The new originator model

State Custodians Mortgage Company, based in the Hunter region of New South Wales, might serve as a model of the way mortgage originators are doing business today.

Three years old, the company has its own portfolio of loans, funded by Challenger Mortgage Management. Principal David Westerman said the company had a good year in 2008.

State Custodians has attracted borrower attention with some very sharp pricing. It offers the choice of a variable rate loan at 4.98 per cent with a $330 annual fee or a 5.08 rate with no annual fee.

It also offers a loyalty rate, cutting 20 basis points off the rate after five years.

Westerman said the company kept its costs down by running a very tight operation. Sales are done over the phone, the marketing budget is tiny and the company does not deal with brokers or financial planners.

Westerman said: "Our strategy is to be a niche provider selling direct to the public. We don't have a lot of people. We don't have shop fronts."

Challenger Mortgage Management general manager for distribution, Steve Weston, said the State Custodians business model was indicative of the trend away from supporting large-scale broker distribution towards low-cost retail.

Mortgage brokers and originators are working under intense cost pressure, due to the combined impact of lower mortgage settlements and reduced commissions.

Weston said: "What we are seeing is that groups that keep their costs down by selling direct are doing better at the moment.

"The broker value proposition, which is all about choice and flexibility, is under challenge in this market. It will be interesting to see if that is a temporary situation or we are at an inflection point."

ING Direct head of mortgage management, Brett Mansfield, said there would continue to be a role for brokers because a lot of borrowers like sitting down with someone who can give them advice about their choice of loan, but he agreed that the recent growth in the originator market was through direct business.

ING Direct funds the mortgage manager Loan Services Australia (one of 17 mortgage managers on its books), which works with several originators, such as MyRate and Quick Direct, that have developed successful direct models.

Mansfield said it would be an exaggeration to say the there was a revival of growth in the non-bank sector (ING Direct has not taken on a new mortgage manager since March last year) but there are the beginnings of demand for an alternative to dealing with the big banks.

"Originators have a better service proposition. The banks are taking weeks to approve loans. With an originator the turnaround is faster and the quality of the ongoing service is better."

Last year borrowers panicked and wanted to deal only with big banks. Slow approvals and poor service standards are starting to drive them back to the alternatives.

Weston cautioned that there is still a negative perception of small financial institutions. Consumers remain extremely cautious about the financial institutions they deal with. But he agreed that borrowers were once again starting to look for alternatives to the big banks.

Challenger has recently created a mortgage product for Plan Australia, a broker group that is owned by Challenger Financial Services Group, and is working on a similar offering for Choice, another broker owned by Challenger.

Weston said: "The Plan Lending product is in the mix as far as rates are concerned. The service level is the differentiator. Approval turnaround is two hours and it gives the broker much better control of the management of the customer relationship.

"We have been talking to financial planning groups about our white label service. They are looking for some other business areas to get into while the investment markets are down."