Some of Australia’s mortgage lenders are putting the squeeze on mortgage brokers to extract more loans out them, and this brings up the question “Do mortgage brokers work for the benefit of their client or the Banks? You may not like the answer.

Mortgage brokers can’t get you a loan for a lender that they are not accredited for. Does that make sense to you?

And right now Westpac and the Commonwealth Banks are starting to make brokers jump through performance hoops, in order to retain their accreditations with them.

The false assumption

Some in the mortgage broking industry claim that their “Independence” as a mortgage broking professional is ” in jeopardy” due the pressure put to them by the major banks to favour their loans. This assumes that the mortgage broker is independent of the banks in the first place. This in my view is a false assumption.
What is more, if any mortgage broker claims to their customer that they are “Independent”, they are guilty of deception and misleading the customer.

How can that be you might ask?

That’s easy. Determine who the principal is and who the client is and who the customer is.

A principal in an agency is easy to spot. They are the one who pays the agent.
Who is the customer? Easy they are the ones who buy the product or service from the agent.
Who is the client then you might ask. Good question! It can’t be the customer, because in the relationship, the customer is the one who pays for the goods or services.
The client is the one who pays the agent for bringing buyers and seller together. When a home buyer pays all the money to the lender, and the lender pays the broker, then the client in my view is the Bank!

Why do I say this? Because the mortgage broker is paid by the banks, not the client. So the mortgage broker is dependent on the Bank or Non-bank Mortgage Lender for his livelihood.  And no broker can claim to be independent of the banks. They are the opposite. They are completely dependent on the Bank.
Mortgage Brokers also have to ensure that they look after the best interest of the lender.
Can you see anything wrong in this? Yes, the mortgage broker appears in fact a [non-exclusive] commission agent of the bank. He or she only gets paid if they bring a deal to the lender that settles.
The banks of course will argue that “No”; they don’t employ the broker as an agent. He or she is merely an introducer to the lender.
If, just for the moment, we take a look at Real Estate Agents and their relationships with buyers and venders of property we can see that the real estate agents principal is the vendor [seller], because [in most situations in Australia] the seller is the one who hires the agent to effect the sales, and the seller also pays the commission on success to the real estate agent. Real estate agents in effect work for the seller to market and sell them property on the seller’s behalf. They have the skills and knowledge to get the best possible price in a given market to affect a good outcome for the seller.

What is the difference with a bank hiring a mortgage broker to sell their loans? I can’t see any. Maybe I have missed something in the home loan or real estate business, so if I have please explain it to me. Until that happens [I’ve been waiting eight years now] I am convinced otherwise. And I will stick with my long held view, that mortgage brokers are the agents of the banks that they represent.
And that brings up a question, and the question is this. What’s wrong with that? Nothing I say. As long as the client is made explicitly aware of this fact, by the broker in a statement, or in writing, before transacting a loan.

Mortgage Brokers get angry when you tell them this.

This notion will rile the many honest brokers who work hard to get the best deal they can for their client. But that is not the point. Yes, most brokers are honest, and will work to get the best loans for their customer [let’s stop calling them clients, OK in case we give someone the wrong impression.
But that is not the point. The point is they don’t have to be honest. They can if they wish sell the customer a worse than optimum loan for their needs. We have all heard of brokers who hire sales people and tell them to sell a particular loan, when they know that this is not best loan or outcome for the client, but benefits the mortgage broker instead.

What is needed is legislation that clears the air so that customers know where they stand on this point, and who is the mortgage broker really working for.

Any Mortgage Broker that tells you that he or she is independent, should be given a wide berth, or reported to the Office of Fair Trading as far as I am concerned. 

Are Mortgage Brokers Honest?

The notion that mortgage brokers will lose their independence if the banks make them sell a certain number of loans is rubbish. To use the real estate agent analogy again, if you give the agency to a real estate agent, who then uses your home as a way to sell other people’s homes instead of yours, is he or she being honest with you, the client and principal? And can you sack the agent if they don’t perform? Of course you can!
Mortgage brokerage need to take a good look at themselves, and start being more honest with their customers, and maybe they need to start with themselves and the relationships with their lending panel.
The final question about honesty is what is implied in a name. Does “broker” imply an agent client relationship? If it does maybe it should be replaced with Mortgage Introducer. That is a more honest name in the opinion of Mr Mortgage.

The big four Australian banks have had it sweet for so long, but have copped a serve from Prime Minister Kevin Rudd in recent weeks, as struggling mortgagor homeowners haven’t been getting all the interest rate cuts from the RBA passed on to them.
Obviously the banks are used to having their names dragged through the mud as its becoming an Australian pastime to bag the banks behaviour by Jill and Joe Public. So the Prime Minister has good right to feel that joining in with a quick flurry of words on behalf of Mr and Ms Mortgage can’t harm him in the polls. But it is not going to change the Banks’ motives or behaviour. After all, they have to work in the best interest of their Shareholders, and on that basis you would have to say they are going a great job, if you compare their performance and results against banks in the US or the UK.
But the big four Banks have a privileged position, and banking is a mainstream public service as well as a business, so Mr Rudd needs to deliver effective competition within the Australian Mortgage Industry to create a level playing field. In my view this will mean legislating for an effective mortgage and credit card marketplace, and one with real competition.
Regional Banks and building societies and credit unions, as well as non bank securitised mortgage lenders need some legislation that might be called positive discrimination to level that playing field.
The big four Australian banks [CBA, NAB, Westpac and ANZ] are, obscenely profitable. For example and raked in $9.5 billion in profit in just six months. And this is while there is a global recession? Australia’s banks are among the world’s most stable and profitable and have been for some time.
The Finance Sector Union (FSU)has urged that banks make their lending practises more responsible by suggesting that Australians’ ever-increasing credit card debt is unsustainable; and that linking salaries to peddling high-debt products like mortgages does not serve customers well, especially when it’s to buy shonky and highly geared investment products such as the two tier real estate market in Queensland in the 1990’s and the recent Storm Financial collapse.
Its time for action Mr Rudd, not another verbal bashing. A viable mortgage alternative to the banks is required by all homeowners and home buyers. The current system means that second tier lenders get the customers that the big four don’t want, and this will only increase the gap in profitability between Australia’s big and small mortgage lenders.
Rick Adlam is Mr Mortgage

Australia appears to have escaped the recession the World recovers

Based on record retail sales, lifting new home sales and recovery in our trading partners, the Reserve Bank of Australia deciding to leave interest rates unchanged at 3 per cent, when the board met today at its June Meeting.

The Rudd government must be dancing in the corridors of Parliament house. Expect them to make the Liberal opposition pay now for its criticism of the stimulus package handouts, and first home owners Grant boost, which saved the building industry from decline and job losses.

The Retail industry must also be thankful as the stimulus reaped them a record April shopping sales.

The decision to keep interest rates at its 45-year low is good news for the housing industry, home buyers and mortgage lenders because there is money to throw at any weakness the RBA board sees later in the year.

In a statement released this afternoon, Reserve Bank governor Glenn Stevens said there was evidence emerging the global economy is stabilising.

“The turnaround is clearest in China and some other emerging countries,” he said.

“Recovery in the major countries is likely to take longer to begin and be slower when it does occur.”

Mr Stevens said although the effect of low mortgage rates was yet to be seen, future rate cuts were possible if the economy continued to deteriorate.

“The prospect of inflation declining over the medium term suggests that scope remains for some further easing of monetary policy, if needed.”

The Reserve Bank cut the official cash rate by 25 basis points in April ending 425 basis points worth of reductions since September.

The central bank has since indicated it is in no rush to lower rates further as it assesses the impact of its easier monetary policy stance and the Federal Government’s stimulus packages.

The stimulus packages have worked their magic and have lifted the retail industry, with figures out yesterday showing consumers spending a record $19.4 billion shopping in April.
Mr Mortgagesays that this is good new for homeowners, home buyers and the residential building building industry.