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Mortgage & Related Services Outlook: Growth to Continue

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The Zacks Mortgage & Related Services industry consists of firms that provide mortgage-related loans, refinancing and other loan servicing facilities. The industry is somewhat dependent on the interest rates determined by the Federal Reserve, as prevailing rates influence customers’ decision to undertake mortgage.

Apart from the above-mentioned services, the companies generate investment income by investing in several financial assets such as residential or commercial mortgage-backed securities, asset-backed securities, equity investments in mortgage-related entities and other strategic investments.

Here are the three major themes in the industry:

  • Rising interest rate environment is a major hurdle for mortgage lenders, as higher rates make cost of borrowing expensive and reduce demand for mortgage originations or refinancing. While the Fed has planned to be less aggressive with rate hikes in 2019, no near-term respite is expected for lenders.
     
  • Per the latest forecast by Freddie Mac, supply of housing in the United States is not enough to meet demand, mainly due to rising costs of development and shortage of skilled labor. However, gradual pick up in supply is expected in 2019, which might lead to higher mortgage loan originations eventually.
     
  • In May 2018, regulations for financial institutions were eased to some extent. Mortgage lenders too were given relief from strict underwriting requirements. Less stringent requirements are expected to qualify prospective homebuyers with less favorable credit score for mortgage loans, helping lenders to originate more loans.
     

Zacks Industry Rank Reflects Bright Prospects

The Zacks Mortgage & Related Services industry, which is housed within the broader Zacks Finance sector, currently carries a Zacks Industry Rank #80, which places it at the top 32% 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 top 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 gaining confidence in this group’s earnings growth potential. In the past year, the industry’s earnings estimates for the current year have been revised upward by 95.6%.

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 two years, though it has performed better than the broader Zacks Finance sector.

The industry has registered growth of 4.3% during this period compared with the S&P 500’s rally of 5.2%. Meanwhile, the broader sector has declined roughly 5.2%.

Two-Year Price Performance

Industry’s Valuation

On the basis of price-to-book ratio (P/BV), which is commonly used for valuing mortgage loan providers, the industry currently trades at 1.76X versus 3.34X for the S&P 500.

This compares to the industry’s highest P/BV of 2.96X and median of 1.87X over the past five years.

Price-to-Book Ratio (TTM)

As finance stocks typically have a lower P/BV 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/BV 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/BV of 2.18X for the same period is way above the Zacks Mortgage & Related Services industry’s ratio, as the chart below shows.

Price-to-Book Ratio (TTM)

Bottom Line

Though current macro headwinds such as rising interest rates and uncertainty related to global economic growth are likely to linger in the near term, mortgage companies might benefit from higher loan originations in the coming quarters.

Also, the companies in this space have been venturing out for other sources of income.

We are presenting one stock with a Zacks Rank #1 (Strong Buy) and two with a Zacks Rank #2 (Buy) that investors may consider betting on.

(You can see the complete list of today’s Zacks #1 Rank stocks here.)

LendingTree (TREE - Free Report) : The Charlotte, NC-based bank has rallied 115.5% over the past two years. The consensus EPS estimate for the current year has been revised 4.4% upward over the last 60 days. The stock currently sports Zacks Rank #1.

Price and Consensus: TREE

Essent Group Ltd. (ESNT - Free Report) : The stock of this Hamilton, Bermuda-based lender has gained 3% over the past two years. The Zacks Consensus Estimate for the current-year EPS has been revised 1.5% upward over the last 60 days. The stock currently carries a Zacks Rank #2.

Price and Consensus: ESNT

TPG Specialty Lending (TSLX - Free Report) : The consensus EPS estimate for this San Francisco, CA-based specialty finance company has moved 2.9% higher for the current year, over the last 60 days. This Zacks Rank #2 stock has rallied 2.8% over the past 24 months.

Price and Consensus: TSLX

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TPG Specialty Lending, Inc. (TSLX) - free report >>

LendingTree, Inc. (TREE) - free report >>

Essent Group Ltd. (ESNT) - free report >>