Originating Mortgage

Many home loan middlemen are keen to help you choose. We investigate.

There’s a new finger in the pie. He is the mortgage broker, what you might call a loan ranger. In recent months more than one mortgage broking business has suddenly appeared, bringing a new dimension to home loan business in South Africa. Until now estate agents have usually played the part of middlemen between banks and the general public. Unless the buyer has insisted on using his own bank, the agent will introduce him to a bank of his own choice and receive a nominal 0.5% commission for his influence. The practice has always been regarded as eminently fair as the commission has been lawfully earned and virtually any bank will pay it to him, ruling out price-war competitiveness or forced marketing influences.

The Loan Ranger - the New Middleman

Is there really a need for another middleman? Has the role of the individual estate agent come to an end? It all depends on how mortgage broking will actually be conducted. There could be great benefits if the practice results in new home buyers having a direct link to all banks through brokers acting principally in the
interests of the individual as happens in countries like the United Kingdom and Australia. There established businesses advertise directly to the public, offering them the service of a wide knowledge of each particular bank’s products. The client has a freedom of choice after being advised of the various options to decide which product and bank to eventually utilize. Laws have been passed ensuring transparency in each broking business including an obligation to always disclose the financial benefit the broker expects to receive. In short,
all mortgage brokers in the United States and these other countries are accountable at law to the public for their activities.

We are seeing the beginning of what is likely to become a permanent feature of local home loan business practice. Already, however, there are signs that government intervention may be necessary if local mortgage broking is to become the healthy institution it is elsewhere in the world. Similar laws will have to be passed to regulate the conduct of brokers to prevent unhealthy elements creeping in which are not going to be in the interests of the general public.

Features of New South African Mortgage Broking

The new brokers operating locally belong to two different types. The first follows the universal practice of public advertising seeking to canvass potential clients directly for their bond business. You can find their services easily on the Internet and they are very clearly projected. Potential customers are encouraged to enter into a deal with the broking agency which places very few restrictions on them. The actual agreements read more like an information chart of how they work rather than a contract binding the client to their services. In fact no commitment comes until the client agrees to the terms and conditions of the financial institution granting him the loan. The broker undertakes to obtain offers from each of its participating banks within 48 hours and, once the client has accepted one of them, it will arrange a meeting with the relevant staff of the
bank to process the loan application.

If they follow the universal practice these brokers will disclose their financial reward for their services, namely 0.35% of the total amount of the loan finally granted. They should not restrict their clients from canvassing other banks at the same time. Are there any drawbacks? The obvious weakness is if your mortgage application is only restricted to a few banks. As a client, you should insist that all banks receive your loan application-or be given the reasons why some are excluded.

Forced Marketing - the Other Type of Mortgage Broking

Then there is the second type - mortgage brokers intervening between banks and estate agencies to ensure business is directed to banks of their choice. Here, however, the involvement is not as transparent as it should be. These new loan rangers generally transact their business without visibility to the buyer who may be totally unaware of their presence or interest. They do not generally advertise to the public at large but conclude private deals on their own terms. They canvass principals of large estate agencies, negotiating deals whereby all the agency’s business is to go to them and through their influence to specific banks. Here the home loan application will not necessarily be directed to the bank offering the best product but the one prepared to pay the biggest bucks. Cases are already known of banks being prepared to offer up - to 2.9% commission to these mortgage brokers for bond business. That’s quite - a whack! On a loan of R500 000,00 the bank will be prepared to pay out no ‘- less than R14 500,00 for its A new business!

This practice is detrimental to good personal business relationships. The fresh air of healthy A competitiveness gives I way to the polluted atmosphere of forced marketing. Individual l agents working for I these agencies are I deprived of any right to influence the ultimate direction of the loan - application. Their recommendation comes no longer from personal experience of the banks offering the best products and after-sales service but from compulsion to use the institutions offering the highest commission.

Which Bank - The One with the Best Product or Biggest Commission?

As you can see many agencies will, in future, be selling their home loan influence to the highest bidders. You can be sure those bidders may well be banks that cannot rely exclusively on the quality of their service and products to net them their business. You will do yourself a huge favour by asking your agent whether his or her agency has an agreement with a mortgage broking agency through which it earns substantial commissions for using specific banks.

Today home loan consultants employed by banks are generally more trained, visible and available than they were before. Services and skills have been sharpened. Commission, however, is another matter entirely. They spoil healthy competitiveness. Banks which attract business through extravagant commission payments are forcing the market against the more acceptable face of mortgage broking - transparent dealings with the public where individuals have complete freedom to consider a wide range of mortgage packages with the broker earning a reasonable commission (up to 0.5%)
for his services.

The Estate Agents’ Code of Conduct

All estate agents are bound by the Code of Conduct issued by the Estate Agency Affairs Board. In its October 1999 issue of its regular publication “Agent” the Board has given a reminder to all agencies of their responsibilities to the public in a short article headed Mortgage Broking. Agents may not deliberately“steer” buyers to financial institutions of their own choice through any improper influence. No agent may recommend one bank’s products or services over another purely to earn a commission. Payments of commissions to agents in the traditional manner have again been endorsed as perfectly fair. No obligation rests on the agent to disclose to the buyer that he will be I remunerated for directing bond business a certain way but no undue influence may be used to achieve this end. The agent’s role, first and foremost, is to offer advice on the best services available and to allow each buyer plenty of room to compare the various packages offered by the different banks.

Directing home loan applications to specific banks through mortgage broking agencies purely because of a private deal guaranteeing high commission payments would appear to be the very thing the Code of Conduct defines as unprofessional conduct.

Clients, Customers and Professional Service

What can you do to avoid becoming a victim of forced marketing? You will need to maintain a lookout for loan sharks lurking in the shadows. By all means let your estate agent recommend a bank but ask why the preference is suggested. In what way do the bank’s products and service compare more favorably than those of other banks, what experience has the agent had of other banks, how long has the agent been in real estate to be able to speak with authority? If you are willing to accept an agent’s recommendation, go to the bank yourself, meet the loan consultant personally, and conduct your business directly with the bank’s loan staff. Getting to know them personally paves the way for a long-term harmonious relationship.

In an article headed Buyers suffer in battle for bonds (Sunday Tribune Property Guide, 12 September 1999) the problem of exclusive alliances between banks and estate agencies was highlighted. “Estate agents who punt bonds from select banks only do home buyers a disservice” writes the property editor James Brennan. The intervention of mortgage brokers, operating beyond reach of the buying public, only aggravates the problem. Keep a lookout for the professional estate agents who will have your best interests at heart. Watch out for the mercenary interests of others!