovating competitors will enter the market and their market share will shrink.
This will be a defining year for clubs. The edeus warning to those that think they are in for an easy ride is simple – innovate or die.
Brokers must reassess their partners as distribution models change
by Ian Giles, director of marketing at Kensington Mortgages
Americans may ride in elevators, walk along sidewalks and go on vacations but the only difference between them and their British counterparts who get in a lift, stick to the pavement and take a holiday is the subtlety of language.
And while language can enhance understanding it can also be a stumbling block if interpretation is subjective. Ask an American to think about a game of football and they will probably think of a different sport to the one most British people would consider. But show them footage of a game and there is no room for confusion.
When it comes to mortgage distribution, language can also be confusing. Packagers, networks, clubs and sourcing systems all have different labels but with the evolution of technology the distribution model is changing and businesses involved in distribution are developing the services they offer to brokers.
Originally established to handle administration and package applications for lenders, packagers have since been recognised as experts in the specialist market and many are harnessing technology to integrate with lenders and improve their distribution capabilities.
Last autumn Kensington launched K-link, the first large packager integration scheme of its kind, allowing packagers to link into Kensington’s e-commerce system called K-net and provide their brokers with decisions and Key Facts Illustrations direct from lenders. The first packager partners to be part of K-link were Solent Mortgage Services and Primrose Mortgage Processing. Kensington will be announcing more partners soon. But for all of those packagers that move towards a more automated distribution model there will still be those that say ‘I am a packager and that is how I wish to remain.’ And while these new distributors and more traditional packagers may all be known as packagers, their roles will be different.
The market has traditionally been polarised between mainstream and specialist. By their nature, mainstream products and criteria are more simple, building automated systems is more straightforward and so the mainstream market has traditionally been more automated.
The specialist market has taken a more individual approach to underwriting. But as technology has advanced so has the ability to automate parts of the specialist market. Indeed, in the near prime sector criteria are relatively simple and lenders simply have to be automated to offer speedy case turnaround.
But there are still people whose circumstances are more complicated and if lenders were to rely wholly on automated systems they would get the response: “Computer says no”.
We will see three sectors emerging – the mainstream sector will be almost totally automated, the near prime sector will be largely automated and the more complex part of the market will need human involvement.
The way distributors operate will reflect these sectors so it is important that brokers look at their markets, look at what service they are receiving and select the right partner.