The Hayne royal commission mortgage broker reforms are going to hurt

Hayne appears to have used an axe on the mortgage broking sector when a scalpel would have done the trick.

 

It is looking like the Hayne report has used an axe on the mortgage broking sector when a scalpel was needed.

Mortgage rates and fees are set to lift as a direct result of Hayne’s recommendations already approved by the government.

At worst, the move is going to push up the cost of mortgages to the majority of borrowers at the worst possible time. We have a credit squeeze already occurring in the market against a backdrop of falling house prices.

Yes, mortgage brokers brought on Hayne’s draconian recommendations because they have been pocketing trailing commissions for years and “invisible” arrangements like this are absolutely out in this new era of closer regulation.

But a drop of nearly 30 per cent in the share prices of major players Mortgage Choice and AFG on the ASX tells you these dramatic changes are going to hurt.

In summary, Hayne wants to swing the cost of mortgage broking services from the banks (which currently pay the commissions) to the customer — he wants this done fast, the process is supposed to start next year and finish in three years.

The reality is that under Hayne’s plan banks will have to bring forward future costs relating to trail commissions they would have paid to mortgage brokers — the banks will need to fund those costs immediately — the trailing commission arrangements are to go by July 1 next year.

What will happen next?

“Bank mortgage rates will have to go up, an average home loan rate which is now 5 per cent could go to 5.5 per cent very quickly — we have had no warning on this and no chance to explore alternatives,” says Peter White the CEO of the Finance Brokers Association of Australia.

It is worth noting what mortgage brokers, at their best, can do. In the ideal arrangement you outsource the very difficult business of finding the best mortgage deal to someone who is a specialist and they get a better deal. No wonder mortgage brokers now control more than half of all new mortgage business.

I’ve used mortgage brokers since they first came on the scene in the mid-1990s. I’ve just used one again over Christmas and two things were achieved. First, I actually got a mortgage in a market where they are extremely difficult to land regardless of your track record. Second, the rate I got — from a bank I already deal with — is almost 1 per centage point below the lowest relevant rate I can see this bank promoting on the bank loan comparison services. I know the broker gets an 0.15 per cent trailing commission but I am willing to pay it.

Nothing is free in financial services — mortgage brokers have boomed partly because the fees were invisible to the consumer. Faced with a very sudden new regime from Hayne where customers must now carry the costs, mortgage broking could return to the margins. Worse still, the lost business will be taken on once again by the major banks who already have a stranglehold on the mortgage market.

Surely against a such a background a better arrangement might have been hammered out. The sharemarket nosedive of listed mortgage brokers says loudly that banks win here, mortgage brokers lose and home loan borrowers might have better transparency … but did they win or lose if rates and fees rise from here?