Orbiter’s Wayne Smethurst believes technology in the form of mortgage sourcing systems can help the intermediary market once again find favour with lenders
Decision makers at lenders will have a lot to think about in 2010 as the market continues to reshape and evolve. One of the topics likely to be on the agenda in the majority of boardrooms and management meetings is the role intermediary generated business will play in future distribution strategies.
When reviewing their distribution strategy, it is important for lenders to consider the role of mortgage product sourcing systems. The reason I say this is because it is possible that developments in the sourcing market can help lenders grow volume again in the intermediary market but in a controlled way. On the face of it this may seem like a strange claim, as recent years have seen a boom in consumer comparison sites which make finding a mortgage or other financial product considerably easier than it has been previously. What the latest intermediary technology can offer, however, is a level of visibility and control that in the current lending market is more desirable than ever before.
Intermediaries are still a key element in most lenders’ distribution mix and will remain so for lenders to meet the needs of homeowners. As a result, there is a continued need for product sourcing, and the electronic application and control features that go with it. In conversations with lenders last year, it became very clear to me that they were happy to do business with advisers but were very concerned about having too competitive a product. The problem here is twofold.
Firstly, the comparison tables are forever changing, as lenders launch products with limited funding, a two-year fixed rate for instance, and then withdraw them as the tranche is filled. This in turn can lead to what was a product designed to be reasonably competitive suddenly finding itself inadvertently sitting at the top of the table. Demand rockets with all sorts of consequences, not only for the marketing team and their tranche control but also for the administration teams and their ability to handle the inflow to a satisfactory service standard.
Secondly, while a lender may be open to offering exclusive products to the intermediary sector as a whole, or just to a specific network or club, a competitive product can sell out in hours. This can lead to all kinds of headaches and complaints when the tranche is full and the lender needs to withdraw the product.
These problems are not entirely alien to lenders of course. The lending community has long operated application booking procedures but these are often cumbersome, relying in some cases on aggregating information from a number of sources and in others on someone at the lender’s end answering a telephone and entering the booking manually. The danger here is that not only are the booking procedures slow and messy, they are too easily inaccurate, providing inadequate and out-of-date information in a slow and awkward fashion.
Inevitably, this leads to poor tranche control. Lenders are left with under- or over-used funding lines and are therefore exposed to unnecessary interest rate risk. Given what technology can do nowadays, this all seems somewhat stone-age, but budgets may understandably be focused on other priorities.
So what can a technology company, especially an adviser-facing sourcing and distribution platform provider, do to help? Well, while continuing to support advisers – it’s what we do after all – this type of platform provider can be more of a go-between, with a foot in the lenders’ as well as in the advisers’ camp. And it can do this by making it much easier for lenders to control lending tranches or exclusive products offered through advisers, by making it less cumbersome for those advisers to book applications, and by making it much easier for both sides to know exactly when a tranche is running low or is being withdrawn.
It’s all a question of monitoring and control and, for this kind of problem, technology can be very much an enabling solution and, even more to the point, a real-time solution.
Tranche management
Having researched the issue amongst lenders and product distributors, we identified an 8-point process that a tranche management system would need to work for all parties, including intermediaries. The process is set out below, along with the lender/distributor requirements that came through the research.
Define the product. The lender or distributor (let’s call it the tranche manager) must be able to enter or select any number of products to be monitored and controlled when managing a tranche. This could be, for example, a two-year fixed rate with a range of LTV/pricing points, each of which the tranche manager might want to control to give a targeted interest rate mix across the whole tranche. Or it could be that the product is only available to specific borrower types – first-time buyers or re-mortgagers say. Whatever the requirements, the whole process must be quick and easy.
Select or invite advisers. The tranche manager must be able to specify discrete intermediary groups, for example a network or a club, or perhaps specify directly authorised intermediaries (DAs) only. Similarly, a tranche manager which is a club or network, must be able to specify their own members only. Whatever the specification, it is only those intermediaries specified that may have access to the product.
Set tranche amount and dates. The tranche manager must be able to specify the volume of the tranche, split into as many LTV/pricing bands as required, and each band, if wanted, with its own mini-tranche. A ‘low warning’ level must be available, which warns all parties when the tranche is beginning to run out. The tranche manager must be able to set start and end dates, with the facility to move the end date forwards or backwards if circumstances change.
Launch tranche. We were told in our research that once the start date was set, it should not be necessary for the tranche manager to provide further authorisation for the tranche to go live. But knowing how some companies and individuals work, we suspected that there would be instances where the tranche manager would want a subsequent ‘go live’ authorisation, so we think the system procedures must allow for that. Research is a wonderful tool but sometimes research respondents get just a bit carried away!
Monitor and control. All elements within the 8-point process are important but “monitor and control” is probably first among equals. The tranche manager must be able to monitor product bookings and application take-up in real time. The manager must be able to see the tranche status – the speed of utilisation, the tranche pipeline and the tranche balance with the data cut and sliced whichever way the manager wants. Tranche volumes, end-dates and low warning levels must be amendable, if required.
Running low. The adviser or intermediary group must be able to see a warning when funds are running low, according to the pre-set or amended level. Bookings for amounts that exceed the remaining tranche must be rejected.
Withdraw. The tranche must be automatically withdrawn when it is sold out or the set end-date is reached.
Analyse. The tranche manager must be able to review the cases submitted and how the tranche is being utilised. In addition, the manager must be able to access at any time a management information report suite online that encompasses analyses by loan amount, LTV, borrower type, or any other key indicator. That’s something else about research – sometimes respondents come out with a catch-all like “any other key indicator”, leaving the researcher to guess what that might mean.
There was one further issue we asked about when it came to setting the tranche amount (number 3 in our 8-point process). Different lenders have different booking to application fall-out rates and different application to completion fall-out rates, indeed different fall-out rates by LTV band as well. But tranche managers felt they should do their own homework before setting the tranche rather than expect the system to sort it out for them. I think this was the only bit of feedback where sighs of relief were heard from our software team.
Looking through the results of our various conversations with lenders and distributors, and the 8-point process that we put together on the back of them, there didn’t seem to be anything that a technology provider worth its salt should not be able to handle. After all, lenders, distributors and advisers are the customers, and technology is merely a tool to help deliver what customers want.
Additions
And being customer-centred, we identified a number of wrinkles that ought to be added to the process to make life easier for all concerned.
Pre-registration. All product sourcing and distribution platforms have some kind of registration process but we felt that, if required, it would be very helpful to pre-register a network’s ARs where those ARs were to be specified as having access to a tranche.
Real-time online booking system. Being able to book a product instantly supports the adviser/client relationship and the automatic allocation of a unique booking reference number is the adviser’s confirmation that their client’s mortgage has been reserved. But from a lender’s perspective, over-booking creates other problems. So having a time-out period set as part of the tranche rules, whereby an application must be input within a specified number of days from the booking date, helps both lenders and advisers, with unused bookings going back into the tranche.
Online booking fee payments. It was slightly surprising that the lenders and distributors didn’t mention this but perhaps it was a given that a tranche management system would have a fully secure card payment facility for booking fees.
Tranche cloning. Once a product has been defined, tranche managers should then be able to replicate the same product set-up without re-entering everything.
Easy to use and intuitive user interface. Again it’s stating the obvious but however complex the underlying code is, it is essential that the user, whether tranche manager or adviser, goes through a logical and straightforward process that doesn’t require an evening class in computing!
In control
So with our research complete, we looked at the conclusions and insights and we could see that there was a clear need to build a system following our 8-point process. We felt that the process could help to resolve most, if not all, of the issues I set out in the opening paragraphs of this article.
This may all sound like good theory, but can it actually deliver value? Early indications are very encouraging. Certainly our own system, which we call Lender Exclusive Management, has brought a good deal of positive comment and, as expected, it’s the “control” aspects that have generated the most interest.
From the clubs’ and networks’ perspective, identifying the exclusivity of a product via a sourcing system is nothing new. The real benefit comes with the ability to control and monitor how an exclusive product tranche is used. For the lenders – existing, re-emerging or new – the level of control over the distribution of a particular product is well beyond what they have had in the past. One particular comment came from a re-emerging specialist lender which had largely relied on packagers for distribution before the crunch hit. For them it means that the dog will be wagging the tail again, rather than the other way. It also means that their understandable caution is managed while advisers are able to start to re-build their business.
So it’s a win-win situation for all involved. Lenders get unprecedented monitoring and control of their lending activity. At the same time, the intermediary sector has an opportunity to strike back against direct-to-consumer deal and customer-led technology is used to serve the needs of the market. As for the customer, they get the benefit of expert advice combined with a level of certainty around product availability that has not been seen in the mortgage market in recent years.
Wayne Smethurst is managing director of Orbiter Distribution Limited
Date: 5th, March, 2010
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