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3 Mortgage & Related Services Stocks to Battle Industry Woes
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The Zacks Mortgage & Related Services industry has been under pressure with high amount of forbearance as industry players are required to advance payments with their limited cash availability. Adding to these woes, low housing supply and a sharp increase in home prices are likely to limit origination volumes while tighter margins compound woes for industry players.
Nonetheless, economy reopening is likely to drive loan volumes. This along with portfolio diversity and technological enhancements is anticipated to keep Walker & Dunlop, Inc. (WD - Free Report) , Ellington Financial LLC (EFC - Free Report) and Velocity Financial, Inc. (VEL - Free Report) afloat.
Industry Description
The Zacks Mortgage & Related Services industry comprises providers of mortgage-related loans, refinancing and other loan-servicing facilities. With numerous banks retreating from the mortgage business over the past few years due to higher compliance and capital requirements, non-banks .continue to build capacity in order to gain more market share in the mortgage loans business that accounts for the largest class of U.S. consumer debt. 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 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.
3 Mortgage & Related Services Industry Trends to Watch Out For
Forbearance Woes Continue to Burden Mortgage Servicers: According to data released by Black Knight, the number of mortgages in active COVID-related forbearance plans aggregated 2.06 million as of Jun 22, increasing by 1,000 since the prior week. This indicated 3.9% of mortgaged properties. Also, estimated monthly principal and interest advances on active forbearance plans amounted to $2.5 billion. Moreover, in May, the national delinquency rate rose to 4.73% from 4.66% in April. With this, there are around 1.7 million first-lien mortgages that are seriously delinquent. While forbearance and other government aids allow millions of homeowners with federally-backed mortgages to forgo monthly mortgage payments, this might become problematic for mortgage servicers as they are required to make advances related to principal and interest payments to investors holding these loans, regardless of coronavirus-related deferments, leading to a liquidity crunch.
Originations to Fall: While 2020 was a banner year for mortgage originators with robust purchase and refinance originations, this wave is likely to have normalized in the subsequent quarters. Despite strong demand, homebuyers are being held back due to low supply and a sharp increase in home prices. Moreover, mortgage rates have been increasing in 2021 and this trend is expected to continue in 2022 as well. These factors are likely to lead to lower purchase volumes. Also, with a rise in mortgage rates, incentives for borrowers to refinance their loans are likely to fade. This is likely to impact portfolio growth and operations for industry players.
Competition Picking Up: According to a forecast by Mortgage Bankers Association, U.S. single-family mortgage debt outstanding is expected to increase year over year in the upcoming years. This is anticipated to be primarily driven by house price appreciation, rebound in the economy as well as continued GDP and employment growth. While this typically results in the growth of single-family mortgage portfolio for industry players, the competitive landscape of the mortgage services industry is likely to be a deterrent. In fact, numerous companies have hinted at significant declines in gain on sale margins across the space. With tighter margins, many originators might struggle to remain profitable in the upcoming period, especially if rates continue to trend higher.
Zacks Industry Rank Reflects Dismal Prospects
The Zacks Mortgage & Related Services industry, which is housed within the broader Zacks Finance sector, currently carries a Zacks Industry Rank #232, which places it in the bottom 8% 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 bleak prospects 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 negative 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 June 2020, the industry’s earnings estimates for the current year have been revised 8.3% 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 Underperforms Sector and S&P 500
The Zacks Mortgage & Related Services industry has underperformed the broader Zacks Finance sector and Zacks S&P 500 composite over the past year.
The industry has declined 5.8% during this period against the broader sector’s rally of 45.9%. The S&P 500 composite has witnessed growth of 40.7%.
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 2.13X compared with the S&P 500’s 7.14X.
Over the last five years, the industry has traded as high as 2.42X, as low as 0.79X, and at the median of 1.81X, as the chart below shows.
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 3.32X 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
Ellington Financial LLC: This 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.
This diversified model is a flywheel for the company, with its credit portfolio offering higher returns while Agency portfolio providing liquidity to be nimble in challenging times. Moreover, the vaccine-driven recovery should boost Ellington Financial’s small balance commercial portfolio with economy reopening underway.
The Zacks Consensus Estimate for current-year earnings has been revised slightly upward to $1.77 over the past month. This indicates year-over-year growth of 8.6%. Moreover, 2022 earnings are expected to be up 8.2% year over year. Shares of this Zacks Rank #2 (Buy) company have surged 64.9% over the past year.
Velocity Financial, Inc.: Based in Westlake Village, CA, Velocity Financial is a vertically-integrated real estate finance firm that offers and manages investor loans for 1-4 unit residential rental and small commercial properties. The company originates loans across the United States through its extensive network of independent mortgage brokers.
Considering the increased economic activity supported by market normalization and progress with reopening, demand for investor properties is anticipated to remain robust. This is expected to drive investor loan demand. Given the company’s expanded liquidity capacity, it is well poised to capitalize on growth in the addressable market and thereby fund loan volume in the upcoming period.
The Zacks Consensus Estimate for current-year earnings has been revised slightly upward to 71 cents over the past two months. This implies a whopping year-over-year growth of 145.8%. Moreover, 2022 earnings are expected to be up 38% year over year. Shares of this Zacks Rank #2 company have surged 226.6% over the past year.
Price and Consensus: VEL
Walker & Dunlop, Inc.: This Bethesda, MD-based company is the largest U.S. provider of capital to the multifamily industry and the fourth largest lender for all commercial real estate that includes industrial, office, retail, and hospitality. The company’s expansion strategies, and strengthening of online lending platform through acquisitions are likely to drive the top line. Further, its commitment to capture new consumers on the back of heavy investments in AI and machine-learning capabilities is commendable.
Shares of this Zacks Rank #3 (Hold) company have gained a whopping 114.5% over the past year. The Zacks Consensus Estimate for the 2021 and 2022 earnings indicates year-over-year growth of 10.5% and 5.3%, respectively. Also, the stock has delivered a decent earnings surprise of 50.7%, on average, in the trailing four quarters.
Price and Consensus: WD
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Image: Bigstock
3 Mortgage & Related Services Stocks to Battle Industry Woes
The Zacks Mortgage & Related Services industry has been under pressure with high amount of forbearance as industry players are required to advance payments with their limited cash availability. Adding to these woes, low housing supply and a sharp increase in home prices are likely to limit origination volumes while tighter margins compound woes for industry players.
Nonetheless, economy reopening is likely to drive loan volumes. This along with portfolio diversity and technological enhancements is anticipated to keep Walker & Dunlop, Inc. (WD - Free Report) , Ellington Financial LLC (EFC - Free Report) and Velocity Financial, Inc. (VEL - Free Report) afloat.
Industry Description
The Zacks Mortgage & Related Services industry comprises providers of mortgage-related loans, refinancing and other loan-servicing facilities. With numerous banks retreating from the mortgage business over the past few years due to higher compliance and capital requirements, non-banks .continue to build capacity in order to gain more market share in the mortgage loans business that accounts for the largest class of U.S. consumer debt. 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 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.
3 Mortgage & Related Services Industry Trends to Watch Out For
Forbearance Woes Continue to Burden Mortgage Servicers: According to data released by Black Knight, the number of mortgages in active COVID-related forbearance plans aggregated 2.06 million as of Jun 22, increasing by 1,000 since the prior week. This indicated 3.9% of mortgaged properties. Also, estimated monthly principal and interest advances on active forbearance plans amounted to $2.5 billion. Moreover, in May, the national delinquency rate rose to 4.73% from 4.66% in April. With this, there are around 1.7 million first-lien mortgages that are seriously delinquent. While forbearance and other government aids allow millions of homeowners with federally-backed mortgages to forgo monthly mortgage payments, this might become problematic for mortgage servicers as they are required to make advances related to principal and interest payments to investors holding these loans, regardless of coronavirus-related deferments, leading to a liquidity crunch.
Originations to Fall: While 2020 was a banner year for mortgage originators with robust purchase and refinance originations, this wave is likely to have normalized in the subsequent quarters. Despite strong demand, homebuyers are being held back due to low supply and a sharp increase in home prices. Moreover, mortgage rates have been increasing in 2021 and this trend is expected to continue in 2022 as well. These factors are likely to lead to lower purchase volumes. Also, with a rise in mortgage rates, incentives for borrowers to refinance their loans are likely to fade. This is likely to impact portfolio growth and operations for industry players.
Competition Picking Up: According to a forecast by Mortgage Bankers Association, U.S. single-family mortgage debt outstanding is expected to increase year over year in the upcoming years. This is anticipated to be primarily driven by house price appreciation, rebound in the economy as well as continued GDP and employment growth. While this typically results in the growth of single-family mortgage portfolio for industry players, the competitive landscape of the mortgage services industry is likely to be a deterrent. In fact, numerous companies have hinted at significant declines in gain on sale margins across the space. With tighter margins, many originators might struggle to remain profitable in the upcoming period, especially if rates continue to trend higher.
Zacks Industry Rank Reflects Dismal Prospects
The Zacks Mortgage & Related Services industry, which is housed within the broader Zacks Finance sector, currently carries a Zacks Industry Rank #232, which places it in the bottom 8% 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 bleak prospects 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 negative 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 June 2020, the industry’s earnings estimates for the current year have been revised 8.3% 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 Underperforms Sector and S&P 500
The Zacks Mortgage & Related Services industry has underperformed the broader Zacks Finance sector and Zacks S&P 500 composite over the past year.
The industry has declined 5.8% during this period against the broader sector’s rally of 45.9%. The S&P 500 composite has witnessed growth of 40.7%.
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 2.13X compared with the S&P 500’s 7.14X.
Over the last five years, the industry has traded as high as 2.42X, as low as 0.79X, and at the median of 1.81X, as the chart below shows.
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 3.32X 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
Ellington Financial LLC: This 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.
This diversified model is a flywheel for the company, with its credit portfolio offering higher returns while Agency portfolio providing liquidity to be nimble in challenging times. Moreover, the vaccine-driven recovery should boost Ellington Financial’s small balance commercial portfolio with economy reopening underway.
The Zacks Consensus Estimate for current-year earnings has been revised slightly upward to $1.77 over the past month. This indicates year-over-year growth of 8.6%. Moreover, 2022 earnings are expected to be up 8.2% year over year. Shares of this Zacks Rank #2 (Buy) company have surged 64.9% over the past year.
You can see the complete list of today’s Zacks #1 (Strong Buy) Rank stocks here.
Price and Consensus: EFC
Velocity Financial, Inc.: Based in Westlake Village, CA, Velocity Financial is a vertically-integrated real estate finance firm that offers and manages investor loans for 1-4 unit residential rental and small commercial properties. The company originates loans across the United States through its extensive network of independent mortgage brokers.
Considering the increased economic activity supported by market normalization and progress with reopening, demand for investor properties is anticipated to remain robust. This is expected to drive investor loan demand. Given the company’s expanded liquidity capacity, it is well poised to capitalize on growth in the addressable market and thereby fund loan volume in the upcoming period.
The Zacks Consensus Estimate for current-year earnings has been revised slightly upward to 71 cents over the past two months. This implies a whopping year-over-year growth of 145.8%. Moreover, 2022 earnings are expected to be up 38% year over year. Shares of this Zacks Rank #2 company have surged 226.6% over the past year.
Price and Consensus: VEL
Walker & Dunlop, Inc.: This Bethesda, MD-based company is the largest U.S. provider of capital to the multifamily industry and the fourth largest lender for all commercial real estate that includes industrial, office, retail, and hospitality. The company’s expansion strategies, and strengthening of online lending platform through acquisitions are likely to drive the top line. Further, its commitment to capture new consumers on the back of heavy investments in AI and machine-learning capabilities is commendable.
Shares of this Zacks Rank #3 (Hold) company have gained a whopping 114.5% over the past year. The Zacks Consensus Estimate for the 2021 and 2022 earnings indicates year-over-year growth of 10.5% and 5.3%, respectively. Also, the stock has delivered a decent earnings surprise of 50.7%, on average, in the trailing four quarters.
Price and Consensus: WD
Bitcoin, Like the Internet Itself, Could Change Everything
Blockchain and cryptocurrency has sparked one of the most exciting discussion topics of a generation. Some call it the “Internet of Money” and predict it could change the way money works forever. If true, it could do to banks what Netflix did to Blockbuster and Amazon did to Sears. Experts agree we’re still in the early stages of this technology, and as it grows, it will create several investing opportunities.
Zacks’ has just revealed 3 companies that can help investors capitalize on the explosive profit potential of Bitcoin and the other cryptocurrencies with significantly less volatility than buying them directly.
See 3 crypto-related stocks now >>