Michael Russell

Michael Russell is the chief executive of Mortgage Choice, Australia’s largest independent mortgage broker. Russell was appointed in May, in the middle of an extremely difficult year for the company. He talks to SmartCompany about the pressure on commissions, the need for more competition in the banking sector and whether or not our kids will ever be able to afford their own homes.

Michael, it’s been a fairly tumultuous year for the mortgage broking sector to say the least.

It was an extremely challenging year and as I said at our AGM yesterday, it was our 16th full financial year and it was without doubt the toughest we’ve experienced. The housing finance market was actually down last year by 4.8% and while we came out of the year okay we did underperform in terms of new commitments written. Our approvals were down 8.2% and that did hurt us. The fact of the matter was because our approvals were down we were down in settlements and as you probably saw we were 23.9% down in our cash net profit number.

I guess the good news that came from it was that our loan book performed better than the banking system which is I guess a testament to the quality and experience of our franchisees in that they are actually putting our customers into the right home loan, into sticky loans.

And secondly, in the second half and certainly into the first quarter of this year, we’ve rebounded very strongly. So your point’s well made, that it was a very tough year. We underperformed market in some areas and that was predominantly due to a poor first half, but we did get control pretty quickly at the half way point and we’ve finished off and we’ve got some good momentum into this year.

Tell us a little bit about how the GFC has changed the structure of the mortgage market. We have seen a lot of power move back to the big four, so how has that impacted your business? I gather commissions have been eroded, is that turning around at all?

Commissions aren’t turning around, no. In fact there was a very funny quote in The Australian which probably summarised it well – it said the commission cuts were quite severe but they certainly were a long way off a full Brazilian. I thought it was quite funny actually and he’s probably correct.

The first cut was April 2008 when Westpac were the first to go and they’re still the watermark. We don’t have any lenders paying us less than Westpac are paying us, but by the same token we’re not having any lenders stepping forward and offering us more commission. I think what happened with the commission cuts was the lenders made the cuts at the lowest ebb of the GFC and we were informed they made the cuts severe so they only needed to make them once. And I think hopefully we all agree that that lowest point we’re not going to see for a long time to come. And on that basis we think the commissions that we are working on now are sustainable.

In terms of the market I’ve been quite outspoken in saying that we really need the ACCC and the Government to start proactively looking at how they can reintroduce some competition into the market because there have been a lot of pain being borne by the second tier lenders, the regional banks, building societies, credit unions. There’s been a lot that have just packed up their bag and said enough’s enough.

You can go all the way back to the early 1980s when the Government commissioned the Campbell Report when they were concerned that we had a situation with four banks – not a lot of competition, not much product innovation, not a great deal of customer choice or customer service. And out of that report the Government said ‘we need to do whatever we can to bring some new lenders into the landscape’ and they issued those banking licences.

Look, what’s happened, the real winner out of all of that has been the consumer. But now we’ve got a situation where you’re correct, liquidity is a huge issue. It’s not looking like it’s going to repair itself any time soon. The Government have given another $8 billion to help the mortgage market and that will help, but that’s got to be deemed a short-term measure at best.

We’d like to think that at Mortgage Choice, we’ve got to represent the homebuyer not only today’s generation of homebuyers but future generations of homebuyers. We need some more competition back into the market and I think the four banks would say that they would welcome competition as well because that gets everybody thinking innovatively and creatively on really developing our home loan market and our home loan products. I’m still very concerned.

Actually the only good news there James for us is that while 91% of all our settlements are going to the banks, that’s nine banks, we’ve almost recalibrated our lender’s spread over the past year. We had 75% of our settlements going with the four pillars three quarters ago, now that’s come back to mid-50s now. We are finding that the second tier banks, the INGs, St. George, Suncorp, AMPs, etc, they are and have reclaimed a lot of their lost market share. But I don’t think that’s enough.

It sounds like there needs to be more done. You spoke earlier about a bit of momentum that you’re starting to build. How is the mortgage market shaping up across 2010?

In terms of volume the only way is up because we haven’t had a new flow decline like we saw last year for many, many years. So we’d like to think the only way is up.

It’s certainly a more challenging market because the lenders are still faced with this liquidity issue, this funding issue. The cost of funds is still expensive and on that basis the lenders are still continuing to ration. They’re still rationing the amount that they can make available for us to offer our customers.

We’re seeing that rationing done in a number of ways, either the complete withdrawal of product or the tightening of credit policy. And I can tell you brokers are really having to earn their keep at the moment because the credit policy that we’re operating under now is incredibly tight. Not only have the loan-to-value-ratios been pulled back but certainly higher hurdles from a serviceability perspective have been set by lenders. So if you’re a first homebuyer at the moment, you really need to make sure you’re seeing a really experienced broker.

Do you look at the rising levels of house prices and get worried? I must admit I often look at the house prices and look at my very young son and wonder if he’s going to be living with me until he’s 45 years old. Can you give me some good news on that?

I think that’s a good point. I think rising house prices have good and bad aspects to it. Obviously if you’re an existing homeowner, you are warmed by the fact that the home prices are going up. If you’re a parent like you and I, the only way you’re going be able to offload your children, as much as you love them, is to actually help them into their first home. A big percentage of our loans are done with parental support, either limited guarantees from mum and dad or mum and dad helping with the deposit.

Now if you think about it, the banks are asking for as much as 10% deposit now plus costs. A first homebuyer’s probably going to have to spend $350,000-$400,000 to get into the market. So they’ve got to look at saving somewhere upwards of $40,000. That’s a big ask for a young person who’s just started work. You’re dead right about they’re either going to be at home until they’re into their 30s or mum and dad are going to have to help them out.

That’s the aspect we get to talk about affordability, housing affordability and as house prices go up it will place pressure on affordability. The only good thing, is that I did my first home loan in the mid-80s and that was when the regulated home loan rate was 13.5%. The Government put a cap on and we thought how lucky we were to have a 13.5% home loan. The only thing I will say is that if the government can work hard to provide jobs for people and keep the unemployment level where it is now, people will be able to pay their mortgages off. So I’m not as concerned about increases in interest rates, you know marginal increases in the cash rate, obviously I wouldn’t welcome them but I’m not as concerned about that as I am about unemployment.

And hopefully we’re over the worst of that.

I think we are. The last two unemployment numbers I think were 5.7% and 5.8%. Yu never want to see people out of work, but they were lower than what most people thought they would be.

Now Michael you started in May and you’ve done a great job in coming up with a snazzy new title for your strategy in DREAM which stands for Diversification, Recruitment, Existing Franchiser Support, Acquisition and Managing costs. The first question is what came first? The snazzy title or the strategy?

Certainly the strategy. But in order to deliver the strategy and then make sure it is a living, breathing plan, we needed to make sure it lives and breathes throughout the full financial year. We needed to obviously name the plan so that our staff and our franchisees can attach to it all year round. So we continually run a lot of events here to just reinforce the plan. All the staff have dream catchers over their desks and we’re having a little bit of fun with the name of the strategic plan. And that’s the idea of it – we need to have it front of mind right throughout the financial year.

And you know, we need to introduce a lot of clearly defined goals that we can measure throughout the year. Getting back to your very first question, Mortgage Choice faired reasonably well but the reason that our approvals underperformed market in the first half of the year was quite simply that we didn’t have enough troops on the ground and that was a consequence of our recruitment in recent years has been very poor.

Like any business like ours, you have attrition, you have retirements and you have those that are not performing as well as others and drop out of the system and you need to keep topping up and last year we only recruited two new greenfield sites and the year before we only recruited 11 and that actually impacted this year.

So the big focus for the year has been really on relaunching the franchise model. We’ve only launched the DREAM I think in late August and I think we’ve sold eight greenfields already. This what I was talking about – momentum – we’ve got some really good momentum with a lot more in the pipeline.

One other thing I wanted to talk about was diversification. Obviously Mortgage Choice has been a very focused business and that’s probably been one of your strengths. How do you diversify without losing that focus?

That’s a question that when I launched this, we had a lot of cynical criticism around just that point. We have been very focused but I probably turn it around, upside down and say look, what we have been doing is being very focused on our client. We’ve been focused on doing what is right for the client and what this diversification is just an extension of that. It’s just an extension really of a duty of care which we think we’ve got with our client to offer them a couple of products that are complementary to the mortgage.

So we’re never going to diversify into selling products that aren’t complementary into the mortgage. But for as long as I can remember, I personally think that it’s incumbent upon any lender that when we provide someone with a debt that we’ve at least got to make them aware that there’s an opportunity to insure that debt or increase the insurance on themselves. Because the worst thing we want to do is in the unlikely event something happens to one of the co-borrowers, we don’t want the other co-borrower to have to sell the asset to clear the debt. So what I’m saying now is I think insurance really does complement the home loan and so does the asset finance and the car leases that we’re doing as well. But the point to be made, is that our core business will always be mortgage loans.

The other plank is acquisitions and you’ve made one, a part of Loan Kit’s loan book. Are there other targets out there?

Look there are, the industry is consolidating very quickly and I guess one of the reasons that I’ve been employed is first of all to grow our market share of home loans written in Australia and two, utilise that market share to look at selling some additional products to our customers.

Now coming into Mortgage Choice, fantastic organisation, quality brokers, I think we’ve provided over 250,000 home loans over the journey. One thing I’ve realised is that we’ll do our best to organically grow our market share but we’re not going to compromise on our quality to do that. So for us to look into the aggregation or to look into that wholesale aggregation space and say look there are no new learnings required, let’s operate this other channel along the franchise channel that we can write home loans in.

And that’s fundamentally why we’re doing it, but the distribution piece is consolidating quickly. You probably know that one of the companies that I ran for seven years [Choice Aggregation Services] was sold to Challenger in late 2007 and that’s been packaged up and sold to NAB. CBA’s taken out Aussie, Macquarie are soon to bring together three or four top 20 aggregators. So there’s a lot of consolidation happening in the space and my only comment there is Mortgage Choice doesn’t want to be a bystander any longer, we need to participate in that.