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Real estate group McGrath has highlighted the potential for increased regulation of the mortgage broking industry to curb the group’s profitability as it prepares to float on the ASX.
In a prospectus lodged with ASIC last week, McGrath outlined the success of its broker business, Oxygen Home Loans, but also noted the potential regulatory risks associated with the sector.
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“The mortgage broking industry can be considered to be more heavily regulated than the residential real estate services industry.
“Further regulatory changes to the mortgage broking industry could result in a greater regulatory compliance burden for McGrath which could increase McGrath’s cost base or the manner in which it operates and therefore have an adverse effect on McGrath’s profitability,” the group said.
The group also warned that a change in the wholesale funding market may mean that lenders are no longer able or willing to provide products or services, which could adversely affect Oxygen Home Loans.
Further, the McGrath prospectus considered the risks to its broker business as a third-party channel reliant on a panel of lenders.
“Lenders may choose to reduce their reliance on mortgage brokers. For instance, lenders may seek to develop or utilise distribution channels which compete with mortgage brokers,” the group said.
“Oxygen Home Loans generates its income from origination and trailing commissions. McGrath’s financial results could be materially impacted if lenders seek to reduce these rates.
“Oxygen Home Loans relies on members of its lender panel to perform services related to the loan administration process, including appraisals, credit reference checking and title searches. Any interruptions or delays in the provision of these services may cause delays in the processing and closing of loans for its customers.
“If Oxygen Home Loans is unsuccessful in managing the timely delivery of these services Oxygen Home Loans may also experience customer dissatisfaction and its business could be adversely affected.”
While the McGrath prospectus was clear about the potential risks to its broker business, it also highlighted the opportunities for future growth.
“As McGrath grows its network, it believes that Oxygen Home Loans represents a strong growth opportunity and that there is significant scope to increase broker numbers, improve broker productivity and increase the referral and conversion rate from the McGrath Network.”
Oxygen brokers are located at both company-owned offices and franchise offices to encourage cross-selling, with franchisees required to provide office space for Oxygen brokers as part of their franchise agreement.
Oxygen brokers settled $676 million of loans in 2015 financial year, an increase of 16 per cent. The brokerage has a total book valued at approximately $2 billion and a team of 31 loan writers.
[Related: Agent referral relationships are hard work, says McGrath]
