Bank margins eroded.

In the past few weeks, all three lenders – National Australia Bank, Westpac and ANZ – reported serious downturns in earnings and each doled out unexpectedly large wads of cash to shareholders, either to distract from the performance or to diminish the pain and keep the share prices elevated.

But there was something even more startling when it came to real estate. Mortgages over housing continue to dominate the activity and loan books of our major banks. But the profit stream is rapidly diminishing. In some cases, the earnings drop has been alarming.

The rise of mortgage brokers has also played a significant role, and unlike the emergence of a hungry new interloper, their influence is likely to be permanent.

Around 75 per cent of new home loans now are negotiated through mortgage brokers. It's a development that has broken the traditional link between client and institution, and has helped put borrowers into the power seat.

Where once loyalty, or maybe even apathy, made borrowers hesitant in moving their business across the street, price now dominates how buyers choose a lender.

Banks can no longer rely on a captured clientele and have been forced to battle, not just against each other, but a range of upstart, online operators and aggregators that publish the competing rates from all lenders on your phone screen.

Home loans increasingly have become a commodity that can be switched on a whim. Brand no longer matters.

The banks initially saw mortgage brokers as a means to cut operational costs, as they needed fewer staff in-house to sell home loans. But that has come back to bite them.

The brokers helped unleash a wave of competition that has smashed bank earnings from their biggest business line. Westpac's retail bank earnings dropped 32 per cent in the first half of this financial year. ANZ's division was down 25 per cent and NAB felt the pain as well. NAB CEO recently claimed that broker originated loans were being written below the cost of capital.

Banks now have to fork out up-front and trailing commissions to brokers. And given brokers now account for three quarters of all new mortgages, bank profit margins have been whittled back through a spike in costs.

Add into that, the intense competition that has slashed what can be charged, and the banks are under fire at both ends.

The banks have pressure on profit margins and thus mortgage holders are facing a lack of vigorous competition from the country’s major lenders, creating a scarcity of good deals, while at the same time elevated interest rates and high living costs push more households behind on repayments.

Australia’s big banks profited greatly from the quick-fire series of rate hikes that ultimately pushed the official cash rate to 4.35%, although that also ushered in a period of heightened competition as lenders sought to grow their customer base.

Now Bank’s have collectively pulled back and they’re allocating capital to other business lines where they believe there are better returns. The behaviour is seen in terms of how hard they’re willing to price for customers (or not). It means customers need to shop around more because there are still competitive offers in the market, but they are harder to find. Hence, use a broker.

Taken in part from ABC News correspondent Ian Verrender and from The Guardian.

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