Are Mortgage Networks Safe?

Are Mortgage Networks Safe?

The past few years have been unprecedented in our industry and trading conditions have been tough by anyone’s standard.  As a result we have seen some high profile casualties amongst, large directly authorised firms, investment networks and to a lesser extent, mortgage networks. However it’s fair to say that if mortgage networks generally had never existed then causalities amongst small and medium sized mortgage broker firms forced to take on full responsibility for their own compliance would have been considerably higher.

Failed mortgage networks

Leaving aside Directly Authorised businesses and investment networks which obviously have totally different and much bigger problems, the truth is that all of the failed mortgage networks including Mortgage Times and Home of Choice failed because of problems within their internal structure. Essentially their business model just didn’t work either because of its design or because of its lack of flexibility in the face of dramatic changes within the industry, rather than as a result of any deep seated flaw in the base network model.  Mortgage Times for example derived a significant portion of its income from in house packaging services for a number of smaller, niche lenders.  This was a core part of their business model and they benefited from the thick margins that this delivered.  Then when this type of lending “nose-dived” in 2008 they were effectively unable to make up this income from other sources within the time frame.  In the case of Home of Choice, Gerry O’Brien who was then the CEO commented that it was the networks inability to service debts of over £5 million that caused their demise.

Successful mortgage networks

Which Network has found that most of the mortgage adviser networks who not only successfully weathered the storm but have actually grown throughout the recession did so by having streamlined business models and a flexible, low fixed cost base which is easier to scale up and down to fluctuating business volumes; along with good responsive management controls allowing them to make appropriate changes to their financial model when required. Corporate parentage or benign investors can help, but “no debt” is better since high debt levels are often a killer along with sponsors who rather than looking at the future of the business are continually just looking at annual returns on their investment.  In addition to this, the networks themselves need to be continually striving to add value to their proposition for each of their Appointed Representative firms helping them to maximise income streams and avoiding any running down of AR numbers.

With continual changes in FCA regulation lenders demands and the financial services industry becoming increasingly reliant on IT and good client management systems not to mention the demands imposed by MMR and ever higher compliance requirements, it’s plain to see that the Mortgage Network is going to be the preferred option for a lot of small, medium and large mortgage brokerages for some time to come. As well as the obvious benefits, many small businesses find that a good network can provide inspiration, motivation and a sense of community spirit, fellow AR’s to bounce ideas off or pick up ideas from.