How mortgage originators work

Bruce Whitfield:
Anyone who has run up mortgage debt over the last 10 years would have noticed the phenomenon of friendlier, more generous banks in terms of the amount of the interest rates they’re prepared to give, compared to about a decade ago.

The cover story in the latest edition of Finweek caught my eye. Entitled ‘Loan Rangers’, it is a story of how three entrepreneurs built multi-million rand empires in six years, of mortgage originators and how they impact our lives.

We’ve got two of those mortgage originators on the line now. The first one is Saul Geffen, the CEO of MortgageSA. Saul, who was the first of the mortgage originators in the South African market?

Saul Geffen:
Hi Bruce. MortgageSA pioneers mortgage origination in South Africa in 1999.

Bruce Whitfield:
Where did it come from? Where was the concept imported from?

Saul Geffen:
Essentially, at the time that mortgage origination started, interest rates were around 24 percent. The banks were struggling with low business volumes and high fixed costs, and the property market was under pressure. All the participants were looking for a way to reduce fixed costs and to increase revenue. Combined with the fact that there was no service model for consumers when applying for home loans, the market was right for this kind of service. Mortgage origination offered a strong value proposition to consumers and banks.

Bruce Whitfield:
Where did you get the idea from though? Was it imported from outside the country?

Saul Geffen:
No.

Bruce Whitfield:
So it’s a South African concept; to act as an intermediary between the potential client and the bigger banks.

Saul Geffen:
: Just to correct that point. Essentially, mortgage origination and the facilitation of mortgage applications is common practice in many international countries. Mortgage origination started in South Africa based around real estate and the relationships with banks. It wasn’t imported from another country, it stemmed out of the environment that we had in the 1999 era.

Bruce Whitfield:
What we had in 1999 was a very dangerous situation for banks. A lot of property owners felt very vulnerable. You saw an opportunity; you got involved in the market. Now it is looking a little controversial because it looks like the mortgage originators have taken a lot of business away from the banks. You stepped in very neatly and pulled the rug out from under their feet.

Saul Geffen:
Well if you look at the consumer proposition, it is fast approvals, free independent advice, and better interest rates. Banks weren’t known for excellent service delivery, and if you look at what happened over that period you will see the volume of loans increase substantially, the interest rates have decreased. So I think the consumer proposition of one point of access to all the major lenders was bound to prevail over a single product provider.

Bruce Whitfield:
Because you do get commissions from the banks in order to drive this business to them, don’t you?

Saul Geffen:
Correct. We get paid commission for sources, processing and administering the loan.

Bruce Whitfield:
Customers who work through originators believe they always get the best possible deal. Is that a guaranteed fact?

Saul Geffen:
Well, I would say that on the whole, yes. It depends on the customer at the end of the day, as the customer drives the process. They typically decide which banks they want to go to, and at the end of the day depending on the product the customer wants and their loan profile, the odds are that there will be a better interest rate.

The property consultant is able to negotiate with the banks and submit multiple applications. They essentially do all the work with regards to the paperwork, and consultants know exactly what banks are giving at any point in time. The fact that 70 percent of buyers are using mortgage originators to get their loans proves that they are getting a better deal.

Bruce Whitfield:
Saul Geffen, the MortgageSA CEO, thank you very much indeed. Rudi Botha is PA Betterbond CEO. Rudi, the issue around commissions is fairly controversial as well. If bank A paid you R100 for business but charged the client a slightly higher rate than bank B, which only gave you R50, where would you send the client?

Rudi Botha:
Hi Bruce. At the moment we receive from the banks very similar commissions, so I don’t think there’s a difference in the commissions we receive. We certainly don’t pay our consultants any different on the various banks. Their prerogative is to go out there and give the best advice to the consumer and find the best deals.

Bruce Whitfield:
That’s an important point you’re making. So the individual consultants, whether they put in a bond with Standard Bank, Nedbank, FNB or Absa, it makes no difference to the amount of remuneration they get as individuals?

Rudi Botha:
Not at all. We don’t want to differentiate, because even if we did get paid differently, we want the consumer to get the best advice.

Bruce Whitfield:
Is there not pressure on the consultants from head office to perhaps favour bank A over bank B, if you’re getting a better deal?

Rudi Botha:
No. We don’t do that, we don’t even allow the banks to try and source business from our consultants in a way where they would favour them by sending them on an overseas trip or whatever. We want them to be independent, and give independent advice.

Bruce Whitfield:
Some commentators say that the mortgage originators have an unhealthy hold over the mortgage market in South Africa. You’ve done a great service up till now, but now you really control the market. The banks have lost control, they suggest.

Rudi Botha:
I’m not sure about that. I think the whole origination concept is very much consumer driven. As we can see now in the insurance industry, it’s about whatever is best for the consumer at the end of the day. The consumer has won quite a bit when it comes to interest rates and service when dealing with the banks. The banks are quite happy to deal with us, because we have contracts from four to eight years with some of the banks.

Bruce Whitfield:
Some banks do pay higher rates. Why would they do that if there isn’t an incentive for them to do so?

Rudi Botha:
That is a very good question. I think at the end of the day banks do want to gain market share, and at head office level we are also running a business trying to make a profit. But at the end of the day when the consultant sits with a client, he doesn’t even know what commission we receive from the banks.

Bruce Whitfield:
Why don’t you deal with SA Homeloans? They refuse to pay the commissions. They might offer a better deal than a bank might offer, yet they’re not included in your suite of offerings. You only deal with the big four banks.

Rudi Botha:
Yes. We have not been contacted by SA Homeloans to originate on their behalf, so I can’t comment on that perspective.

Bruce Whitfield:
It’s an interesting perspective. Rudi Botha, thank you very much indeed. He is PA Betterbond’s CEO. I thought it might to interesting to see how mortgage originators work in the South African market, how they interact with the banks.

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