Banks boot Mortgage Originators

The gloves are off! I knew it would happen, but did not expect this so soon!

The Bond Originator industry sprung up almost overnight and grew into a huge industry at an amazing pace. One day we had never heard of such a business and before we could wipe our eyes, they were everywhere and have cornered the vast majority of mortgage bonds in South Africa.

Banks willingly outsourced this part of their business and in fact, courted the larger Bond Originating companies.... but this house of cards could not stand for long.

Think about it for a moment... The property industry was booming. Rapid Capital Growth ensured there was always significant equity to cover the banks' risks. Interest rates were still quite low, so affordability was not an issue for most bond-holders...

But then interest rates went up, affordability suffered, bond repayments were missed, equity dried up and banks "inherited" properties that were worth less than the outstanding bonds. More and more repo's realised less at the sheriffs' auctions than the attached debt. The National Credit Act (NCA) further dampened the volume of business for SA banks.

And still, many new bonds were being granted, as a large portion of the risk assessment part of the approval process had been outsourced along with the mortgage originating.

These mortgage originators carry zero risk. They are guaranteed their fat commissions to bring this business to the bank. So they started squidging the submissions and massaging the numbers, to slip them past the banks' own scrutiny process and, in effect, loading the bank (their customer) with higher risks than they would knowingly accept. They head-hunted experienced personnel from the banks to get the inside track on the scrutiny process to work around the bottlenecks.

This is a recipe for disaster. With increasing risk and less business (thanks to the NCA), the banks' margins are now under huge pressure... How long before they decide to bypass the Mortgage Originators? I was holding my breath, waiting for the inevitable... when I chanced upon this article at Real Estate Web (click to read the article).

Basically Standard Bank has given the two largest mortgage originators, Ooba (formerly MortgageSA) and Bond Choice, the boot and will no longer accept any further mortgage submissions from them. It seems the intent is to completely do away with the mortgage originating industry and bring this function back in-house where it apparently belongs.

Now we just need to convince the banks to have separate experienced personnel dealing with investment residential property purchases (buy-to-let) and run the Home Loans department only for the home-owners (buying a home to live in).

Is that too much to ask for?

The banks need to wake up to the percentage of residential properties purchased by investors vs home-owners.