If you recall the next line of the famous Edwin Starr song, so often added to any Vietnam War soundtrack, you might think: Absolutely nothin’! I’ve recently noticed a resurgence of packagers in the BTL mortgage market and this is exactly what I thought. However, it is interesting to consider why this re-emergence is taking place and if there is a purpose for packagers after all.
A packager is a firm that acts like a broker, administrator and case handler for a mortgage lender. They interact with a mortgage broker, typically because they are not qualified as advisors by the Financial Conduct Authority (FCA), and ‘package’ a case for the lender who then would only have to review it and produce an offer. Packaging consists of checking the criteria, inspecting the paperwork to ensure it’s what the lender requires, ordering the valuation, processing the report and taking any fees. This seems reasonable until you consider that they would charge a fee and that most of these tasks would be the responsibility of the broker anyway. Typically, packagers would charge an extra administration fee on top of any lender booking fees, valuation fees or broker fees, though it is possible to find a broker like AALTO that doesn’t charge. They can take a large slice of the commission from the lender too!
At first, I couldn’t get my head around why these relics of the pre-2008 property boom were seeing such a revival given that they cost both the client and the lender more money – and make life that little bit harder for the broker. Before the credit crunch in 2008 it was understandable; lenders had seemingly limitless supplies of money and, with property prices rising, seemingly limitless supplies of new business. They could use packagers to ensure they could get an enquiry through to offer as quickly as possible. Cost mattered less because banks, brokers and BTL investors were making a fortune. It would have been just another expense.
Due to this packagers flourished. They set up huge clearing centres, taking a slice from inflated valuation fees, charging their own upfront processing fees and taking a cut of the commission. This would all be for managing paperwork for a transaction that was going to happen with them or without them. Indeed, once the financial crisis took hold packagers seemed to disappear overnight – or so we thought! Now we are witness to a growing selection of packager firms gaining exclusive mortgage deals that will only be available to the client through them. In many cases, packagers will have the very best deal, often much better than deals we can get directly from the same lender. But how does this make commercial sense?
As it turns out, the answer relates to the latest regulations set by the FCA and the Prudential Regulation Authority, or PRA, the body set up to ensure banks and financial institutions have contingencies in place to prevent another financial crash. We then have to consider the fact that new banks, keen to enter the market, cannot always meet these tough new regulations.
The FCA has made it much harder for banks to lend and requires stricter processing to ensure that the recipients of the funds are in a position to repay them in full over the entire term of the mortgage. To do this, a lender must have rigorous checking processes in place that ensure each client can prove they meet the requirements set out if the FCA has approved their risk analysis. They would need a compliance team, a processing team and systems that track and monitor documents securely whilst always meeting data protection rules. An infrastructure like this would be the equivalent of a new call centre: a very expensive undertaking and extremely prohibitive for a fledgling business.
To make this entry easier, a bank would set its risk policy and then outsource the control to a packager. In doing so, they can then manage the application with just a team of underwriters who may only need a few hours per case to decide if it should be approved or not. As a result, they can be more competitive and pioneering because their overheads will be significantly less. I’m sure you will agree that more competition in the marketplace is always a good thing as it keeps rates low and encourages the bigger lenders to stay on their toes, adapt and innovate.
What about those bigger lenders then that have those infrastructures already in operation? Why would they use a packager? They would already have systems in place including websites, online decisions, as well as document uploading systems, experienced case handlers and sales support staff. How would they benefit from paying over the odds for business they probably would have gained straight from a broker anyway? After all, we brokers are tasked with hunting out the best deals and to start recommending the lender’s best price that day to the clients that enquire.
To answer these questions we must look at where the money is sourced. Lenders get their funds from various sources. Typically, it comes from an exchange between firms that receive lump sums and then pay this back in incremental amounts, like annuities or investment firms. They may sell this annuity or investment firm a bundle of mortgages that will receive a trickle of payments over time. Alternatively, the lender might simply borrow the money. The source of the funds may well influence the rate at which they can lend, and so lenders often release a limited period offer; once that money is spent the offer would then close.
When speaking with lenders, they have reported that this kind of approach causes a great deal of dissatisfaction among brokers and clients alike as once it is made available to the whole market, the money can run out extremely fast, sometimes within days. A client could be offered a particular rate only to then find it’s no longer available, therefore reflecting badly on the broker. However, by providing this money through one particular packager, one who has exposure to a smaller section of the market, the funds get allocated much more slowly. A packager can also ensure that only the quality of business that the lender wants gets an allocation of funds so they can be sure to spend it much more efficiently.
At times, packagers can be frustrating for brokers and, in turn, for you the client – but it seems they do serve a purpose. By allowing new lenders to get products to clients quicker, they can help you as a buyer find more innovative solutions to unique problems that the big lenders are not interested in serving. They are also able to provide a buffer to big lenders. By offering restricted but extremely attractive rates, packagers help guarantee that lenders get the best return on those funds and improve the chance that the broker will be able to secure funds for a client.
If I’m working with a packager, there are a few things I can do to make the process run as smoothly as possible. Knowing that there is an extended chain of communication, I would ensure I have every document I think the lender might require well in advance. Every document request may take a week to get from lender, to packager, to you, to the client and back, whereas requests done directly may only take a few days. I would always advise my client of what a packager’s role is and why they are part of the process. This would ensure that they are aware of the benefits packagers can provide but also the issues that may arise and if that makes them suitable for the transaction. If the client is buying a property with a 28-day exchange deadline, for instance, it won’t be a good idea to involve a packager!
Securing a broker that understands the way the industry works and can give you advice on all aspects of a particular proposition is extremely important. Here at AALTO Mortgage and Property Solutions we have the experience to secure not only the best deal but also the one that’s right for you. We also don’t believe in charging broker fees, ever.
Speak to us now on 0207 183 1101 or view our contact page to find out more ways you can get in touch.