Mortgage origination booming

Posted On Tuesday, 09 July 2002 10:01 Published by eProp Commercial Property News
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The industry has grown rapidly since 1998 due to the lack of barriers

Property-Housing-ResidentialOf the many and varied challenges that have confronted SA banks in recent years, one of the least commented on has been the rapid rise of the mortgage origination industry.

From a zero base in 1998 originators have multiplied like proverbial rabbits due to the lack of significant barriers to entry. There are now up to 100 out there, although the big banks recognise and deal with no more than a dozen of the biggest and most professional among them.

MortgageSA is the overall market leader, while BondNet seems to dominate the online environment. The most recent arrival of significance is Bond Choice, which was launched at the beginning of this month, making use of the experienced staff and infrastructure that remained after First National Bank took out NBS Homeloans' loan book earlier in the year.

Ironically, NBS was the one big player in the SA bond market that sought to hold back the tide by refusing to work with originators. Presumably this was because they take commissions of up to 2% on the mortgages they place. That is about what it costs the banks to employ their own staff to do the job.

With so many operators fighting for market share it is no surprise that originators now introduce about 40% of the R60bn worth of home loans that are granted by SA banks each year. Many in the industry confidently predict that this proportion will reach 50% as early as next year, and settle close to the 80% level that prevails in more mature financial services environments such as Australia and the US.

But what is mortgage origination, and what does the explosive growth of the industry mean to the financial services sector?

The concept is so simple that it is hard to believe that it did not take off in SA far earlier: originators shop around on home buyers' behalf to secure the best mortgage deal. Whereas in the past, potential clients invariably approached banks directly when seeking a home loan often on the recommendation of the estate agent selling the property they can now speak to an originator and expect to get the best deal available.

The early experience in SA was that originators could help lop two percentage points or more off the prevailing home loan rate, although the extent of their influence was reduced fairly rapidly as the banks moved to protect their market shares. Still, there can be no doubt that, along with the advent of securitisation in the SA market, origination has placed considerable pressure on margins in the home loan market.

Of course anybody is free to shop around, so while originators do rely to an extent on consumer apathy, they must be offering more than just the convenience of having somebody else to do the legwork for you.

Bond Choice MD Mark Beckett says one of the reasons South Africans have taken to bond origination is that the range of products on offer has become more sophisticated, so originators are effectively acting as independent financial advisers.

'It is no longer as simple as choosing between banks offering more or less the same thing. Some of the instruments that have come onto the market are complicated, and it takes experience and expertise to choose the most appropriate option for the individual's circumstances.'

Among the innovations introduced relatively recently into SA are access-type bonds, more flexible repayment periods, fixed and capped interest rates, rates linked to the bankers acceptance and other market rates, and securitised loans (where the debt is packaged into a tradable form and sold to other financial institutions). Beckett says home buyers believe that originators will represent their interests in the same way that estate agents represent the interests of the seller.


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