Banking royal commission: Credit to stay tight, mortgage brokers could quit

Prospective homebuyers will still have to jump through hoops to get a home loan but the process appears unlikely to get even harder, in light of the financial services royal commission’s final report.

But some mortgage broking groups saw their share prices slump 25 per cent or more on Tuesday amid warnings a recommendation on broker pay structures could hit their business models, as well as reducing  competition for consumers.

Commissioner Kenneth Hayne noted that home lenders have already become more cautious, checking borrower expenses and relying less on a low benchmark known as the Household Expenditure Measure.

His report stopped short of urging an even deeper lending crackdown, although he did raise the prospect of new laws to make sure banks do verify a consumer’s financial situation.

The findings will have little impact on the already tight availability of credit, AMP Capital chief economist Shane Oliver said.

“You could make an argument that the findings from the royal commission are out of the way, that might take a little bit of pressure off the banks,” he said.

“But the banks have still got [regulator] APRA breathing down their neck, making sure they verify expenses.”

Real Estate Buyers Agents Association of Australia chief executive Rich Harvey said a lot of the heavy lifting on loan approvals has been done.

“I don’t think there’s going to be any reprieve coming out of the royal commission report, I think it will continue to be a tight level of scrutiny,” he said.

Canstar group executive of financial services Steve Mickenbecker said the report recognised that banks have already clamped down on lending in recent months.

“One thing that it did do, which I’m grateful for, is it came out and said, ‘We actually think the banks have done enough in tightening up credit and we’re not going to hit them on the head and make them do more’,” he said.

But a recommendation on mortgage brokers could have a wider impact.

The report called for borrowers to pay a fee upfront to their broker, instead of brokers getting paid by commissions from the banks whose loans they sell.

The federal government stopped short of pledging to implement this finding, opting instead for a review.

Mr Mickenbecker warned borrowers would be reluctant to pay a broker fee that could cost about $2000, meaning mortgage brokers facing a threat to their business model could drop out of the industry.

Making brokers more independent would be a benefit to the customer, he said. “But if the broker isn’t there … it becomes totally hypothetical.”

Ray White group managing director Dan White was concerned that a hit to the broking industry could leave home buyers with fewer options, which could affect their ability to bid for properties.

“The concern is that competition will be reduced. We’ll go back to the dark old days where you have to go cap in hand to a big-four bank,” he said.

“The big four [banks] have got big advantages, they’ve got the branches and the big marketing budgets to attract customers.”

Century 21 chairman Charles Tarbey said customers would experience worse service when borrowing directly from a bank than through a mortgage broker, particularly a mobile broker who will visit customers outside business hours.

“When you try to get a loan off banks in the past, it’s quite a difficult process,” he said. “There are not people jumping through hoops to get the job done for you.”

Industry body the Mortgage & Finance Association of Australia said the recommendations were a win for the big-four banks.

“This sort of fee would see customers deserting brokers, cutting access to smaller lenders and driving consumers into the branches of the major lenders,” chief executive Mike Felton said.

Investors sold off shares in ASX-listed mortgage brokers after the report. Australian Finance Group shares dropped 29 per cent by market close on Tuesday, while Mortgage Choice fell 25 per cent.

Australian Finance Group welcomed the federal government’s rejection of the proposed upfront fee.

AFG chief executive David Bailey warned if changes were not handled properly, competition could be reduced and low-income earners would be the hardest hit.

Mortgage Choice chief executive Susan Mitchell said the recommendations on broker pay “need to be thought through carefully” as they could give more pricing power to major banks.