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4 mortgage broker companies you should know

Mortgage broking goes hand-in-hand with the property market. The big four banks control a large share of the mortgage business, but there are a number of listed companies that investors can look at to see what prospects they have with a housing revival.

For exposure to the mortgage lending and broking market, there are four listed companies that you should know.

RHG (ASX: RHG) funds and services residential home loans. It was formerly operating under the RAMS home loan brand, until the brand was purchased by Westpac Banking Corporation (ASX: WBC). RHG is a closed loan book, meaning it is not originating new loans and is running off its current book. It is still making a profit from its book, but as the loan terms reach expiry or are paid out, they are not being replaced, so over time the company earnings are expected to decrease respectively.

This year, it received two takeover offers from Resimac and a consortium of Pepper Australia with Cadence Capital (ASX: CDM). In the end the RHG board decided to go with the Resimac bid. RHG shareholders voted this week in approval of the Resimac offer. The company’s current mortgage portfolio is estimated to be about $2 billion.

Mortgage Choice (ASX: MOC) is a $338 million mortgage broking company by market capitalisation. It holds about 9% of the Mortgage Brokers industry according to IBISWorld, making it third after Australian Finance Group and Commonwealth Bank of Australia (ASX: CBA).

In 2013, it had NPAT of $18.7 million on total revenue of $156 million, which was only slightly better than the $18.46 million in 2012. Net profit margin was about 12% and return on equity was 18.8%.

Over the past 12 months, its share price has risen from about $1.75 to $2.89, or 65.1%, due to market expectations of a revival in the housing market. Being connected to the housing market, it has had a slightly negative past five-year NPAT compound annual earnings growth of -0.66%. Now it has a PE of 17 and analyst forecast for earnings per share growth.

Mortgage broker and financial services provider Yellow Brick Road (ASX: YBR), founded by Mark Bouris, who is known for building the Wizard Home Loans franchise, offers a variety of services that capture more potential client business than an average mortgage broking company.

A major shareholder is Macquarie Group (ASX: MQG), it is financially backing Yellow Brick Road, strategically combining its mortgage funding with the branch network the mortgage broker has developed across Australia.

Since its listing in 2008, right in the middle of the GFC, Yellow Brick Road hasn’t turned a net profit. In November last year it arranged a deal with Macquarie Bank and Nine Entertainment Company (ASX: NEC) for financial backing and national TV promotional advertising. After that the share price quickly rose from about $0.25 a share to a high of $0.74. Currently it is at $0.54.

It has been increasing its loan book over the past two years from $481 million to $1.79 billion, as well as building up its personalised insurance premiums to $2.44 million in 2013. It has $275 million of funds under management in its wealth management segment. This has helped lessen the net loss it realised in 2013, to a negative $6.57 million from a negative $6.82 million in 2012.

Lastly, Homeloans (ASX: HOM) provides loan origination and management, as well as securitisation of mortgages through the Residential Mortgage Trust.  Although just $87 million in market capitalisation, it had NPAT of $7.7 million on total revenue of $37.5 million in 2013, making its net profit margin 20.5%.

It has been making a profit every year for the past 10 years, yet after hitting a profit peak of $12.2 million in 2010, subsequent years’ earnings have been declining, while total revenue has been rising. This would need to be investigated further to understand the trend.

Foolish takeaway

Although many people have existing loans, it is expected that many more will buy homes as the housing market recovers. Mortgage broking is still a cyclical business, so investors have to look over the long-term prospects of a company. Competition amongst lenders and mortgage brokers can be fierce, since borrowers can easily shop around for the lowest interest rates. With rates at their lowest in decades, the increased opportunity of more loans can be counterbalanced by pricing competition and new market entrants.

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Motley Fool contributor Darryl Daté-Shappard does not own shares in any company mentioned. 

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