Tough Time For Loan Managers

Sydney Morning Herald

Saturday December 13, 1997

Peter Lavelle

PETER LAVELLE reports on the battle between banks and cut-price mortgage providers.

Mortgage managers - those cut-price no-frills home loan providers who burst onto the home lending scene three years ago - are doing it tough these days.

Offering interest on variable rate loans at times up to 1.5 per cent below the banks' variable rate loans. By June this year they had managed to snatch around 20 per cent of the new loan market from the banks, according to the lastest housing finance figures.

But after an initial period of burying their heads in the sand, the banks have fought back and are now offering no frills loan options at the same low interest rates - sometimes lower.

Mortgage managers have found themselves having to match some of the additional features banks offer, such as redraw facilities and fixed/variable rate options in order to keep customers. These features have added to their costs.

With their market share now contracting (they now have only 18 per cent of new home loans), and their costs rising, many mortgage managers are finding the going too tough, says Bill Rankin, national manager of lending services at Mortgage Choice, which matches home borrowers with lenders.

"While there's little chance of them going bankrupt, many are finding that the expected profits aren't there and they'd prefer not to be in the market," says Rankin.

In recent months several mortgage managers have sold their loan books to other lenders and there will be more sales of loan portfolios as the industry rationalises, Rankin believes.

What does this mean for the holder of a home loan with mortgage manager? Are you at risk of losing your home, or being forced to pay the loan out early? Definitely not, says Rankin.

Though you may not be fully aware of the fact, your loan contract is not with the manager but with an independent trustee appointed by the provider of the funds. The mortgage manager isn't a party to the contract - their job is merely to manage the day-to-day administration of the loan on behalf of the trustee, he says.

If the mortgage manager decided to quit the market - or even if they went into liquidation - all that would happen is the loan would be transferred to another manager.

If the mortgage manager ceased trading for example, the trustee would simply appoint another manager, who would then take over the administration of the loan, says Rankin. The borrower would be notified in the mail of the appointment of the new manager.

However, there is a risk that the terms and conditions - interest rates, fees, etc - could be changed by the new mortgage manager, says Jon Denovan, partner at law firm Gadens. This is a direct result of the new credit code, he says.

Prior to the introduction of the new credit code, the terms and conditions of the original contract couldn't be altered.

But the new credit code now allows lenders to vary some the terms and conditions of the loan at will - subject to a month's notice. "Most home loan contracts now have provisions allowing for, in some cases quite extensive, variations in terms and conditions," says Denovan.

So, theoretically at least, the new manager could raise the interest rate if the loan is a variable rate loan, or impose additional fees, even jettison extra facilities like redraw facilities if it suited them.

Fortunately, in practice this hasn't happened and is unlikely to happen, says Bill Rankin.

If a new manager were to change the terms and conditions, they would run the risk of you deserting to another lender.

"The mortgage managers have no other source of income other than the fee they charge for administering that loan. If they lose you as a customer, they lose that income" he says.

Even if they tried, the provider of the money - the securitiser or bank that originally provided the funds for the home loan - would prevent it. The bank or securitiser usually has the final say as to how the contract can be varied, and their desire is to see the flow of repayments continue. "They would be more likely to replace the manager than allow changes," says Rankin.

However, there is no rock solid guarantee that you are safe from changes in terms and conditions, he admits.

If the terms are varied, and provided it can be argued the changes are arbitrary and unconscionable, there are several avenues of recourse open to the borrower, says Jon Denovan.

First up, you can refer the matter to the internal complaints resolution mechanisms of the lender. If this fails, you can take the case to the relevant industry association - in the case of mortgage managers this means the Mortgage Industry Association of Australia (MIAA); in the case of banks, it's the Banking Ombudsman. Failing this, the next step is the Consumer Claims Tribunal.

Otherwise the best option may be to simply refinance the loan.

These days, under the credit code, there are no exit penalties allowed for exiting from a variable rate loan, says Bill Rankin.

Moreover, most lenders these days will usually waive establishment fees as an incentive for you to refinance with them.

So refinancing is simple, quick and costs nothing, Rankin says.

There are penalties in refinancing out of a fixed rate loan. But as the fixed rate can't be altered by the new manager, there may be less of a pressing need to refinance anyway, says Rankin.

So on the whole, home loan borrowers have nothing to fear from the changes in the industry, he says.

Some banks may try to convince borrowers the mortgage managers are less safe now because of the changes. But in fact the banks are in a similar situation, with mergers and rationalisations taking place, says Denovan.

"If you have a home loan with Advance, by May next year you'll have the same loan with St George. How do you know the year after it's not going to be with NAB or Westpac?"

He says these days there is little difference between that offered by mortgage managers and banks - increasingly they are obtaining their funds from the same sources. Whether a particular product on offer best suits your needs is more important than the category of lender, he says.

But Bill Rankin concedes that for some people the prospect of a sudden transfer of their loan from one mortgage manager to another might be unsettling. In this case, it may tip the choice in favour of a home loan from a bank.

© 1997 Sydney Morning Herald

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