Zillow (Buy, $42 PO) Stock view: controversy sounding the mortgage business While we still expect Zillow’s core business to have a solid quarter on product improvements, the self-serve platform, and its recent Seller Boost product, the controversy surrounding Zillow’s mortgage business (which potentially has implications for Zillow’s core business and the retail estate industry} has been a key recent driver of the stock. The Consumer Financial Protection Bureau (CFPB} has indicated that it views Zillow’s mortgage referral system as potentially violating parts of the Real Estate Settlement Procedures Act (RESPA}. RESPA (Real Estate Settlement Procedures Act) is an act designed to product potential homeowners by outlawing kickback and referral fees from real estate services, particularly in relation to mortgage brokers who often receive referrals from real estate agents. Since Zillow’s mortgage referrals involve a pre-application and a referral directly to a mortgage agent that than a larger entity like a bank, this could be violating the act. Mortgage brokers often fund some of the real estate agents online advertising expenses and a crackdown on mortgage agents could potentially hurt real estate agents ability to spend dollars on Zillow. For now it is too early to say how this will develop as there are conflicting views for and against this view with the CFPB not releasing an official stance, but we expect this to be a near term overhang on the stock until a clear view of the CFPB’s view and intentions unfold. While a contentious issue, mortgage revenue is still only 8% of total revenue and even a cut back would have a minimal impact to overall revenue growth. As for the impact on real estate agent spend on Zillow, we believe at with only roughly 5% penetration into real estate agents online spend Zillow has plenty of room to grow the core business and the high ROI of the ad unit will ensure agents buy placements on Zillow regardless of mortgage broker involvement a