Three ASX shares stood out to me after Friday's mini rally in mortgage-related companies. The market was clearly excited by the prospect of easing responsible lending laws. Banks led the charge with the Westpac Banking Corp (ASX: WBC) share price rocketing up by 7.39%. However, I see banks as a problematic area to invest in. The regulator, Australian Prudential Regulation Authority (APRA), has already limited what they can pay in dividends. In addition, banks are still feeling the impacts of loan repayment holidays.
However, the mortgage sector is very large and there are a number 0f companies that did very well on Friday outside of banks. In fact, when there is a ray of optimism in the residential housing sector, you get an idea of just how large the impact is.
ASX shares for mortgage brokers
Mortgage brokers are high margin operators not subject to the same regulations as authorised deposit taking institutions (ADIs). They are distribution channels for the mortgage industry, helping clients to secure secured loans for residential housing predominantly.
The first that caught my attention was Mortgage Choice Limited (ASX: MOC) which saw its share price rise by 7.14% on Friday and has rocketed 10% higher at the time of writing today. The company showed a high level of resilience through the coronavirus pandemic lockdown with only a 16% fall in annual net profit after tax (NPAT). Mortgage Choice is currently selling at a price to earnings ratio (P/E) of 12.6, which is lower than its 10-year average of 17.6. It also has a trailing 12 month dividend yield of 6.9%.
The second mortgage broker, and one I have liked for a while, is Australian Finance Group Ltd (ASX: AFG). This ASX share saw its price rise by 5.41% on Friday alone. Unlike Mortgage Choice, Australian Finance Group saw its statutory NPAT rise by 15%. It also saw residential settlements rise by 9% to $34.1 billion. Part of the company's revenue streams are drawn from renewed interest in Residential Mortgage Backed Securities (RMBS). These are a specific type of bond that are secured against a large pool of residential mortgages (home loans).
Mortgage insurance
Genworth Mortgage Insurance Australia Ltd (ASX: GMA) is a pure-play mortgage insurance company. It saw its share price jump by a massive 10.21% on Friday. Like the other mortgage brokers, Genworth is selling at historically low P/E multiples. Nevertheless, the company has a TTM dividend yield of 10.86%, which is very strong. The company reported a bad first half of FY20 from January to June, however it has a solid balance sheet with only a minor increase in net liabilities.
If the housing sector gets a boost due to the easing of lending laws, then Mortgage Choice will also see an increase in top line revenue. Personally, I expect to see the company's share price rise further as the market turns its attention to recovery.
