A heavy reliance on mortgage brokers could be a potential pain point for lenders if economic conditions change, according to one credit and investment expert.
Damien Wood, principal at specialist investment firm Spectrum Asset Management, said that with more than half the mortgage market originating from brokers, the financial health of certain lenders could be at risk if mortgage losses begin to rise.
In a recent
Spectrum Insights article, Wood said the link between broker commissions and the volume of loans written raised concerns especially compared to bank staff who were primarily motivated by “a broader range of benefits including developing a career as a banker.
“The downside for a mortgage broker, if bad loans are written, is some foregone trailing commission in the future,” he said.
Speaking to
Australian Broker, Wood noted that while this potential loss of income may disincentivise brokers from writing bad loans in the first place, how effective this was at achieving this would depend on the comparative weight between upfront and trail.
In his article, Wood said that mortgage defaults were a main contributor to the global financial crisis in the US. A third of mortgages originated from brokers nationally with these loans having higher default rates than bank-sourced mortgages, he added.
However, he admitted it was up to the banks to mitigate any risks involved with third party lending.
“The onus is on the banks to do so. The problem is we don’t know how good their controls are until there is an uptick in defaults, which will happen one day.”
With the banks taking the “ultimate risk,” they should be responsible for any consequences, he said.
Wood expressed concern that different banks had different standards when vetting mortgage applications with some being more effective than others.
“The problem is until the tide goes out, you just won’t know who’s wearing trousers and who’s not.”
Finally when asked whether measures such as serviceability buffers were reducing this risk, Wood said that fabricated loan documents could undo these added precautions.
“I’m sure the bulk of applications are fine. There’s just going to be the marginal guys – the broker or the bank – trying to get the deal and the volumes done. These numbers work well when prices are going up for property, jobs are freely available, and interest rates are low. But when one of these factors changes, it will then test whether buffers are applied appropriately to everybody.”
Since banks were leveraged 15 times with regards to mortgages, it would take just a few mistakes to have a material impact on the lender’s performance, he warned.
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