Packagers or ‘specialist mortgage distributors’ have evolved in their role since their emergence during the mid-1990s.
Described by some as an extension of the lender, packagers offer access to large-scale distribution and, for a number of reasons, now operate primarily in the more specialist segments of the mortgage market.
Within its market space – notably non-conforming – it is the role of the packager to source solutions for retail intermediaries whose clients’ needs or circumstances are complex or unconventional.
Packagers add value through specialisation and an ability to deliver bespoke solutions to the clients. They enhance the value of their service by building close working relationships with a panel of specialist lenders which often extends to the presence of on-site underwiters who are empowered to make quick, commercial decisions, responding flexibly to a very diverse range of enquiries.
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The introduction of mortgage regulation was touted by many commentators as a driver for the inevitable decline and ultimate extinction of the packager. In reality packagers’ business models have proved much more resilient than anticipated, but the debate continues to rage. The latest putative reason cited for the demise of the packager is emerging technology.
Technology revolution
There is no doubt that the World Wide Web has revolutionised, with extraordinary rapidity, the way that mortgage business is transacted by intermediaries in the UK. Sourcing systems are now well established as a powerful tool for identifying suitable prime mortgage products, but have not yet had the same success in delivering effective product selection to the adverse credit market.
While some lenders offer a cascade online decision, this is a less than satisfactory solution. If an intermediary identifies that a particular lender’s near-prime pricing is competitive, but on application the customer is rejected and cascaded to a higher rate, the intermediary cannot be certain that the deal on offer still represents good value.
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Instead he must go back to the whole market and start again – a hopelessly inefficient and expensive process. The problem is exacerbated by the fact that many retail intermediaries don’t see enough non-conforming business to become expert in that market space. No wonder then, that so many intermediaries continue to use the services of a packager.
Fresh dire predictions
While the status quo would suggest that the packager’s position in the market remains secure, each new technological development brings with it fresh dire predictions. Leading edge thinking suggests that sourcing technology will become increasing more intelligent and effective. A more sensitive sourcing system that could conduct a whole of market search and process a mass of complex credit data could possibly threaten the packager’s franchise. The packager wouldn’t disappear overnight but its position in the value chain could be at risk.
One of the weaknesses of this argument is that it assumes that packagers would just sit there like a bunch of dinosaurs and wait for the end of their world. All the evidence suggests that packagers are a highly entrepreneurial species and acutely responsive to market dynamics. They too have recognised the power of technology and are already harnessing it to their advantage.
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Without doubt, packagers represent a big, additional cost of distribution and many non-conforming lenders are actively seeking to disintermediate them. While this is irritating, successful packagers know it doesn’t represent a serious threat to their position. Ironically, the pressure on profitability is more likely to come, in the medium-term, from the increasingly savage competition between non-conforming lenders who have driven margins downwards and may now start to challenge the substantial share of the shrinking cake soaked up by the packager.
A powerful force
Figures recently released by the Intermediary Mortgage Lenders Association suggest packagers will remain a powerful force. A quarter of brokers said that business handled by packagers would increase during the next couple of years. This is partly because of the level of anticipated growth in the non-conforming sector, as more consumers slip out of the prime market lending criteria. Packagers handle one-in-eight of all mortgage applications, and brokers expect them to retain their market share. The bottom line is that packagers are a valued resource for brokers and whether lenders like it or not, it’s brokers who call the shots.
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