The latest group caught in the closing teeth of the housing market slump is the mortgage intermediaries, writes Simon Carswell, Finance Correspondent
As banks shoulder the rising cost of loans to borrowers amid the credit crisis, the middlemen selling mortgages - the State's brokers - are under pressure as they are forced to accept lower commissions and less attractive products.
The Professional Insurance Brokers Association (PIBA), which represents half the country's 1,800 brokers, has gone further by suggesting that, with reductions in commissions and falling mortgage volumes in a declining market, brokers will be forced to charge customers fees for advice to make up the shortfall in earnings. This will potentially pass on another cost to new borrowers.
On Wednesday, the State's largest bank, AIB, followed Permanent TSB, First Active and Bank of Scotland (Ireland) by cutting commissions to brokers.
Haven Mortgages, the business set up by EBS Building Society last year to sell mortgages through brokers, reduced the size of new mortgages on offer but left commission rates unchanged.
PIBA is unhappy with the changes. Chairman Jack FitzPatrick said: "With the slashing in half of broker commissions, which were paid for by the lenders with no cost to the consumer, independent advisers now have no option but to charge customers for expert financial advice."
First Active and Permanent TSB were the first to move when they announced plans to reduce commissions last year. First Active is halving the 1 per cent commission, the norm in the industry, from next month. Permanent TSB is reducing the rate to 0.8 per cent from next year. Bank of Scotland (Ireland) last week cut commissions to 0.5-0.8 per cent without giving advance notice.
Ironically, the entry of Bank of Scotland into the mortgage market in 1999 helped drive down the cost of mortgages for Irish borrowers. Its decision to cut commissions and tighten the lending rules on its home loans sold through brokers reflects the dramatic changes in the market, as it starts to descend after the decade-long property boom and as the credit crisis erodes bank profit margins.
Ulster Bank is withdrawing from the broker market altogether. It will focus on selling through its 131 branches, leaving its sister bank, First Active, to sell through brokers. ICS Building Society, which sells Bank of Ireland's home loans through brokers, is reviewing its commissions.
Brokers are also angered by the decision of some lenders to increase the period during which banks can claw back commissions if mortgages are redeemed.
Permanent TSB has announced an increase in the clawback period from three to five years, while AIB has moved from two to three years. Brokers claim this change will create uncertainty in recording income in their businesses, forcing them to qualify their accounts accordingly.
Brokers sell one in every two mortgages, with the intermediary market accounting for about €17 billion of the €34 billion in mortgages sold in 2007.
Falling property prices and tighter lending rules will lead to declining mortgage volumes. Mortgage lending is expected to fall to €29 billion this year, though some lenders are predicting this could drop as low as €25 billion. This, coupled with lower commissions and increased clawbacks, will put brokers under pressure.
Given that average commissions will drop from 1 per cent to 0.7 per cent of mortgages drawn this year, according to one large broker, the mortgage middlemen are facing a cut of €70 million.
By reducing mortgage volumes and cutting broker commissions, lenders are essentially passing on to brokers their higher cost of funding due to the credit crisis.
Three-month euro interbank borrowing reached its highest level since mid-December, rising for the 10th day in a row, to almost 4.84 per cent, or 0.84 per cent above the European Central Bank (ECB) base rate of 4 per cent. Traditionally, the interbank margin was 0.1-0.2 of a percentage point above the ECB rate.
Frank Conway, director of mortgage broker Irish Mortgage Corporation, says AIB's decision to halve commissions was "an unfortunate reflection" of the "new and very tight lending environment". "Consumers have benefited from the independence offered by the mortgage broker channel, as have banks when they reduced their marketing costs to get new customers," he said.
AIB sells fewer mortgages through brokers than most lenders and its chief executive, Eugene Sheehy, pointed out after the bank's annual meeting on Tuesday that it preferred to grow its market share by selling mortgages itself to its own customers.
However, brokers have questioned whether lenders will still be able to offer a competitive range of products. Most concede there will be consolidation in the market as a result of the changes.
IFG, the listed financial services group whose businesses include a network of 166 brokers and 35 franchisees, said 15 brokers joined its franchise network last month, its largest increase. It said there was demand particularly among brokers selling €25-€40 million in mortgages.
Other brokers believe they will simply have to grin and bear it, absorbing lower commissions. Peter Bastable, managing director of Simply Mortgages, said brokers were no longer reacting with surprise as more lenders changed their terms of business. "This is the world we are living in now. Brokers will just have to adjust."
Brokers have enjoyed the boom in mortgage lending, which peaked last year. Irish Mortgage Corporation made a pretax profit of €1.9 million in 2006, bringing retained profits to €4.9 million, its most recent accounts show. Seven directors received pay and pension contributions totalling €2.8 million. Mortgage cheques issued by IFG increased to €1.55 billion from €1.44 billion in 2006 - a 13 per cent increase. This figure fell 9 per cent in 2007 to €1.44 billion.
"When property prices rocketed, brokers did extremely well. Obviously when prices fall and volumes drop, it will make a massive difference to the broker business," said Davy analyst Emer Lang.
One senior banker said brokers had grown used to massive annual growth and had it "very easy for a long time", but they needed "a higher bandwidth of products" to cope with the changing market.
"Banks are going to focus on their direct business and the brokers may not feel as loved."
