With the impact of the credit crunch spreading wider and wider, some commentators have predicted a cull in the number of packagers in the coming months.
It has even been suggested that as few as five or six packagers will still be in business in six months’ time – but are things really that bad for the packaging community?
There is no doubt that the turmoil in the mortgage market has had a significant impact on the packaging sector. Lenders that have traditionally dealt with packagers have withdrawn from the market, priced themselves out of it or restricted their criteria. All this means packagers are likely to see falls in volume of between 35 and 50 per cent. It is clear that there will be an impact on profitability as cost bases remain static but income plummets. This is not a good combination for business survival and one thing we can be sure of is that there will be some casualties in the next few months.
The global liquidity crunch has put even more pressure on lenders and many are likely to want to increase their control by reviewing distribution strategies. Packagers will have to work extra hard to deliver volumes and justify fees – commissions will reduce and some degree of consolidation is a likely consequence.
A different story?
It could be a few months until we feel the full effects of the credit crunch. Application to completion time is generally about three months so at the moment packagers are being paid for work done three months ago – after Christmas it might be a different story altogether.
Mortgage Times marketing director, Payam Azadi, says there will definitely be packager casualties but believes it is difficult to predict how many and in which areas.
He explains: “There will be casualties but I don’t think it’ll be the case that we will have just six packagers in the market in six months’ time. There will be casualties within packagers, networks, lenders and brokers. No one is immune to the problem – everyone will be affected by this. So we could see solicitors, estate agents and valuers affected too – anyone involved in mortgages.”
Azadi says that smaller packagers could well be the ones that survive as they do not have huge overheads or big wage bills. The bigger firms with huge volumes of business and tied distribution deals should ride out the storm too – but the medium-sized firms could struggle.
“The big guys can decrease prices and still survive and the smaller ones will have brokers they have dealt with for years and years, “ he says. “But traditional packager models will be under threat and they will need to diversify to survive – by franchising, going into estate agents, broking or diversifying into general insurance. One big problem packagers have is they do mainly non-conforming mortgages and some only have small panels of lenders.”
Broker John Charcol rarely uses packagers and so senior technical manager, Ray Boulger, is reluctant to name the names of those likely to go out of business.
“I think the packagers best placed are the larger firms with large panels, especially those that don’t operate solely on the non-conforming market and those which have diversified so that their packaging operations complement other parts of the business,” he says. “In the current market conditions, the value of having a large panel, rather than concentrating on a relatively small number of lenders, perhaps selected more by reference to the fees they pay rather than the overall competitiveness of their proposition, becomes even more obvious. Brokers will really appreciate those packagers which are able to offer a good choice of lenders in current market conditions as well as in the good times, and those packagers which look after their customers in this way will have a much better chance of surviving.”
Evolution
Some critics say that some packagers, while initially created to provide a genuine service in terms of administration, have evolved into glorified distribution channels. edeus is one lender which is of the view that some mortgage packagers have played an over-valued role in the mortgage market in recent years – especially in the area of specialist lending.
Managing director of edeus, Alan Cleary, says: “Although there are a number of packagers who genuinely prove their worth and provide a beneficial service, there are many that add no value at all to the mortgage supply chain.”
Cleary reckons that the percentage of business controlled by the few large players will increase further and as a result there are likely to be a significant number of casualties. “Ultimately those who do not go the full distance to prove their worth will find that they are no longer operating a sustainable business model,” he says.
Other critics say that the skill of the remaining packagers will lie in distribution, and those that focus on local marketing and seek to deliver a consistent level of volume will be well placed to weather the storm. Undoubtedly to survive the current climate, packagers need to recognise the opportunities associated with technological innovation, and seek to add value to lenders, as well as brokers and borrowers.
Rob Jupp, managing director of Personal Touch Packaging, says distribution – not packaging – is now the key, and he is upbeat about the future for his firm.
“I believe that packagers are in a strong position; they have a role to play, as now has never been a better time to use a packager,” Jupp says. “I, for one, refuse to allow external turbulence to rock our internal boat. We have all had to review our business models; to reform, reshape and regroup. As long as we continue to see ourselves as distributors for our lenders, they will still regard us as an excellent added value to their business proposition. “
GHL Group sales and marketing director, John Smith, also has a positive outlook. He says that packagers with the best chance of survival will be those who have a form of tied distribution and a diversified offering. Smith believes that those that have no tied distribution are now at the greatest risk of disappearing into oblivion unless steps are taken to cut costs and restructure.
“Restructuring will inevitably mean reducing costs and this means reviewing margins, resources and new opportunities. Undoubtedly new opportunities will exist for those businesses that were bold enough to take the necessary steps at the right time.”
Technology driven change
Looking at the wider specialist mortgage market, investment in technology is certainly driving change, increasing automation and lowering costs. With the prevalence of processes such as automated valuations and electronic identity verification there will be a decline in the act of gathering documents to support a mortgage application. Any packager with a robust business model should be able to recognise this trend and react to the market, bringing products to the market and adding value to the application process.
Ian Giles, marketing director at Kensington Mortgages, reckons that technology is key and forward-thinking distributors are carving themselves a niche by providing intermediaries with solutions such as multi-lender sourcing and cascade systems, which help brokers to search for specialist products and provide a supporting audit trail.
“In reacting to the changing market, many distributors will have a sound future, and Kensington is working closely with our partners to ensure our business models are closely aligned to succeed in this new environment,” he says.
Packager optimism
Packagers themselves are optimistic about the future, with some going as far to say there has never been a better time to be in the packaging industry. Lenders’ criteria and loan-to-values are constantly changing and so rather than brokers going direct to lenders, finding they cannot get a deal and having to go elsewhere, a packager can do it for them.
It has already been evidenced within the market that the best packagers are those with flexible business models that can adapt to market conditions, including the ability to cut costs effectively. In present market conditions, this should be seen as a positive management trait.
“Packagers need to pull together to survive,” says Dale Jannels, sales and marketing director at All Types of Mortgages. “I think the strongest will survive, those that deal with all-status lenders from prime to non-conforming and those that have a decent number of lenders on their panel.”
Unity has been the watchword at a number of packager-focused industry events. Speakers have enthused about how important it is for packagers to work together to survive. These events hold sessions offering packagers the chance to discuss how funding and credit structures will develop, and also host workshops where delegates can learn how lenders plan to support their distribution partners.
Despite gloomy discussions on the outlook for the non-conforming market, and talk of £15 billion worth of lending potentially being wiped off the heavy non-conforming sector, many plucky packagers are keen to stress they are ready to take on whatever the market has to throw at them.
However, although upbeat about Personal Touch Packaging’s future, Jupp admits that there will inevitably be casualties in the packaging sector. He says: “We have already seen some lenders completely pull from the market and some packagers have announced job losses during their workforce remodelling,” he says. “To quote figures about how many may survive would be pure speculation and I, for one, am unwilling to do so. Those packagers that continue to add value to their brokers and lenders, continue to provide exceptional service and those that have been prudent and entrepreneurial in these torrid times are likely to win the day.”
Strong resilience
It is likely that the real effects of the credit crunch will be felt by packagers in January and February next year, although a 50 per cent downturn in the amount of business being received has already been reported across the industry. On top of this, with criteria hardening, conversion ratios will undoubtedly be affected.
However it is not the first time packagers have been under threat of extinction and history has shown that the packaging community has a strong resilience to market. They are unlikely to be the only victims of the credit crunch as we have already seen some lenders fall by the wayside, as well as Northern Rock’s much publicised problems. The current economic conditions could well lead to more casualties across the board and the next year could be painful with mergers, companies slimming down or ceasing to trade.
After all, we are already getting frequent redundancy announcements from lenders and brokers, as well as other participants in the mortgage market, and this will continue for some time.
Cleary agrees that the current economic conditions could well lead to more casualties in lending and broking. However, he is confident that the market will recover. “The priority now is to focus on the positives of the industry and we are confident that those lenders and brokers who position themselves correctly and act prudently will be well placed to weather the storm.”
Jupp says those brokers that rely heavily on business from the high adverse end of the market are likely to be affected. “As more lenders pull away from this type of business, brokers are faced with the very real situation that they may not be able to place 100 per cent of their clients business as before,” he says. “This will have an obvious affect on their profit. Sadly this may mean that inevitably we may seem some casualties within the broker sector too.”
Only time will tell what the future holds for the packager, but one thing is for sure; packagers are not going down without a fight.
