The mortgage broking industry claims it is picking up a greater share of home loan originations, but this growth was not in evidence when the three big ASX-listed broker groups reported their financial results over the past few weeks.
Yellow Brick Road’s loan settlements in the 2018/19 financial year fell by more than the market average and Mortgage Choice was just about in line with the average. AFG was the only one that reported an above-average volume of settlements.
It was a tough year for the big broker groups as they endured weaker mortgage sales and the disruption of business restructuring.
According to Mortgage Choice, 59.7 per cent of home loans are originated by a mortgage broker – up from 55.3 per cent a year earlier.
The Australian Bureau of Statistics revealed that new mortgage lending fell 17.6 per cent in the 12 months to June 2019.
Yellow Brick Road’s (YBR) settlements dropped 19 per cent to $11.8 billion, Mortgage Choice was down by 18 per cent to $9.4 billion and Australian Finance Group (AFG) dropped a lesser 11.5 per cent to $31.2 billion.
Mortgage Choice chief executive Susan Mitchell says: “Settlements for the year were lower than we expected, given a tightening of credit and lending processes for residential mortgages and a continued softening of the housing market in the wake of the Royal Commission, especially in the second half.”
In addition to weak mortgage sales, these groups have had to deal with structural change. YBR exited its wealth management business, Mortgage Choice changed its broker remuneration model. In a positive change, AFG is working on a merger with Connective.
YBR suffered a net after-tax loss of $37.39 million compared to $658,000 in the previous year.
The loss included the write off of $33.95m on the carrying value of the company’s wealth advisory and lending business, a loss of $5.4 million in trail commissions and a 5 per cent increase in operating expenses.
Its business structure will consist of mortgage distribution (the franchise network and Vow aggregator network), mortgage servicing through Resi, and mortgage funding and securitisation.
YBR is still working on its own mortgage products and is well advanced in negotiations to access the bank wholesale and debt capital markets to fund its own products, which t says will give it a better margin.
YBR executive chair Mark Bouris says: “Establishing our own mortgage product has taken much longer and been much more difficult to establish than I initially thought it would, in large part because of significant regulatory change and uncertainty.”
YBR’s loan book increased to $49.4 billion from $47.6 billion in the previous year. Bouris says he observed a number of positive changes in the demand for mortgages recently. “Since the Federal election, we’ve seen a 36 per cent increase in new business.”
Mortgage Choice’s Mitchell agrees: “We are seeing signs that the market is turning, and we expect settlement flows to improve in 2019/20. Since the Federal Election we have seen more stability in house prices and interest rates have moved to historically low levels.”
Mortgage Choice’s cash profit was down 40 per cent to $14 million and its loan book dropped around $300 million down to 54.3 billion and experienced a 13 per cent decline in its franchise network, down from 449 to 381.
Reflecting the fall of its settlements, the total value of commissions fell by 6 per cent to $157.7 million.
In addition, the total value of commissions paid by Mortgage Choice to its broker network increased by 6 per cent to $115.5 million reflecting changes to the brokerage’s remuneration model.
Mitchell says: “In August last year we introduced a new mortgage broking remuneration model, and in October a new remuneration model for our financial planners. While significantly impacting our performance, these initiatives were necessary to ensure we can compete and grow sustainably by attracting new franchisees to the network.”
AFG had a better year compared to its competitors, with its underlying profit increasing by 1.8 per cent to $28.56m over the year and its loan book grew 7 per cent to over $147 billion.
AFG chief executive David Bailey says: “The mortgage broking sector has endured a tumultuous 12 months with unprecedented external forces creating a tough lending environment leading to residential settlements being down 11.5 per cent compared to last year.”
The company’s SME lending solution, AFG Commercial, had settlements increase to $89 million from $46 million the previous year. The 30.4 per cent investment in Thinktank contributed $1.5 million to net profit before tax.
Last month, AFG announced a $120 million takeover of rival mortgage aggregator Connective Group.
The acquisition will make AFG a mortgage distribution superpower with a total of 6575 brokers and a staggering $76 billion of the $198 billion of mortgages that settle each year.
AFG chair Tony Gill says: “The merged business will have a significant national footprint in Australia’s $1.8 trillion home loan market. The delivery of competition and choice to the Australian lending market is at the core of our strategy.”