Brokers with their own interests
After the huge changes in the mortgage market, we must now ask how independent our brokers are
CAN consumers trust mortgage brokers to act independently on their behalf?
Few could blame consumers for asking that question after upheavals in the mortgage market in the past few days, upheavals that mean the mortgage business as we know it in this country is set for massive change.
Moves by some banks to stop dealing with brokers while other lenders have slashed the commissions they will now pay mortgage brokers have radically changed the environment for brokers and their customers, the borrowers.
The commission changes imposed by the banks raise major issues about the independence of brokers.
Whether brokers like it or not, the changes in commission arrangements mean that there could now be a perception that brokers will no longer act in the best interests of the borrower, and instead will put the business where they are likely to get the best commissions.
For more than a year and a half now, National Irish Bank has offered the best value to those who want to switch their mortgage. But NIB does not pay broker commissions. That has been a problem for brokers.
But it just got worst. Last week Ulster Bank said it would no longer deal with brokers, and would instead concentrate on promoting its home loans business through its 131-branch network.
Ulster's sister bank First Active cut the commissions it will pay brokers from 1pc of the value of the mortgage arranged to just 0.5pc. And Permanent TSB has announced plans to cut its broker commissions to .8pc, while Bank of Scotland (Ireland) is moving to paying between 0.5pc and 0.8pc in commissions.
Contrast that situation with a market where Bank of Ireland and AIB are currently still paying 1pc commissions to brokers who arrange home loans for them. But these banks are unlikely to resist the temptation to also cut commissions.
More than half of the mortgages sold in Ireland every year are arranged through brokers. Last year some €34bn worth of mortgages were sold.
If, up to recently, brokers were getting 1pc of half of all the mortgages arranged, that means that some €174m went in commissions to brokers last year.
But with a slower mortgage market this year, the overall value of the market is likely to fall back under €30bn.
And with commissions now averaging 0.7pc, this means the brokers' share of the cake will fall to €100m, a drop of some €74m for the 1,800 or so brokers in Ireland.
All of this creates a suspicion that brokers will now place what little business they get this year with those lenders prepared to pay them.
"How would you feel if you come into work one day and you were told that your income was to be cut in half?" was how chairman of the largest broker body, the Professional Insurance Brokers Association (PIBA), Jack FitzPatrick, put it.
Mr FitzPatrick strenuously denies any suggestion that brokers will act to shift business to where they will get paid the most and thus not act in the best interests of the consumer.
Michael Dowling of the Independent Mortgage Advisers' Federation is also adamant brokers still act with the interests of consumers at heart.
But placing business where the commission is highest is precisely what brokers were accused of doing a few months ago, before the cut in commissions gathered momentum.
Haven Mortgages, the broker business of EBS Building Society, accused brokers of pushing homeloans business to where the commission levels are juciest. Brokers hit back that they are legally bound, under the provisions of the statutory Consumer Protection Code, to act in the best interests of consumers.
Once a product is recommended brokers have to produce a "reasons why" letter setting out why a particular product or lender has been selected.
The solution, brokers recommend, to all of this is to radically alter the payment arrangements for brokers. Instead of brokers being paid a percentage of the value of the mortgage in commissions, an arrangement fee would be provided upfront by the borrower.
This would increase transparency as it would mean that the payment for the broker was not dependent on choosing one homeloan product over another.
This is the way the mortgage broker business works in Britain and in Holland. In such a scenario consumers using a broker would have to stump up between €1,000 and €3,000 upfront when arranging a mortgage.
With larger deposits now needed from first-time buyers, and lenders prepared to advance less of the value of a property, it is highly unlikely that the a new fee-based system will be embraced by consumers.
But expect to hear a lot more noise about it in the next while as brokers reel under the type of pressure they have never experienced before.