Banks have grabbed the opportunity offered by the property slump to rewrite the rules for the mortgage originators.
Originators help prospective home-buyers to apply to banks for mortgages. They quickly dominated the banks' business during the boom years, as bank mortgage extension grew from about R200bn in 1999 to nearly R1 trillion today.
At first, banks thought originators would save them marketing costs, through electronic provision of neatly packaged applications that could go straight to banks' credit committees.
Rob Katz - It's also about service
But this came at another cost. Originators could send the packages simultaneously to each of the four big lenders. The banks found themselves competing hard with each other.
This was the originators' valuable contribution to consumers. Competition brought bond interest rates as low as 2,5% below prime, and 1,5% was the norm. But with originator commissions of up to 2,5%, banks quickly found they were often running at a loss.
Originators, meanwhile, became rich, probably earning more than R12,5bn gross in commissions over five or six years, half of which they shared with the estate agencies tied to them. They also spawned hundreds of sub agent "aggregators" who raked in commissions of R100 000 or more a month. But this excess came crashing down from 2007, as the National Credit Act and the property slowdown began to bite.
The big four banks stopped accepting originator applications early this year. But how to avoid the same competitive squeeze when the market turned up? No 2 mortgage lender Standard Bank came up with what could be called the "Glengarry Glen Ross" solution.
The 1984 David Mamet play of that name opens with an abusive representative from head office telling a group of Manhattan estate agents during a recession that the rules have changed. The top performer in the branch will win a Cadillac Eldorado convertible. Second-best is awarded a set of steak knives. The rest are fired. The resulting predatory process makes up the play.
Standard Bank officials were very polite and less extreme. But the message was similar. The four big originators would regularly be asked to tender for Standard's business. Only the best three would be accepted.
Originator ooba, owned by the major estate agents, lost out in the first tender at the end of July. As MortgageSA.com, ooba had launched origination in SA, with Standard as its closest home-loan supplier. The first result is that origination commissions have dropped from as high as 2,5% to about 1,5%. But Standard Bank director of home loans Rob Katz says: "It's not just about commissions. It's also qualitative issues such as service levels."
Other banks haven't followed Standard in Glengarrying the originators. Absa home loans chief Luthando Vutula criticises the Standard technique as reducing competition among the originators. But most banks have decided to invest in strengthening in-house marketing. They're offering clients higher loans-to-value and lower interest rates if they apply directly to the bank.
Standard Bank clients will get a 100% loan for bonds under R1,5m. Absa has similar inviting offers for its clients.
Vutula and Katz emphasise that their relationships with the originators are good. And one theory is that Standard's exclusion of ooba was aimed more at negotiating with that company than intended to apply to the whole industry. But it remains to be seen whether the banks' ultimate aim isn't to regain control of the mortgage market.
Even the originators who survived Standard's tender are having a tough time. Betterbond CEO Rudi Botha says his monthly turnover has fallen 70% from R5bn/month at the peak to R1,5bn. Gross commissions have fallen 82% from R125m/month to R22,5m.
Originators, aggregators and estate agencies built enormous infrastructure on top of those commissions. Botha must still carry a full staff and maintain commissions to the estate agencies - many of which are also struggling to survive.
Turnover in the property market will start reviving slowly, but another boom is unlikely for at least five years. So the originators could be at a disadvantage for some time.
Still, there are smart operators among the originators, not least ooba CEO Saul Geffen. His big weapon is his shareholders - Pam Golding, Wakefields, Jawitz, Seeff and Lew Geffen among them. But the originators are avoiding controversy. Says one executive: "We need Standard Bank's business, so we prefer to lie low. We would prefer long-term contracts, with all originators supplying Standard, because stability is important in the property market now."
Even SA's biggest agency, Pam Golding Properties, is being guarded. "Of course it is essential to our business for our clients to be able to make application to all banks," says CEO Andrew Golding. "But I'm sure Standard has carefully weighed up the consequences and risks." He wouldn't comment further.
Golding is a powerful force. His R10bn/year turnover results in a substantial income stream for his bankers - Standard.
This play isn't over and, unlike Mamet's, where the protagonist makes a desperate and criminal move to survive, the originators don't need to go that far. It is certainly in the borrowers' interest for originators to keep banks competing.
