Mortgage Choice looks to higher commissions

A slowdown in lending growth, tighter commission rates and only a modest expansion of the franchise network were the ingredients for a 12.5 per cent fall in earnings for broker franchise operator Mortgage Choice in the year to June.

Mortgage Choice yesterday reported a net profit of $23.5 million for 2009/10, down from $26.8 million in the previous year. After adjusting for changes to assumptions about the runoff rate and future trail commission income, the company reported a cash profit of $14.8 million, up 14.3 per cent on the previous year.

The loan book increased 11 per cent from $36 billion to $40 billion. Settlements were up 4.7 per cent from $8.6 billion to $9 billion.

As a result of a below-system settlement rate, Mortgage Choice market share fell from four to 3.8 per cent.

Origination commission income fell two per cent, from $53.4 million to $52.1 million. Trail commission income fell 16 per cent, when calculated on a statutory basis, or two per cent on a cash basis.

Some good news for the company was that non-core revenue was up 98 per cent (non-core items include life insurance sales, commercial loans and LoanKit aggregator sales).

Another bit of good news was that operating expenses were down nine per cent, from $30.6 million to $27.9 million.

Mortgage Choice chief executive Michael Russell said the group had a very strong focus on cost control and operating efficiency.

One area where this resulted in improved revenue was in the management of conversion rates. Most lenders now offer a basic upfront commission rate and a maximum rate, depending on application quality, loan size and conversion. The maximum rate can be as much as 40 per cent higher than the base rate.

Mortgage Choice built a new electronic conduit for filing loan applications so it could get a better view on quality and conversion issues. It has used the system to improve the performance of its loan writers and it has also been able to use the data it has gathered to challenge the reports coming back from lenders.

Russell said Mortgage Choice had previously been in a position where it had to accept the lender's data, but with its own data it is disagreeing with about 10 per cent of the lenders' assessments on quality and conversion. This is one reason the average upfront commission rate increased over the past six months.

Mortgage Choice's lender mix changed during the June half, with the big banks increasing share. Russell said this was largely due to National Australia Bank's broker business, Homeside, making "a very strong commitment" to the broker channel.

Russell said: "Homeside's share of our business went from four per cent in the 2009 financial year to a peak of 21 per cent last month. There is a 27 points spread between the home loan rates of the big four banks, and with six rate increases since October pricing is more of a factor.

"There is more to it than pricing, however. They have got their act together on the processing."

ANZ and Commonwealth each account for about 20 per cent of Mortgage Choice business and Westpac eight per cent.

Russell sad he was happy with the progress of the group's move into life insurance sales. Mortgage Choice brokers made more than 6000 life insurance referrals during the year, up from 3000 in 2008/09. Total life insurance sales stand at $3.8 billion.

Mortgage Choice established 18 new franchises during the year but that was offset by 14 terminations.

Russell said commission structures had stabilised, with no changes during the year. His expectation is that trail commissions will start to rise.

"Since the GFC the mortgage broking industry has worked with lenders to reduce origination costs, through electronic lodgement and better quality applications. We see trails getting better on long-life loans."