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Mortgage & Related Services Outlook: Near-Term Prospects Dull

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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.

Here are the industry’s three major themes:

  • The Federal Reserve cut interest rates to near zero in March, with an aim of supporting the U.S. economy amid the coronavirus outbreak-induced slowdown. The move provided relief to mortgage lenders as a decline in interest rates increases the demand for loan originations or refinancing by making cost of borrowing comparatively less expensive. Also, indications that the central bank might keep interest rates low this year are expected to attract homebuyers’ interest.
     
  • With rising unemployment rates and the need to maintain social distancing, home sales are expected to remain low in the near term.
     
  • The new policy announced by the Federal Housing Finance Agency comes in favor of borrowers with forbearance plans, as it reduced the eligibility to refinance or buy a new home three months after forbearance ends (down from 12 months previously) and three on-time payments. However, the coronavirus outbreak-induced mortgage forbearances might keep mortgage activities subdued in the near term.

Zacks Industry Rank Reflects Dim Prospects

The Zacks Mortgage & Related Services industry, which is housed within the broader Zacks Finance sector, currently carries a Zacks Industry Rank #136, which places it at the bottom 46% 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 weak 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. Over the past three months, the industry’s earnings estimates for the current year have been revised 9.5% 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 Lags S&P 500 and Sector

The Zacks Mortgage & Related Services industry has underperformed the Zacks S&P 500 composite and the broader Zacks Finance sector over the past year.

The industry has registered a fall of 20.9% during this period against the S&P 500’s growth of 10%. The broader sector has witnessed a fall of 12.5%.

One-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 1.48X compared with 4.21X for the S&P 500.

This compares to the industry’s highest P/BV of 2.76X and median of 2.03X 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 2.31X for the same period is above that for the Zacks Mortgage & Related Services industry, as the chart shows below.

Price-to-Book Ratio (TTM)

 

 


Bottom Line

Although companies in the Mortgage & Related Services industry are expected to benefit from relatively lower interest rates, macroeconomic uncertainties and operational headwinds on account of the COVID-19 outbreak might hamper the performance of the industry players.

We are presenting two stocks with a Zacks Rank #2 (Buy) that investors may consider betting on.

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

PennyMac Financial Services, Inc. (PFSI - Free Report) : The consensus estimate for current-year earnings for this Moorpark, CA-based financial service provider has moved 29.1% higher over the past 60 days. The company has rallied 65.4% over the past 12 months.

Price and Consensus: PFSI

 

 

Fannie Mae (FNMA - Free Report) : The consensus estimate for current-year earnings for this Washington D.C.-based government-sponsored enterprise has moved considerably higher over the past 30 days. The company has lost 28.6% over the past 12 months.

Price and Consensus: FNMA

 

 

Furthermore, investors may hold on to the following stock, as it has been seeing positive earnings estimate revisions and has solid long-term growth potential. The stock currently carries a Zacks Rank #3 (Hold).

Orchid Island Capital, Inc. (ORC - Free Report) : The stock of this Vero Beach, FL-based lender has lost more than 60% over the past year. The Zacks Consensus Estimate for its current-year earnings has remained stable over the past 30 days.

Price and Consensus: ORC

 

 

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PennyMac Financial Services, Inc. (PFSI) - free report >>

Orchid Island Capital, Inc. (ORC) - free report >>

Fannie Mae (FNMA) - free report >>