Why Jessica Irvine & News Ltd are wrong on mortgage brokers

Darren Moffatt

Confession time: I'm a big fan of Jessica Irvine.

I've read her stuff for years in the SMH and Fairfax, and have almost always found myself nodding furiously in agreement. I love her brand of accessible, econo-political insight. It's rare for an economist to effectively deconstruct big issues for the masses, and rarer still to offer common sense solutions. That she regularly does both, is a real testament to her talent and value as a writer.  

Recently she moved to News Ltd and now commands a much larger audience. Her column is syndicated out through the Sunday dailies such as the Sun Herald Sun, The Sunday Telegraph, and Sunday Brisbane Courier mail.

It's a pity then, that so many people would have read her howler of a column today. It’s a real shocker.

Her attack on mortgage brokers might make for a nice headline, but it’s riddled with factual inaccuracies and omissions. It’s not even a real story – everyone KNOWS that brokers are paid commissions by the lenders and that this is how it’s (mostly) kept as a free service to consumers. Borrowers themselves use brokers for convenience, product knowledge, and access to many lenders so they can more easily get a better rate and save on interest. Several iconic household brands such as Aussie and Mortgage Choice have been built on this premise. It’s not news.

But most damning of all, is her total failure to understand the crucial role brokers play in keeping some semblance of competition in our bank-dominated mortgage market. More on this in a moment.

First, the errors. Early in her piece she claims that:

"Brokers are failing to adequately disclose the commissions they receive from lenders when they sign up borrowers for a loan

Really? What’s the basis for this assertion? Because I can’t find one in her column. It also ignores the reality of the Government’s recent efforts to legislate against this concern (amongst others). In 2009, they introduced the National Consumer Credit Protection (NCCP) act, and substantially lifted requirements for broker disclosure on commissions. If, as she claims, brokers are not disclosing, then the bigger story would be the failure of government policy. Strange then, that we do not hear about this.

In fact, it’s impossible for any authorised credit representative (broker) NOT to disclose exactly how much they’re getting paid (unless they’re deliberately breaking the law). The main document for this is the “Credit Proposal Disclosure” form, but there’s also the “Credit Guide” and the commissions are disclosed again the lender’s loan offer contract.

That’s lot of disclosure in any one’s book.

Jessica makes the point that brokers aren’t required to disclose the commission rates of every-single-lender, only a short list, so there is potential for brokers to recommend lenders that pay a higher commission. Technically this is true. And no doubt, some brokers (a very, very small minority I would say) might abuse this. However, the law again requires that brokers offer borrowers a choice of lenders & rates, and the practicality of the process is that most brokers have software that compares hundreds of mortgage products right in front of the client.

Now, her omissions.

Jessica proclaims the laudable information and convenience of online comparison sites such as iSelect & Rate City, in stark contrast to mortgage brokers who are apparently compromised by commissions and “conflict of interest”. It’s true, these sites have many great qualities and pose a real threat to brokers – something I’ve been banging on about for a while now. But she’s left out a crucial detail here: these sites also receive income from banks and lenders for introductions to potential borrowers. Here are the terms from the Rate City site:

“We make money by generating qualified leads for financial institutions. A lead is generated when our users visit a financial institution's website via a link from the RateCity website. If you visit a bank's website via RateCity, we may get paid either for that click itself, or more likely, for you "doing something" with the institution - for example, opening an account, or completing an application form on the bank's website.

How is this different from what mortgage brokers do? In the case of iSelect, they're actually an online broker!

Here’s a quote from their site:

“iSelect receives payment of commissions from participating lenders (via our aggregation partner, Australian Finance Group Limited, ABN 86 148 217 181 ('AFG'Wink for mortgage products sold via the services referred to on this website. You are not required to pay iSelect for the use of the website.”

This is not to knock either organisation, simply to highlight the sloppy journalism in Jessica’s article. These are very serious omissions that in my view, serve her readers poorly. One can only hope they were the result of a zealous sub-editor, not lazy research.

Finally, brokers are not just commission-earning machines.

Mortgage brokers have been called many things over the years, but Jessica’s comparison to “washing machine sales people” is a new low. I know many brokers, who, with 30 years plus banking experience, a Certificate IV, a Diploma of Mortgage Broking, and hundreds of very satisfied clients would be insulted at the analogy, but this is beside the point.

The real point is that the comparison is erroneous. In trying to illustrate that a mortgage is a commodity item sold just like a washing machine, she has seriously erred. For a start, a mortgage is a much more complex product, with deep financial and emotional implications for the consumer. This is a comparison ONLY an economist could love. But most importantly, her analysis ignores the fundamental issue of mortgage market dynamics.

In the fragile eco-system that is the Australian mortgage market, brokers play a vital role in keeping the flame of competition alive. Yes, they originate nearly half of all mortgages, but for non-bank lenders the figure would be closer to 95 per cent. They are the main (sometimes only) distribution channel for non-bank lenders and regional banks,  who over the last twenty years have helped cut the interest margins big banks charge their customers from 4 per cent to well under two per cent. This competition from non-banks lenders has been an immeasurable win for consumers, but it simply would not have been possible without a mortgage broker distribution channel.

In fact, brokers were so good at delivering consumers a better deal from lenders outside the big four banks that by 2007 non-bank lender had 20 per cent of the mortgage market. Thanks to the GFC, and some cack-handed government policy, just five short years later the big four banks now once again control around 90 per cent market share. Is this good for consumers?

Some journalists complain when the banks jack up their rates. But banks are only able to do this because competition has diminished. What would happen if commissions, and therefore, brokers disappeared entirely? Would banks pass on the cost saving to consumers in the form of lower rates? We know the answer. Brokers are a bulwark for consumers against complete bank dominance. If, or when, broker market share declines as a result of rising volumes to bank proprietary online channels, it's likely we'll see their rate margins return to the higher levels of the bad old days.

Like any industry, mortgage brokers are not perfect. And yes there are some genuine issues with commission-based incentives; Jessica rightly highlights bonus volumes as an area of concern. However, the industry has come a long way, is now fully-regulated with a high degree of compliance, and continues to serve the interest of consumers well. One day the online channel may take over and brokers might become extinct. But in the meantime, busy, stressed Aussies will continue to enjoy the convenience, choice, and interest savings that mortgage brokers provide, regardless of the twaddle good journalists even sometimes publish.

Disclosure: Darren Moffatt is owner & dircetor of the mortgage broker business Seniors First. He is also CEO of Housenet.com.au