We use cookies to understand how you use our site and to improve your experience. This includes personalizing content and advertising. To learn more, click here. By continuing to use our site, you accept our use of cookies, revised Privacy Policy and Terms of Service.
You are being directed to ZacksTrade, a division of LBMZ Securities and licensed broker-dealer. ZacksTrade and Zacks.com are separate companies. The web link between the two companies is not a solicitation or offer to invest in a particular security or type of security. ZacksTrade does not endorse or adopt any particular investment strategy, any analyst opinion/rating/report or any approach to evaluating individual securities.
If you wish to go to ZacksTrade, click OK. If you do not, click Cancel.
3 Mortgage & Related Services Stocks to Escape Industry Woes
Read MoreHide Full Article
The Zacks Mortgage & Related Services industry has been witnessing rising forbearances, which is weighing on mortgage servicers as they are required to advance payments with their limited cash availability. Refinancing activities are likely to fall as borrowers would want to dodge the extra burden of extra fees.
Nonetheless, industry players like PennyMac Financial Services, Inc. (PFSI - Free Report) , LendingTree, Inc. (TREE - Free Report) and Ellington Financial LLC (EFC - Free Report) might benefit as the interest rates are likely to stay low for now, thereby keeping demand for mortgages alive. Low interest rates raise the demand for loan originations by making cost of borrowing comparatively less expensive.
Industry Description
The Zacks Mortgage & Related Services industry comprises providers of mortgage-related loans, refinancing and other loan-servicing facilities. Players in the industry are somewhat dependent on the interest rates determined by the Federal Reserve, as prevailing rates influence customers’ decision to apply for a mortgage.
The companies also generate investment income from several financial assets such as residential or commercial mortgage-backed securities and asset-backed securities. Further, the firms make equity investments in mortgage-related entities, among others.
What’s Shaping the Future of Mortgage & Related Services Industry
New Refinance Fee to Partly Offset Benefits From Historically Low Rates: In the September FOMC meeting, the central bank indicated that it might keep interest rates low till 2023, which is expected to continue attracting attention of refinancers. However, Fannie Mae and Freddie Mac have imposed a new 0.5% fee, effective Dec 1, for every refinance loan made by mortgage lenders, which might offset some of the benefits of lower rates. Thus, refinancing activities might decline once these fees are imposed as borrowers will be impacted by the new fee.
High Level of Forbearance Burdens Mortgage Servicers: Mortgage forbearance option provided under the March 2020 Coronavirus Aid, Relief, and Economic Security (CARES) Act allows millions of homeowners with federally-backed mortgages to forgo monthly mortgage payments. In fact, COVID-19-related forbearances peaked in late May with 4.7 million home owners in such plans. Going forward, this will be problematic for mortgage servicers as they are required to make advances of principal and interest payments to investors holding these loans, regardless of coronavirus-related deferments, leading to a liquidity crunch.
Spike in Homebuyers Interest to Continue: Despite the pandemic-related concerns, the housing market is booming. In August, purchase applications increased to the highest level since early 2009. Stay-at-home orders is one of the reasons for steady increase in demand for homes. Also, apprehensions of rise in home prices due to slow supply growth might boost home sales as borrowers would want to offset this downside by taking advantage of the record low interest rates. Thus, rise in demand for originations is expected to continue.
Zacks Industry Rank Reflects Bleak Prospects
The Zacks Mortgage & Related Services industry, which is housed within the broader Zacks Finance sector, currently carries a Zacks Industry Rank #128, which places it at the bottom 49% of more than 250 Zacks industries.
The group’s Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates continued outperformance in the near term. Our research shows that the top 50% of the Zacks-ranked industries outperforms the bottom 50% by a factor of more than 2 to 1.
The industry’s positioning in the bottom 50% of the Zacks-ranked industries is a result of solid earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, it appears that analysts are gradually losing confidence in this group’s earnings growth potential. Since the end of March 2020, the industry’s earnings estimates for the current year have been revised 2.6% downward.
Before we present a few stocks that you may want to consider for your portfolio, let’s take a look at the industry’s recent stock market performance and valuation picture.
Industry Outperforms Sector, Lags S&P 500
The Zacks Mortgage & Related Services industry has underperformed the Zacks S&P 500 composite over the past year, though it has outperformed the broader Zacks Finance sector.
The industry has registered growth of 2.6% during this period compared with the S&P 500’s rally of 17.6%. The broader sector has witnessed fall of 6.7%.
One-Year Price Performance
Industry’s Current Valuation
On the basis of price-to-book ratio (P/B), which is commonly used for valuing mortgage loan providers, the industry currently trades at 1.54X compared with 5.99X for the S&P 500.
The industry’s highest P/B of 2.32X and median of 1.77X have been recorded over the past five years.
Price-to-Book Ratio (TTM)
As finance stocks typically have a lower P/B ratio, comparing mortgage loan providers with the S&P 500 may not make sense to many investors. But a comparison of the group’s P/B ratio with that of its broader sector ensures that the group is trading at a decent discount. The Zacks Finance sector’s trailing 12-month P/B of 2.57X for the same period is above the Zacks Mortgage & Related Services industry’s ratio, as the chart shows below.
Price-to-Book Ratio (TTM)
3 Mortgage & Related Services Stocks to Keep a Close Eye on
PennyMac Financial Services, Inc.: This Zacks #1 Ranked (Strong Buy) stock is a specialty financial services firm with a comprehensive mortgage platform and integrated business focused on the origination and servicing of mortgage loans along with management of investments related to the U.S. mortgage market. The company is based in Moorpark, CA.
The company’s move to develop production technology seems to be working well. Also, focus on long-term growth of its direct lending platforms is likely to enhance its prospects.
The stock has seen upward estimate revisions for current-year earnings over the past 30 days by 4.1%. The same for 2021 has been revised 20.8% upward in the same time frame and PennyMac has seen its shares gain 48.8% in the past three months.
LendingTree, Inc.: The company’s online marketplace provides clients access to product offerings from more than 450 active lenders. It operates through Home, Consumer and Insurance segments and is headquartered in Charlotte, NC.
The company’s expansion strategies, including enhancement of its credit services and credit card product offerings, along with strengthening online lending platform through acquisitions, are likely to drive the top line. Further, its commitment to boosting revenues by diversifying non-mortgage product offerings is commendable.
Shares of this Zacks Rank #3 (Hold) company have gained 8.3% over the past three months. The Zacks Consensus Estimate for the 2020 and 2021 earnings has remained unchanged at $1.86 and $4.88, respectively, over the past 30 days.
Price and Consensus: TREE
Ellington Financial LLC: Old Greenwich, CT-based company invests in a diverse array of financial assets. These include residential and commercial mortgage loans & mortgage-backed securities, consumer loans and asset-backed securities supported by consumer loans, collateralized loan obligations, non-mortgage and mortgage-related derivatives, equity investments in loan origination companies, and other strategic investments.
The company remains focused on exploring some potential strategic investments in loan originators. Also, its ability to keep asset acquisition yields high and credit quality decent, despite the uncertain times, is likely to support its financial performance in the quarters ahead.
The Zacks Consensus Estimate for current-year earnings has been revised 4.2% upward to $1.50 over the past two months while the same for 2021 has been stable at $1.39. Shares of this Zacks Rank #2 (Buy) company have rallied 16.7% over the past three months.
Price and Consensus: EFC
Just Released: Zacks’ 7 Best Stocks for Today
Experts extracted 7 stocks from the list of 220 Zacks Rank #1 Strong Buys that has beaten the market more than 2X over with a stunning average gain of +24.3% per year.
These 7 were selected because of their superior potential for immediate breakout.
Image: Bigstock
3 Mortgage & Related Services Stocks to Escape Industry Woes
The Zacks Mortgage & Related Services industry has been witnessing rising forbearances, which is weighing on mortgage servicers as they are required to advance payments with their limited cash availability. Refinancing activities are likely to fall as borrowers would want to dodge the extra burden of extra fees.
Nonetheless, industry players like PennyMac Financial Services, Inc. (PFSI - Free Report) , LendingTree, Inc. (TREE - Free Report) and Ellington Financial LLC (EFC - Free Report) might benefit as the interest rates are likely to stay low for now, thereby keeping demand for mortgages alive. Low interest rates raise the demand for loan originations by making cost of borrowing comparatively less expensive.
Industry Description
The Zacks Mortgage & Related Services industry comprises providers of mortgage-related loans, refinancing and other loan-servicing facilities. Players in the industry are somewhat dependent on the interest rates determined by the Federal Reserve, as prevailing rates influence customers’ decision to apply for a mortgage.
The companies also generate investment income from several financial assets such as residential or commercial mortgage-backed securities and asset-backed securities. Further, the firms make equity investments in mortgage-related entities, among others.
What’s Shaping the Future of Mortgage & Related Services Industry
New Refinance Fee to Partly Offset Benefits From Historically Low Rates: In the September FOMC meeting, the central bank indicated that it might keep interest rates low till 2023, which is expected to continue attracting attention of refinancers. However, Fannie Mae and Freddie Mac have imposed a new 0.5% fee, effective Dec 1, for every refinance loan made by mortgage lenders, which might offset some of the benefits of lower rates. Thus, refinancing activities might decline once these fees are imposed as borrowers will be impacted by the new fee.
High Level of Forbearance Burdens Mortgage Servicers: Mortgage forbearance option provided under the March 2020 Coronavirus Aid, Relief, and Economic Security (CARES) Act allows millions of homeowners with federally-backed mortgages to forgo monthly mortgage payments. In fact, COVID-19-related forbearances peaked in late May with 4.7 million home owners in such plans. Going forward, this will be problematic for mortgage servicers as they are required to make advances of principal and interest payments to investors holding these loans, regardless of coronavirus-related deferments, leading to a liquidity crunch.
Spike in Homebuyers Interest to Continue: Despite the pandemic-related concerns, the housing market is booming. In August, purchase applications increased to the highest level since early 2009. Stay-at-home orders is one of the reasons for steady increase in demand for homes. Also, apprehensions of rise in home prices due to slow supply growth might boost home sales as borrowers would want to offset this downside by taking advantage of the record low interest rates. Thus, rise in demand for originations is expected to continue.
Zacks Industry Rank Reflects Bleak Prospects
The Zacks Mortgage & Related Services industry, which is housed within the broader Zacks Finance sector, currently carries a Zacks Industry Rank #128, which places it at the bottom 49% of more than 250 Zacks industries.
The group’s Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates continued outperformance in the near term. Our research shows that the top 50% of the Zacks-ranked industries outperforms the bottom 50% by a factor of more than 2 to 1.
The industry’s positioning in the bottom 50% of the Zacks-ranked industries is a result of solid earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, it appears that analysts are gradually losing confidence in this group’s earnings growth potential. Since the end of March 2020, the industry’s earnings estimates for the current year have been revised 2.6% downward.
Before we present a few stocks that you may want to consider for your portfolio, let’s take a look at the industry’s recent stock market performance and valuation picture.
Industry Outperforms Sector, Lags S&P 500
The Zacks Mortgage & Related Services industry has underperformed the Zacks S&P 500 composite over the past year, though it has outperformed the broader Zacks Finance sector.
The industry has registered growth of 2.6% during this period compared with the S&P 500’s rally of 17.6%. The broader sector has witnessed fall of 6.7%.
One-Year Price Performance
Industry’s Current Valuation
On the basis of price-to-book ratio (P/B), which is commonly used for valuing mortgage loan providers, the industry currently trades at 1.54X compared with 5.99X for the S&P 500.
The industry’s highest P/B of 2.32X and median of 1.77X have been recorded over the past five years.
Price-to-Book Ratio (TTM)
As finance stocks typically have a lower P/B ratio, comparing mortgage loan providers with the S&P 500 may not make sense to many investors. But a comparison of the group’s P/B ratio with that of its broader sector ensures that the group is trading at a decent discount. The Zacks Finance sector’s trailing 12-month P/B of 2.57X for the same period is above the Zacks Mortgage & Related Services industry’s ratio, as the chart shows below.
Price-to-Book Ratio (TTM)
3 Mortgage & Related Services Stocks to Keep a Close Eye on
PennyMac Financial Services, Inc.: This Zacks #1 Ranked (Strong Buy) stock is a specialty financial services firm with a comprehensive mortgage platform and integrated business focused on the origination and servicing of mortgage loans along with management of investments related to the U.S. mortgage market. The company is based in Moorpark, CA.
The company’s move to develop production technology seems to be working well. Also, focus on long-term growth of its direct lending platforms is likely to enhance its prospects.
The stock has seen upward estimate revisions for current-year earnings over the past 30 days by 4.1%. The same for 2021 has been revised 20.8% upward in the same time frame and PennyMac has seen its shares gain 48.8% in the past three months.
You can see the complete list of today’s Zacks #1 Rank stocks here.
Price and Consensus: PFSI
LendingTree, Inc.: The company’s online marketplace provides clients access to product offerings from more than 450 active lenders. It operates through Home, Consumer and Insurance segments and is headquartered in Charlotte, NC.
The company’s expansion strategies, including enhancement of its credit services and credit card product offerings, along with strengthening online lending platform through acquisitions, are likely to drive the top line. Further, its commitment to boosting revenues by diversifying non-mortgage product offerings is commendable.
Shares of this Zacks Rank #3 (Hold) company have gained 8.3% over the past three months. The Zacks Consensus Estimate for the 2020 and 2021 earnings has remained unchanged at $1.86 and $4.88, respectively, over the past 30 days.
Price and Consensus: TREE
Ellington Financial LLC: Old Greenwich, CT-based company invests in a diverse array of financial assets. These include residential and commercial mortgage loans & mortgage-backed securities, consumer loans and asset-backed securities supported by consumer loans, collateralized loan obligations, non-mortgage and mortgage-related derivatives, equity investments in loan origination companies, and other strategic investments.
The company remains focused on exploring some potential strategic investments in loan originators. Also, its ability to keep asset acquisition yields high and credit quality decent, despite the uncertain times, is likely to support its financial performance in the quarters ahead.
The Zacks Consensus Estimate for current-year earnings has been revised 4.2% upward to $1.50 over the past two months while the same for 2021 has been stable at $1.39. Shares of this Zacks Rank #2 (Buy) company have rallied 16.7% over the past three months.
Price and Consensus: EFC
Just Released: Zacks’ 7 Best Stocks for Today
Experts extracted 7 stocks from the list of 220 Zacks Rank #1 Strong Buys that has beaten the market more than 2X over with a stunning average gain of +24.3% per year.
These 7 were selected because of their superior potential for immediate breakout.
See these time-sensitive tickers now >> >>