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Challenger’s Drew Hall has played a hand in Challenger’s fate for a number of years. MPA asks the chief executive of mortgage management what NAB’s acquisition of the entity means for the third party channel.

Challenger’s Drew Hall is experiencing déjà vu.

In 2003, the chief executive of mortgage management played a key role in helping Challenger take over ownership of what was then called Interstar. Now, just six years on, he’s at the centre of another acquisition – NAB’s proposal to purchase Challenger’s aggregation and mortgage management platform for $385m.

It seems it is Hall’s fate to be linked with Challenger.

Back in the 1990s, he moved from PricewaterhouseCoopers to a company called Bankers Trust, which was where he had his first interactions with Interstar, the former Challenger Mortgage Management entity.

When Bankers Trust was sold to Macquarie Bank, Hall worked as a division director at the new organisation, until a small group of former Bankers Trust employees started their own business called Zurich Capital Markets. That company was eventually wound up, but Hall, who was helping their client Interstar find a new owner, joined the company in 2003 when it became part of Challenger. 

“No, I would never thought 15 years ago I would still have these associations with Interstar and I was only very loosely associated with it back in the ‘90s, but things have a way of working their way around.”

Halls main responsibility as chief executive is setting strategy. He has nearly 400 staff and some 6,000 customers in mortgage managers and brokers.

“So my role is to make sure the business is functioning, that we’re coordinated and that we’re getting good outcomes for our customers and our people and our shareholders as well.”

Under the NAB acquisition, Hall says it will be business as usual.

“So the way I would describe the NAB acquisition is that it’s a bolt on, where we’re running the business as is and we’ve got the same management structure in place, the same infrastructure in place, right down to the finance, IT and premises. NAB’s got a very strong view – that we share – that to make the business a success what it really needed was the funding or the oxygen to get the lending side back going again.”

Hall says the realisation that Challenger needed “oxygen” really came on the back of an overseas trip he did in February 2009. Hall travelled to the US, UK, Europe and Asia to meet with the 140 investors Challenger had in its RMBS program to see which ones were still in business and which ones were still interested in backing business.

“And it was at the end of that that I was really able to get a good sense of where this market was going and how long it was going to take to come back,” he says.

“It was very confronting. I lost a bit of sleep actually. We did about 10 cities in 10 days and a lot of overnight flights and back to the next round of investors. But the outcome was that things were as serious – if not more serious – than we thought and we needed to take action for everybody’s sake. And you can wait so long but you can’t wait forever.”

As a result, Challenger decided that the best thing to do was look for a different source of funding. The entity spent a lot of time with different players looking for the right fit, but in the end Hall says NAB came out on top. The entire proposal was about six months in the making before the announcement.

Despite making the decision to align with NAB, Hall says he does foresee securitisation coming back – just not at the same level or anytime soon.

“So my view is that the RMBS market will come back and the pricing will come back over time, but it won’t come back in at the levels or the time frame to make it worthwhile to stick it out for the next three or four years.”

The deal

At the time of writing, NAB’s proposal to purchase Challenger’s aggregation platform and mortgage management operations for $385m occupied much of the press and was at the forefront of Hall’s mind.

While it was yet to be confirmed by the ACCC, Hall says it sees the acquisition as being beneficial for competition.

“I actually think something like this transaction is a net positive for competition. It puts mortgage managers on the map. Mortgage managers now get access to a very secure balance sheet and the ability to write product that is more competitive than it has been for a number of years.”

He adds that securitisation has always had a few pitfalls – a good example of which would be lenders mortgage insurance on loans below 80% LVR.

“It was often hard to compete in that space because to securitise you had to get an insurance contract on every loan which made the process less efficient.”

Things like higher exit fees, which were symptomatic of the securitisation model, also affected the product mortgage managers were able to offer, he says.

So far the response from mortgage managers has been warm, Hall says.

Challenger currently has between 300 and 400 active relationships (depending on how you define the level of deals coming through), which is a significant drop from its peak, which was 700. A number of mortgage managers stepped back into the broking model, but the recent NAB announcement has given them hope that they can return to mortgage management, Hall says.

“But they can see the light at the end of the tunnel and they can come back and there’s probably more blue sky than there was in late 2006/early 2007.”

Lack of funding has put many mortgage managers on the ropes over the last two years. Hall adds the model also suffered from mortgage insurance restrictions and the way that some participants exited the market, which created a poor experience for their customers.

“All of those things can be cured now because you can have a bank balance sheet funded product. We can some things around fees and we can certainly address the issue about strength and longevity of the channel and funding sources for the loans as well.”

He says the new NAB/Challenger deal will give mortgage managers a much needed boost and make the market more competitive, not less.

“The ones that have good processes, good customer service and scale are the ones that will be successful.”

Hall says many are just waiting to see what can be done in terms of product offerings.

“And the deal isn’t finalized yet of course and you want to get the rubber on the road and start changing things, but we’re not owned by NAB yet so plugging into their balance sheet will take a little bit of time to do.”

As for brokers, Hall says the investment in the third distribution channel by the NAB is “actually cementing a commitment into that channel”.

“At various times we’ve seen various levels of support by various institutions of the broker channel and I think this really does change the landscape there in a positive way. It’s in our interest to see the broker business prosper and broker businesses prosper by being able to offer choice and independently deal with their customers.”

Since the announcement, Hall has been fielding questions from brokers, but one of the most common is around integrity of data and assurances NAB won’t use information for other purposes.

He says both parties have made commitments to both brokers and other lenders on the panel that there will be segregated source systems.

The other concern he’s heard from brokers is about commissions. According to Hall, NAB has made public commitments to not change commission levels.

“And as CEO of a business that has the broker platforms it’s very much in my KPI [key performance indicator] to make sure that our brokers are running successful, profitable businesses and that’s what part of my performance is judged on – the ability of those businesses to grow and be profitable.”

Going forward

While the worst is over, Hall says the from a whole market point of view it’s going to be a slow cure for the global financial crisis.

In saying that however, he says that he’s always thought Australia would weather the storm better than most. Part of his world tour of investors was convincing them of Australia’s key differentiators. Halls says low levels of government debt, a shortage of housing, and the fact that many borrowers are on a variable rate loan (which in turn means interest rate cuts made a significant difference) were huge advantages for the nation.

“And we have a very strong banking system. Yes, some credit has been tightened but it is nothing compared to what happened offshore.”