After the global financial crisis many banks reviewed (that is, cut) the commissions they paid mortgage brokers for the loans they originated. This caused concerns that the whole broker business model would be severely impacted. In the event, these concerns were unfounded, and brokers now account for over 40% of new loans up from about a quarter ten years ago.
Broker Mortgage Choice (ASX: MOC) has continued its solid performance, on Wednesday reporting increased housing loan approvals of $11.2 billion for the most recent financial year, and increasing the total loan book by 6.4% to $45.1 billion by year end.
According to Australian Bureau of Statistics data, new housing finance commitments were $244.8 billion in the financial year, up 2.9% from the previous year and Mortgage Choice increased its share of this market from 4.2% to 4.6%.
The mortage broking model works by banks providing the actual loans, paying an upfront commission to the broker when the loan is approved and a smaller, trailing commission each year that the loan remains in force. The Mortgage Choice business is a franchisor which pays franchisees a different percentage of these commissions, again paying more for new business.
Loans last an average of four to five years, making trailing commissions relatively stable and predictable, and these contribute about 66% of the company's net income. The banks carry all the risks associated with loans and the company doesn't have any debt.
Mortgage Choice CEO Michael Russell said, "In a market of consumer conservatism and subdued credit growth, we are very pleased to report healthy revenue, lower operating expenses and improved broker productivity."
The company declared a fully franked final dividend of $0.07 per share taking the full year dividend to $0.13c per share and forecast a similar dividend for the next financial year. Shares are currently at a twelve month high at $1.57 so the dividend yield (before franking credits) is 8.3%.
The regional banks and building societies such as Wide Bay (ASX: WBB), Bendigo and Adelaide Bank Ltd (ASX: BEN) and Homeloans (ASX: HOM) all offer exposure to the housing market through their lending practices but, because they finance the mortgages, have a different risk profile from Mortgage Choice. As you may remember, RHG Limited (ASX: RHG) (then known as RAMS Home Loans) was an early victim of the financial crisis and, when it ceased writing new business in November 2007, the share price collapsed.
Foolish takeaway
Mortgage Choice pays a consistently high dividend and has overcome many of the doubts about its business model. Trailing commissions provide a firm core revenue stream and the company plans to broaden its offering encouraging brokers to expand into financial planning. If the housing market picks up, MOC is well placed to benefit.
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Motley Fool contributor Tony Reardon owns shares in Mortgage Choice and RHG. The Motley Fool's purpose is to help the world invest, better. Take Stock is The Motley Fool's free investing newsletter. Packed with stock ideas and investing advice, it is essential reading for anyone looking to build and grow their wealth in the years ahead. Click here now to request your free subscription, whilst it's still available. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.
