In January of this year GE Money confirmed that it had ditched around eighty mortgage managers it had previously funded in 2007.

 

The reason for this move was simple –the wholesale funder no longer believed it had a strong enough relationship with these partners and wanted to focus on funding those partners it did have strong ties with.

 

With the current funding environment as it is, GE Money's announcement of its mass culling may well have heralded the dawn of a new era in the wholesale funder/mortgage manager partnership.

 

So what is changing and more importantly, what do mortgage managers need to do to ensure they get the funding and support they need to prevent them (as some continue to predict) becoming historical footnotes in the mortgage industry?

 

According to Brett Morgan, ING DIRECT’s executive director of intermediary mortgages, there are three key ingredients to a successful partnership.

 

Firstly, and of primary importance, Morgan says, it is essential for both businesses to succeed and for that to happen the relationship must be one that "does not take away from either the funder or the manager."

 

The second key ingredient is simplicity, meaning that it should be easy and simple for both parties to interact and lastly, Morgan highlights the issue of trust: "We empower our managers and give them authority and we expect to gain their trust," he explains.

 

GE Money's attitude to its relationship with its mortgage managers echoes that of ING Direct.

 

Mark Rice, managing director, GE Money Third Party Solutions, says the funder see its relationship with its managers as a partnership.

 

"For any partnership to be successful there needs to be commitment trust and communication. This provides the foundation for a sound partnership," Rice says.

 

These ingredients, he says help mortgage managers drive their brands and deliver a great customer experience - the major advantage they have over the banks.

 

"In order to do this effectively strong communication channels are essential for the funder to provide the most effective support," Rice adds.

 

Looking at it from the mortgage manager perspective, Darren McLeod, head of sales at FirstMac, says it's essential for wholesale funders to provide the correct tools, products, services and systems as well as the "support networks for mortgage managers to do business with them".

 

"Mortgage managers looks at the funder, their products and pricing. They also look at how easy it is to do business with them. If they have great product, but they are hard to deal with, it makes it tough for the mortgage manager." McLeod explains.

 

 

According to Morgan, ING Direct seeks to partner with mortgage managers that have national coverage and have built a business model that is sustainable.

 

"We look at the people behind the business and their experience. We look at where they distribute, their sources of distribution, the staff they use and of course the main thing, which is the credit quality of their book," he explains.

 

For those managers currently on the books, Morgan says nothing has changed – "our strong partners are still our strong partners. ING Direct runs a small select program, and we wish to maintain it".

 

As for those managers who are not performing well, he says the bank has a look and sees what it can do to improve things– "We focus on who we want, who will partner for the long term," he says.

 

Darren McLeod says FirstMac has had "very select criteria" in place for funding managers since 2005. These involve looking at the whole business.

 

"We look at a manager's business plan and its strategy for processing credit, the experience of its staff, its post-settlement needs and the systems and staff it has to manage customers," McLeod says.

 

Furthermore, FirstMac seeks references from mortgage insurers and also asks for arrears percentages from other funders, and looks at the quality of its other funders.

 

Once a mortgage manager is being funded by FirstMac, McLeod says it expects them to do a number of functions correctly including putting together well packaged deals, maintaining credit quality and ensuring they are looking after customers post settlement.

 

On the last function, McLeod says mortgage managers make a mistake if they think the only things they have to focus on are those involved in pre-settlement.

 

"[As a funder] we rely on mortgage managers to keep customers on the books – we expect quality business."

 

As wholesale funders and mortgage managers are partners, the way in which they communicate has always been important, but in the current environment it is proving vital to staying on top of funding, costing and distribution challenges.

 

Frank Knez, associate director for product and marketing at Resimac, says transparency, alongside trust and confidence, is an essential for a long-term relationship.

 

According to Knez, while fundamentally, nothing has changed in the relationship, since the outbreak of the sub-prime crisis, there has been more dialogue between wholesale funders and mortgage managers in relation to funding and general market outlook.

 

"Resimac confirms with its customers (mortgage managers) our capacity for new originations, and certainty in funding. While this may have been taken for granted by originators in the past, in view of recent casualties amongst non-bank lenders in relation to funding, this dialogue has become more frequent," Knez explains.

 

And with the funding crisis not expected to resolve itself in 2008, Knez says the non-bank believes the relationship between wholesale funders and mortgage managers will become closer as a result of the current global credit crisis.

 

"Wholesale funders who are able to continue financing and introducing new products to support their mortgage originators will more likely be rewarded with consistent volumes. The relationship will grow closer as funders develop products and processes with input from their major customers," he says.

 

But the need to be transparent is not just one for mortgage managers to grabble with.

 

Darren McLeod says that over the last few months, as the funding crisis worsened, FirstMac communicated with its mortgage managers as soon as it new of the problems.

 

"As soon as we knew that the pricing issue would push rates up, we indicated this to our partners – at the same other lenders were telling their mortgage managers that rates would not move.

 

"We were as open and honest as we could be…in this current market, communicating with your partners and honesty [are essential]. They are your suppliers of products, and they have to let their own networks know as it affects their business.

 

"If you know something, you must pass it on."

 

With funding costs going up and margins shrinking, the challenge for mortgage managers is being able to adapt their business model to one that is most cost-effective and ensures that, once everyone has been paid, they are still able to generate a healthy bottom line.

 

FirstMac's Darren McLeod, says that as the year progresses, mortgage managers will need to be "competitive in a very competitive market in far as product and rate go" while at the same time continuing to make a profit.

 

This means out of the money they receive, not only must they pay their funders, but in many cases they have to pay mortgage brokers (if they use them) an upfront and trail commissions and still have money left over to invest in the business.

 

"Mortgage managers have to go to look at diversification if they have used only one distribution model," McLeod says.

 

According to McLeod, the broker market is very tough at the moment. For those that only operate using this distribution channel, they should look at possibly going direct to market.

 

Brett Morgan agrees with this kind of thinking and says those businesses that rely solely on brokers will struggle, but those who have diversified their distribution and have been innovative in how they do it, have a brighter future.

 

Besides looking at the issue of distribution, McLeod, says managers need to "look outside the square" and consider areas where they can save money and save costs.

 

As an example, a mortgage manager may look at the number of staff that are performing back office functions and what that is adding to the bottom line – if they are doing well enough on sales (and not deriving much benefit from operating their own back office service), they could consider outsourcing this function.

 

McLeod says some mortgage managers have already approached FirstMac to take on their servicing requirements and reduce costs.

 

"I see this really increasing over the next 12 months," he says. "We are trying to say to mortgage managers: 'We understand the market is tough. We will help by taking away some of your functions (at a cost) so you can focus on your customers and your mortgage book."

 

While GE Money's Mark Rice sees mortgage managers beating the banks "in many instances on product and service", he says they still face a challenge in building their brand with the average borrower and in terms of distribution, this means putting their cards behind brokers, not necessarily accessing the market directly.

 

Rice believes brokers are the way forward for managers, and says the challenge and the opportunity for them is to strengthen relationships with the aggregation groups and brokerages.

 

While other managers may argue for channel diversification, Rice believes brokers are an essential distribution channel for the bulk of the non-bank sector.

 

"I believe they represent the best channel for mortgage managers to increase their market share."

 

 

According to Brett Morgan, if mortgage managers wish to survive and thrive in 2008, they need to secure consistent funding and continue to hold a good name among borrowers.

 

The challenge, according to Morgan, is to attract customers in light of the flight of borrowers to the major brand names and to make sure the customer is comfortable dealing with them.

 

Looking at ING Direct's portfolio of mortgage managers, Morgan says one of the biggest mistakes managers make is not partnering with quality distribution sources, which then flow through to book quality.

 

"Managers are too focused on bringing in new business instead of quality business. If the portfolio of loans is not strong as it could be, this will have flow-on effects," he says.

 

Like Morgan though, Resimac's Frank Knez sees the greatest challenge for managers as gaining access to capital to grow their business over the next five years, while he also expects that regulation will have an impact in this sector.

 

"Experience and professionalism will continue to be the guiding light to success."

 

And not everyone sees the future as gloomy.

 

Looking at the current market conditions, Rice is optimistic: "I believe that time favours the mortgage manager. Financial services are changing fast – as are consumer attitudes. Mortgage managers are specialists in providing home financing solutions and as long as they can compete on price and continue to deliver superior service to the banks they are likely to appeal to new generations of borrowers that look beyond traditional channels."