Morningstar | Potential Industry Changes Increase Uncertainty for Mortgage Choice. Stock Under Review
No-moat-rated Mortgage Choice disappointingly downgraded fiscal 2019 cash profit guidance by approximately 12% to AUD 14-15 million from previous guidance of approximately AUD 16.5 million. The mortgage broker blamed tighter lending standards and a slowing housing market for an approximate 10% decline in new home loan settlements compared with fiscal 2018. Mortgage brokers are experiencing longer processing times for loan applications due to tightening lending policies. Home loan applicants are under more rigorous scrutiny, being required to supply more backup to verify income and living expense detail. Maximum borrowing capacity is being reduced and it is becoming tougher to secure higher loan to valuation ratio loans.We are seeking further clarification from management on the near- to medium-term outlook for Mortgage Choice which we expect to receive by late this week. In the meantime, we place the stock under review.
The outlook for the mortgage broking industry is increasingly uncertain due to potential structural changes that could be forced on participants following final recommendations from the Royal Commission to the government in 2019. The major banks seem to be pushing a fixed commission model rather than the current variable commission model. The potential requirement for brokers to act in their client’s best interests would be a major change to way mortgage brokers operate. Changing the broker remuneration model from brokers being paid commissions by lenders on loan settlements to brokers charging borrowers upfront fees would likely have a major impact on consumer demand for broker services. Absent major industry restructuring resulting from Royal Commission recommendations, we expect broker usage across the industry to remain at relatively high levels around 54% due to increasing complexity of securing a home loan.
Previous profit guidance of AUD 16.5 million was predicated on fiscal 2019 home loan settlements being 10% below the AUD 11.5 billion reported in fiscal 2018 and origination commission income broadly in line with the AUD 70 million reported in fiscal 2018. Extensive cost-cutting, and productivity improvements have been insufficient to offset for the fall in revenue. Despite the disappointment of lower top-line revenue, the firm maintains cost guidance for fiscal 2019 of a 10% reduction in operating costs compared with the AUD 35 million incurred in fiscal 2018. The new broker remuneration model was implemented in early August and by November 2018 all franchisees had moved onto the new broker software platform.
Mortgage Choice is engaged in mortgage broking. Co.'s activity includes: the provision of assistance in determining the borrowing capacities; the assessment, at the request of those borrowers, of a range of home loan or other products; and the submission of applications on behalf of prospective borrowers.
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