Bond origination – what does the future hold?

Private Property South Africa
Property Professional

Bond origination came into its own in South Africa when the property boom hit. Those times have long since gone, and as the South African property landscape has changed, so has the origination sector.A while ago, when things got shaken up by the National Credit Act and the recession, it was said that bond origination would cease to exist as a service to the real estate industry. Some of the banks pulled out of the origination space to rather service their clients directly, but came back to include origination as a home loan distribution channel as they saw the value originators bring to the table, although the terms and conditions of operation changed. Commissions were cut and mortgage originators had to run a leaner business than ever. Origination contracts have once again been renewed, and once again commissions have been cut even further. It is also said that not all of the banks have renewed their contracts as yet.

So where exactly does the origination business stand in the current South African property market? Here’s what the industry had to say:The OriginatorsRudi Botha, CEO of Betterbond, says that there is definitely a place for origination in the industry as it is a service that the home buyer, estate agent and the banks benefit from. “Mortgage originators assist home buyers in getting the best possible deal on their bond, coupled with expert advice, more chances to obtain finance and the convenience of one generic application form.

For estate agents, originators provide a free, convenient service which allows them to secure more property sales by providing the buyer with multiple chances to obtain finance. The origination process also allows the agent to retain control of the property sale transaction when it comes to time restraints for conditions of sale to be met, among other benefits,” he explains.Saul Geffen, Chief Executive Officer of ooba, says there is unquestionably a place for mortgage originators in the bank’s home loan distribution channels.

“Mortgage origination offers the banks outsourced, variable cost distribution and, importantly, access to both retention of their own customers and acquisition of non-bank customers. Our banking partners recognise and support origination’s value proposition to real estate, as a single point of contact for the home loan process, and the customer’s requirement for choice.”Botha says that for the banks, origination is a viable acquisition channel through which to obtain new home loan clients, added to which, the majority of the knowledge and expertise of bond finance now lies with the originators. Because of this, originators are able to deliver quality applications to the banks electronically.When asked how ooba views the current role and importance thereof of mortgage originators in the bond finance/home loans sector, Geffen says it is the expert support that a good bond consultant can offer real estate and the homebuyer which is invaluable. “The tough credit environment and the National Credit Act have strengthened the role of and the need for originators. Quality advice can make the difference between the homebuyer getting the bond granted or not and, therefore, between the estate agent closing the sale or not. A good bond consultant is a partner in the estate agent’s sale.”Looking forward, Geffen says that as an industry that provides a customer value proposition to all its stakeholders, origination has a reason for being.

“Origination offers the customer value proposition across the role players and is therefore sustainable. The industry has undergone radical structural shifts over the last few years, and the model has been tested. The customer value proposition of origination has been a constant throughout and has sustained mortgage origination as an industry.”Botha believes that the South African property market would be lost without the origination service. “Although the origination business has had to be re-engineered in recent times to accommodate numerous changes, it still offers a viable and sustainable value proposition to the banks, agents and consumers.”The BanksWhen asked what they think of origination, the banks had varied responses. Nedbank Home Loans, for example, said that relating residential home loan market changes means it would be inappropriate for them to comment on possible future scenarios at present.

Absa, the bank that is reportedly not renewing its origination contracts as they want to get closer to their clients, was more vocal, saying it believes in a multiple-channel approach to home loans. “As part of its multi-channel strategy, Absa will continue to engage with mortgage originators as they are part of the value chain. Absa continuously seeks to give its customers choice and convenience and we assess each of our channels according to strategic fit, cost, profit, possible risks as a result of origination through that channel and customer choice,” says Luthando Vutula, managing executive of Absa Home Loans.Charlotte Smit, head of sales at First National Bank (FNB) Home Loans, says that mortgage originators play a valuable part in the property industry as they add great value to the bank and customer.

“Their relationships with the estate agents, who are at point of sale, are still very strong. We have always maintained exceptional partnerships with key mortgage originators to leverage off these relationships and foresee continued rewarding relationships going forward.”Smit says that the role of the mortgage originator in the home loan industry is held in high esteem due to their knowledge and expertise. “Greater synergy in the operations between the mortgage originator and the bank results in the estate agent and customer being in a better position to make an informed decision on what is most likely the biggest purchase they will ever make,” she says.Smit adds that since originators establish the customer’s needs in terms of products available and compiles the relevant application on behalf of the customer, the banks are able to process the deal seamlessly. “This ultimately means greater efficiencies and cost saving for all parties.

”Mortgage originators are not writing as much business as they used to due to the bank’s differing risk appetites. This is according to Funeka Ntombela, head of Standard Bank Home Loans, who also says that while mortgage origination relationships with the banks are now different, there is always a customer who needs advice on such a major purchase. Therefore, mortgage originators, she says, can and will continue to play a role in the South African property industry. “We continually seek to provide our clients with choice and, as an intermediary, originators are able to secure buyers with the best deal possible.”In addition, she says, the applications received from originators are easier to process, while the originator’s service meets customer needs, which in Ntombela’s mind is their biggest advantage.“While previously we had a fairly high reliance on originators, they now form part of a multi-channel strategy. The future of the mortgage origination industry is strongly linked to the future of the property market in South Africa. And while we have experienced a tough couple of years, with flat predictions for the next three years at least, South Africa has a unique set of circumstances. Our economy is slowly improving, which means there is bound to be pent-up demand for property with a limited supply. With the positive changes in economy, so will affordability issues decrease, while the banks appetite to lend will increase,” she says.

The Agents

All agents agree on the value that origination brings to property transactions and say there can be no doubt as to their sustainability going forward.Herschel Jawitz, CE of Jawitz Properties, says that in the USA and other countries, mortgages are commoditised products. “Buyers go where they get the best rate and will move over for as little as 25 basis points. Banks have to compete on rate and service but the stance that we can only lend to you if we have your bank account and payroll is more the stick approach than the carrot. The challenge we have in South Africa is that, as with most industries, competition is limited and therefore the banks’ power to dictate the terms of their lending is high, relative to other countries where mortgage lending is far more competitive,” he says.For Jawitz, the value proposition of originators is equally clear and even more so in the current market where obtaining a mortgage is not easy. “There is no doubt that mortgage origination provides a valuable service to the consumer and real estate alike and that this value creates a better and more efficient residential market in South Africa. On this basis the industry should be and will be sustainable.

The challenge lies with the lack of competition in the banking environment and the mindset of the banks about who their customers are and how to retain existing and attract new customers. It cannot be done on the basis of 'if you give us ‘x’ then we will grant you ‘y',” Jawitz concludes.Lew Geffen, chairman of Sotheby's International Realty in South Africa says there is certainly value in mortgage origination for both homebuyers and estate agents. “From our point of view, mortgage origination is a very hands-on relationship, with a service provided by a dedicated in-office specialist who is very motivated to make sure that the homebuyer gets the needed finance and that the transaction can thus proceed. We did not find this was the case in the old days when the banks each had their own home loan representatives going around from agency to agency."As to the future, I think mortgage origination is here to stay, or at least that it should, from the banks' point of view as well as that of homebuyers and estate agents. The originators have a high calibre, well-paid and motivated sales force already in place to deliver business to the banks, and the costs to the banks are minimal now that the bloat has been taken out of origination commissions. Going back to the old way of doing things would be like raising a dinosaur."

Adrian Goslett, CEO of RE/MAX of Southern Africa, says that a good originator will be able to identify which bank’s product offering would best suit the particular client and advise accordingly when applying for a home loan. “This,” he says, “is one of the reasons why originators have become an important part of the process ever since the banking institutions took a decision to outsource this function in an effort to reduce fixed overheads.”Goslett says that over the years originators have filled this role, having employed a large majority of the previously employed bank consultants in their organisations. Today originators are an integral part of the home loan process as banks simply do not have the resources or manpower to cope with the volumes.Andrew Golding, CE of the Pam Golding Property group says: “From a South African perspective, while there have been fluctuations and changes, the mortgage origination industry has been a part of local real estate life for the past 10 years and more, the public has become accustomed to using originators and so has the real estate industry.

Originators provide an extremely convenient and efficient service to all concerned and so therefore it seems likely and probable that this function will continue for the foreseeable future.”Looking forward, he says that like any new industry, there is likely to be inevitable teething problems and the past 10 years have seen most of these been ironed out. “It appears now that a satisfactory solution for all parties - being the estate agency industry, the mortgage lenders themselves, as well as the consumer - has now been found and, therefore, on the basis of convenience and efficiency, it is likely that this industry is sustainable.”Berry Everitt, CEO of the Chas Everitt International property group, says that without originators, many sales would fall through for lack of finance - and not necessarily because the homebuyer is a bad risk but often just because he or she does not know how to approach the application process, or does not have the time or inclination to go from bank to bank in search of the best offer. “The fact is that control of the money remains with the banks, and that for mortgage origination to be successful, it must be seen by the banks to deliver value to them as well as homebuyers and estate agents. For some time, it appears, the banks' view was that the advent of mortgage origination had forced them to compete for home loan business and then made them pay heavily for the privilege of doing so. This led to a level of unhappiness, but that appears to have been resolved, where there is now a better balance between the cost of origination and the value of the business being generated through originators.”He says that where previously the banks were looking to mortgage originators to deliver volume and market share, now they want - and are getting - better quality applications at a better price, and they are still saving money on not having to use their own staff to source home loan business and to process home loan applications.

“The future looks solid for mortgage originators as long as consumers and agents, as well as banks, perceive value in what they do,” Everitt concludes. Tony Clarke, MD Rawson Properties says that that the origination function is so important in the obtaining of bond financing in order to complete real estate deals, that Rawson created its own origination subsidiary. “Origination is for the consumers,” he says. “It offers them the freedom of choice. But it is easy to see why the banks are not in favour of origination as they tend to view their clients as a captive audience. Origination forces banks to be competitive by making them compete for their own clients. It is because origination is so consumer-oriented, that we believe it is very sustainable.”Clarke notes that, as in all businesses, origination will keep morphing into different models; however he believes that since origination essentially benefits the consumer, at no cost, it will be around for as long as the bulk of properties in South Africa are sold by real estate agents.Harcourts Africa CEO Richard Gray says that the cornerstone of originators’ value proposition is convenience. “They also offer choice and expertise,” he says.

“Clients who walk into bank branches have typically to endure long queues and very seldom deal with home loan specialists. The securing of home finance in the property transaction has become more and more critical and you need experts and specialists to manage the application process, which mortgage originators provide.”Gray says he believes that the origination industry has been reshaped by the banks in the past two years and is now able to offer huge value to the banks as well as estate agents and the homebuyer. “Originators have also reduced their cost base and have become leaner. As long as the banks commit to their mortgage origination relationships and provide stability for the originators, the industry has the potential to be sustainable,” he says.

Aida CEO Young Carr says that just about everyone in the industry is aware that the banks have been thinking recently about whether or not to bypass mortgage originators and go back to dealing directly with estate agencies and their clients when sourcing new home loan business."However, I think most have already come to the conclusion that this would not foster better relationships with either the agencies or potential borrowers. Homebuyers applying for a loan have grown used to their applications being submitted to several financial institutions at once in order to better their chances of being granted a home loan and, hopefully, offered a competitive interest rate. Agents have also grown used to handing over the loan application process to mortgage originators with their automated submission systems and up-to-date knowledge of the various banks' home loan products, and they are also unlikely to relish the prospect of going back to a time when they had to handle all the paperwork involved and deal with all the different bank representatives.

”Carr says that to go back to the old system, banks would then each have to recreate, at considerable expense, the networks of home loan consultants that were disbanded with the advent of mortgage origination, which I don't believe they would find easy or cost effective. "In short, I think it is clear that mortgage origination is offering a valuable service, to banks as well as homebuyers and estate agents, and that the future of the industry is assured as long as the banks continue to find that the benefits they derive, especially in terms of customer satisfaction, outweigh the costs of this service," he says.It has become evident that everyone is in agreement that the service mortgage originators provide is an invaluable one, which means that, for the foreseeable future, it is one that is here to stay.Article By Michelle Swart for the Property Professional

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