Home Business 3 Mortgage & Related Services Stocks to Watch Amid Industry Woes – October 3, 2023

3 Mortgage & Related Services Stocks to Watch Amid Industry Woes – October 3, 2023

by Joshua Garcia

The Zacks Mortgage & Related Services industry has faced significant challenges in recent times due to a cooling housing market, fears of a looming recession, and rising mortgage rates. These factors have led to tightening in the purchase market and declining refinancing volumes, which have cast a shadow over the industry’s recovery. Housing price appreciation and affordability issues are also posing near-term challenges.

In order to navigate these headwinds and improve operational efficiencies, mortgage service providers have been resorting to headcount reduction and technology adoption. Diversified business operations and favorable scenarios for the servicing segment are expected to help industry players overcome the difficult market conditions.

The Zacks Mortgage & Related Services industry consists of providers of mortgage-related loans, refinancing, and other loan-servicing facilities. Many banks have been retreating from the mortgage business due to higher compliance and capital requirements, allowing non-banks to gain market share. The industry is highly dependent on interest rates determined by the Federal Reserve, as these rates influence customers’ decisions to apply for mortgages. The companies in this industry also generate investment income from various financial assets such as mortgage-backed securities.

There are three key trends to watch in the mortgage industry. The first is the impact of high mortgage rates on homebuyers. The hawkish monetary policy has led to a series of interest rate hikes, resulting in a climb in mortgage rates. High rates, combined with low home inventory, have led to affordability issues and fewer potential home buyers. This has negatively affected mortgage demand, both for purchases and refinancing.

The second trend is the industry’s need to reduce capacity as a result of slower market conditions. The mortgage industry is labor-intensive, and servicing operations are a significant cost driver. As mortgage rates continue to rise, companies will likely need to reduce excess headcount capacity and adopt more automation technology to improve efficiency and reduce costs.

The third trend is the increasing reliance on the servicing segment for profitability. With declines in gain-on-sale margins and lower loan origination volume, industry players are turning to the servicing segment for growth. Slow prepayment speed is expected to provide tailwinds to mortgage service rights (MSR), which can drive value appreciation and offer attractive yields. The U.S. single-family mortgage debt outstanding is expected to reach $13.7 trillion by the end of 2023, presenting a significant growth opportunity for servicing portfolios.

Despite these trends, the Zacks Mortgage & Related Services industry currently carries a Zacks Industry Rank #164, indicating bleak near-term prospects. The industry’s earnings outlook has declined, with analysts losing confidence in its growth potential.

However, despite the challenging industry outlook, there are some stocks to watch. Federal Agricultural Mortgage (AGM), also known as Farmer Mac, is expected to benefit from strong pipelines and volumes in the coming years due to the rising agricultural mortgage market and growth in renewable energy. Velocity Financial (VEL), a vertically integrated real estate finance firm, has seen strong portfolio performance and origination volume levels, which are expected to continue in the near term. LendingTree, Inc. (TREE), the parent company of LendingTree, LLC, has been enhancing its credit services and online lending platform through acquisitions.

In conclusion, the Zacks Mortgage & Related Services industry is facing significant challenges due to a cooling market, rising rates, and affordability issues. However, industry players that adopt technology, reduce capacity, and focus on the servicing segment could weather the storm and find opportunities for growth. Investors should keep an eye on stocks like AGM, VEL, and TREE for potential investment opportunities in the industry.

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