A better idea for mortgages? Mortgage lending "down under" forms a centerpiece for...

Paul Fegan confesses that there are some facets of American mortgage lending that just don t compute for him.

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When he and his banker team visited the U.S. this summer, he was asked what he thought about the trouble in the subprime markets. He said he was

St. George Bank Ltd. resulted from the mergers of four institutions, including a bank, in the 1990s and has its deepest roots as a building and loan. The bank holds about $65.3 billion in mortgages. But the bank's credit policies are pretty conservative.

Subprime had been a growing business, even in Australia, where repossessions are up, but mostly relating to loans made by nonbank specialty lenders, and most of the risk gets passed to credit insurers.

"It's not a space for us," said Fegan. "So the question we've been asking the people we've been visiting here, is, 'Where is the risk being passed off to? Who's sitting on it?'."

It's a question many U.S. bankers have been asking over the last few months, as well. For St. George Bank, it especially relates because the mortgage loan holds a much different place in Australian banking than it has come to hold here, and St. George Bank has some interesting product design twists that U.S. bankers might find of interest.

Building relationships

In Australia, the much-cherished U.S. institution of deductible mortgage interest on residential dwellings doesn't exist. "It's only available on investment properties," Fegan explains. As a result, Australians tend not to leverage up for their homes.

Another key difference involves fixed-rate mortgages. "We don't do 30-year fixed rates," says Fegan of the industry. "About 15% of our own portfolio is fixed and those would predominantly be for three to five years. The average life of a mortgage loan in Australia is around four and a half years."

And while, with the emphasis on secondary market sales in the U.S., mortgages are "more of a transactional product, in Australia it's a relationship product," says Fegan. "In Australia, you borrow from St. George, St. George services it, the statement comes from St. George, and if you want to know anything about it, you ring the bank." The breaking up of the mortgage process that the U.S. has seen isn't typical in Australia, he explains.

Increasingly, in fact, the Australian mortgage represents a centerpiece for cross-selling. Fegan explains that once Australians tended to pay off their nondeductible mortgage debt as quickly as possible, in order to own their house free and clear.

But today, the pattern is, pay off the loan, "get the title, and then mortgage again," says Fegan. "You use the security to 'gear up' [leverage yourself, in U.S. terms] and buy investment property. And then more investment property."

Fegan explains that parents increasingly don't wait until death for their wealth to pass to children, but instead use products much like home equity loans or reverse annuity mortgages to help their children get into the investment property market.

"So we've seen the mortgage product moving from a very short life span into the whole life cycle," Fegan says.

St. George Bank's management believes strongly in bundled products, and often uses the mortgage loan as the hub product.

The Advantage Home Loan Package offers a choice of a standard variable rate mortgage, a fixed-rate mortgage, or a Portfolio Loan, which we'll explain in a moment. The package also includes a choice of credit card, a choice of checking account, and waivers of many fees if the borrower goes for the bundled approach. Customers can also "redraw"--basically, borrow money back out of their mortgage loan by check, somewhat akin to the American home equity line of credit.

An optional feature of the package is "mortgage offset." Essentially, the customer can choose to have the bank apply interest earned on savings toward loan interest. They can opt for 100% offset or partial offset. Bankers might think of this as a "reverse spread." This feature appeals to those who want to own their homes sooner, but also enables the borrower to in effect reduce principal.

On the other hand, those who want to leverage their home to buy investment property or other investments have the Portfolio Loan option. It's a sort of hybrid home mortgage/home equity loan in practice, which enables the borrower to set up as many as ten sub-accounts, each a line of credit, for different purposes. The primary loan account is made at a variable rate; the borrower can choose between fixed or variable rates on the other sub-accounts.

"Super"-charged wealth management

Wealth management is a major business line at St. George, but not in the same way it is for some large U.S. institutions.

"We have three million customers, and, yes, we have a private bank, but that's 2,000 customers," Fegan explains. So, overall, St. George can't live just on premium segments or even "mass affluent." Says Fegan: "Our customer base is very much around the middle."

In 2006 St. George Bank saw its managed funds level rise by 20.3%, and 2007 began with even stronger growth trends, the first half showing an annualized growth rate of 28.2%. Fegan notes that five years ago, the wealth management area had $12 billion under management and 1,100 employees and "to be honest, it was a bit of the ugly duckling in the company."

Nowadays, the function has $50 billion under management and fewer than 1,000 employees. Fegan credits several factors for the shift. These include a proprietary processing platform called Asgard; a conscious decision to home in on a major aspect of the managed funds business; a strong Australian economy; and, last but not least, a government scheme called "superannuation" that's created a huge pot of money that many types of firms can, and do, pursue. St. George has wielded its own aggressive spoon.

Superannuation, recently amended and called "super" for short, is somewhat similar in concept to proposals here for privatizing Social Security.

"The Australian government basically formed the view that it will not be able to afford the traditional government pension as the population ages and grows," explains David Clark, director, institutional business services, Asgard Wealth Solutions. The government saw that the trend of more people living further into old age, joined with a falling birth rate, would create a top heavy situation, too few working people supporting too many retirees.

"So 15 years ago," Clark continues, "the government started requiring Australians to self-fund their retirement. A percentage of an individual's salary must go into the equivalent of your 401K. It's taken out from the gross, so you don't even see it. And you can't take it out until you retire after 55." Contributions go into superannuation funds, essentially retirement-oriented mutual funds, or retirement savings accounts. At the back end, citizens can withdraw their funds as a lump sum, through superannuation pension, or a combination of the two.

Clark says the program began with a 3% of income requirement. Nowadays the percentage has risen to 12% of income, "and there is argument to raise it to 15% or even higher." (For the lowest-income wage earners, the government does offer some matching payments.) Voluntary additional contributions by employees are also permitted, subject to limits. Under a new law, retirement withdrawals are tax free; formerly they had still been subject to some tax.

Originally, most superannuation deductions went into company funds run by independent trustees. Growing compliance duties and imposition of licensing requirements made this less and less attractive to employers.

"So over the last three years 98% of all companies' super funds have closed, and the money has moved into the private sector," Clark explains, "with individuals having the ability to move their money where they choose."

St. George decided to become specialists. The bank leaves asset management and investment strategy to advisory firms.

"The focus for us has been on administration and distribution of the money," Fegan explains. This includes the capability to administer "gearing"--what U.S. bankers would call "margin lending." Many of the solutions provided by Asgard are essentially "white label" offerings that advisors can market as their own products and services. Asgard's Advisenet product, for instance, enables investment advisors to establish, track, and administer client portfolios online. Asgard Elements allows financial advisors to direct client funds into a selection of managed funds that St. George works with.

"Out of $50 billion," says Fegan, "we don't manage one dollar of it. We manage the managers."

The bank handles administration and distribution chores for approximately 600 funds, collecting percentage-based fees for all this activity, in what has become the fourth-largest managed funds industry in the world.

There's much more to wealth management at St. George's, of course, including insurance, financial planning, and Advance Asset Management Limited, an investment arm that links St. George clients with selected outside boutique investment firms.

Ringing out a message--literally

Something that sets St. George Bank apart from many large institutions is that top executives are expected to reach out to customers on the phone.

"Our CEO rings customers," says Fegan of Gall Kelly, managing director and CEO, who left in August for the top spot at $300 billion-assets Westpac Banking Corp., "and she doesn't ring just really wealthy customers. I personally ring 10 to 15 customers a week. Five might be 'welcome to the bank' calls to new customers who could range from a credit card customer to a $40 million loan. But the rest would be about service recovery--there's been a process gone wrong, there's been a complaint. I don't necessarily personally resolve the complaint, but I ring to make sure it is closed in the mind of the customer. Everyone is expected to be doing that."

Fegan pauses and acknowledges the math.

"It will take us a long time to get through three million customers," he says, "but we care."

From Sydney to the Big Apple

Over the summer Australian banking executive Paul Fegan and a team of other officers from St. George Bank, the fifth-largest retail bank in Australia ($100 billion assets), toured U.S. banking institutions, on the hunt for ideas. ABA Banking Journal's Steve Cocheo, executive editor, and Lauren Bielski, senior editor, interviewed Fegan, group executive, retail bank and wealth management, and acting CEO, and three other members of the bank's team: Peter Ewers, genera[ manager, credit and risk management, group credit; David Clark, director, institutional business solutions, with the bank's Asgard Wealth Solutions subsidiary; and Peter Zardo, manager, regional business banking, for Griffith and Leeton. This story represents highlights from the conversation.

By Steve Cocheo, executive editor, and Lauren Bielski, senior editor