Analysis: The new era of white label lending

White label mortgages have lacked innovation in recent years. For aggregators and brokerages, these products have largely been a brand play and a way of securing a sliver of margin. But really, the rates and policies are all very similar to what you get at a bank. The competitive advantage is minimal on pricing. Service has been the main drawcard. But again, most of these loans are funded and serviced by major banks.

APRA’s regulatory fracking has produced some interesting developments in the market over the last two years. The result — or sediment, if you will — that we have been left with boils down to four different residential mortgages: owner-occupied principal and interest (P&I), owner-occupied interest-only (IO), investor P&I and, of course, investor IO. It is from this complexity that a new age of white label lending is flourishing.

Credit just simply isn’t as freely available as it was before 2015, particularly for investors, interest-only borrowers, apartments, certain postcodes and foreign buyers. Not everyone is so risk-averse to these markets, however, and that is where the new age of white label lending is making its mark.

Industry pioneers like Mark Bouris and Frank Ganis are well aware of the writing on the wall and know an opportunity when they see one. APRA’s actions and the resultant credit tightening have their attention.

Mr Ganis now sits on the Yellow Brick Road board and will be a critical cog in the group’s new white label machine. It’s also worth noting YBR’s ownership of mortgage manager Resi.

“We are always exploring different funding lines,” Mr Bouris told Mortgage Business. “Frank was one of the original architects of PUMA, so those are some of the things we’ll be calling on him to have a look at.”

The PUMA program was set up by Macquarie in 1993 to securitise Australian residential home loans. YBR has made no secret about its plans to enter the Australian securitisation market, which is currently experiencing high volumes of RMBS transactions. Reports indicate that more than $15 billion of RMBS deals have been issued since January, double the amount over the same period in 2016.

“The banks are having to change what they can and can’t do, and that is leaving a big gap for many different types of products,” Mr Bouris explained. “One of the things to consider is manufacturing those products ourselves, whether on our own or with somebody else. We’ve got great distribution, and our distribution channels are asking for these types of products.

“It is time for innovation. That is another thing that Frank is good at. It is time for the non-banks to innovate.”

Indeed. But any funding will need to come from beyond the big banks if white label is to have a real competitive edge. Even the non-banks, who rely on warehouse lines from the majors and challenger banks, have been impacted by APRA’s controls. Meanwhile, APRA has been given orders to begin monitoring what the non-banks do — the government is keeping a close eye on any gaps being filled by alternative lenders. Which is interesting, given Scott Morrison’s push for more fintech and more competition in credit.

Any innovation will need to consider the regulatory and political landscape, as well as funding, securitisation models, pricing and policy. Data and technology will come into the picture. True risk-based pricing will be a feature. Comprehensive credit reporting will play a role. There are plenty of moving parts.

Timing is also critical. Much of the demand for these new, innovative white label mortgages will depend on how the big banks react, both to competition and to regulatory changes. APRA may have accidentally created an opportunity for the next generation of mortgage management, but it also has the power to take it away.

Some groups, such as LJ Hooker Home Loans, are banking on a complete monoline model. The group relaunched under new ownership last year and is receiving its funding from Macquarie Bank, Advantedge and Pepper.

Other players have looked beyond Australia for funding partners.

BC Securities launched a suite of mortgage products last month with a focus on non-residents, self-managed super fund (SMSF) borrowers and Australians who rely on overseas incomes. The company also offers a range of mortgage products from a panel of local lenders including the major banks and building societies.

The Melbourne-based group is owned by its Australian management team and Far East Consortium, a Hong Kong-listed real estate group with a market cap of $1.5 billion (HK$9.3 billion) and real estate projects across the globe.

Speaking to Mortgage Business, BC Securities managing director David Hinde explained that the group has received a $650 million tranche to begin funding, with plans to scale the business through broker distribution.

“There is a big part of the broker market that has been left out in the cold when the lenders turned off the tap. It is hard for them when they are trying to service clients and, all of a sudden, the product is not available anymore.”

The group is in discussions with aggregators, mortgage managers and individual brokers who hold their own ACL.

“We are not closing the door on any part of the market,” Mr Hinde said, adding that the company is also in talks with a number of parties about white labeling its products.

They are not alone. The new era of white label lending has arrived.