Mortgage brokers facing countdown to a clean out?

The booming industry could soon face tighter scrutiny and less business from the major banks.

It’s happened so quietly investors could barely be expected to know about it. But from the fringes a decade ago, mortgage brokers have now moved to dominate the property market.

Unlike financial planners, however, mortgage brokers have flown below the radar when it comes to any full examination of whether they are “advisers” or merely product sellers — though that may now be about to change.

Consumer groups are looking more deeply into this remarkable turnaround. In 2003 mortgage brokers controlled 25 per cent of the market, today it is 52 per cent, and the current growth rate is phenomenal.

According to the industry body, the Mortgage And Finance Association of Australia, the total new home loan lending attributable to mortgage brokers for the year to March 2015 was $165 billion — a powerful increase of 19 per cent over the equivalent period a year earlier.

Moreover, within the mortgage broking industry the biggest customer segment by far is investor loans at 40.4 per cent with first-home buyers making up a mere 14 per cent of the business these days.

Behind this boom there has been consistent concern with ­aspects of mortgage broking in relation to standards and disclosure. Armed with consumer complaints, the Choice group recently carried out a limited investigation of the big three players: Aussie Home Loans, Mortgage Choice and Australian Finance Group, which just joined the sharemarket with a $120 million float yesterday. What they found was alarming: the industry scored poorly in seven out of ten consumer criteria.

Moreover, the exercise revealed a string of hard facts about mortgage brokers that most investors might never have understood:

1. Mortgage brokers do not select from the entire market, rather they pick from a limited list.

2. Legally mortgage brokers have no obligation to find you the best loan or even a suitable loan — they only need to avoid loans that could create “financial hardship”.

3. Mortgage brokers may be linked to or even owned by the banks on their lists.

And if you think that’s disconcerting, it’s not the half of it. Specifically, the exercise mounted by Choice discovered that at the three big players they examined there were incidents ranging from unsuitable advice to a ­blatant bias in favour of pushing “own company” products.

Specifically when it came to dealing with requirements for an investor the mortgage brokers did not fare well — AFG “did not adequately consider the needs of the borrower” for example while Aussie Home Loans (now owned by Commonwealth Bank) was reported to be suggesting larger loans than Choice judged reasonable. Judging the overall results, professor Kevin Jamieson, head of the department of applied ­finance at Macquarie University says: “It’s the nature of the industry, product sales rather than ­advice. However, it needs to be recognised, as in financial planning, this is not always in the best interest of the client.”

The MFAA has blasted the survey as misleading and having an insufficient sample size. In the wake of the report MFAA released their own survey commissioned from accountants Ernst and Young and guess what? They found 92 per cent of their 600 respondents were satisfied with the “process of arranging their recent mortgage” through mortgage brokers.

Of course, being satisfied with the process of a retail experience and getting a good deal are not quite the same. In fact, in examining the industry for the MFAA, Ernst and Young unearthed a range of fascinating information about this little understood, lightly regulated sector enjoying a once-in-a-lifetime boom.

As Ernst and Young suggests, the home loan industry in Australia has grown uninterrupted for nearly 100 straight quarters, which is remarkable given this period includes a range of major economic corrections. The industry has grown 10 per cent a year since 2005. Ernst and Young puts forward the suggestion that mortgage brokers will find it increasingly difficult to combat the richness of digital information now accessible to investors.

They might have added that new APRA regulations aimed at restricting investor lending due to be enforced in coming months could be a test for the sector. As AHL founder John Symond told Sydney’s radio station 2GB on Tuesday: “Banks are going to be knocking back a lot of investor applications in the weeks ahead.”

In striking back at Choice the MFAA has largely concentrated on the modest nature of the Choice investigation. But Alan Kirkland, CEO of Choice, says the idea is to get regulator ASIC to delve further into the mortgage-broking industry with a wider investigation — and it looks like that would be well worth doing.

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