Three Prospects in the Mortgage and Related Services Industry

sachs Mortgage and related services The industry continues to struggle with the weak mortgage environment. Rising mortgage rates continue to affect mortgage volumes, especially refinancing. Rising house prices and increasing competition are short-term headwinds.

Nonetheless, robust service opportunities and diverse business models will save the bounty for industry players. UWM Holding Co., Ltd. UWMC, Pennymac Financial Services, Inc. PFSI and Sixth Street Specialty Lending, Inc. TSLX.

industry description

The Zacks Mortgage & Related Services industry consists of providers of mortgage-related loans, refinancing and other loan service facilities. Rising compliance and capital requirements are driving many banks out of the mortgage business. This provided nonbanks with an opportunity to increase their ability to capture market share in the mortgage loan business, which represents the largest class of consumer debt in the United States. Industry players rely to some extent on interest rates determined by the Federal Reserve. This is because prevailing interest rates influence a customer’s decision to apply for a mortgage or not. These companies also generate investment income from multiple financial assets, including residential or commercial mortgage-backed and asset-backed securities. In addition, companies make equity investments in mortgage-related entities, among others.

3 Mortgage and Related Services Industry Trends to Watch

Continued drop in original volume: The Federal Reserve has tackled high inflation levels through rate hikes. This has pushed mortgage rates to their highest level in more than a decade, creating a major affordability challenge. These factors may constrain purchase and refinancing origination volumes in future periods. In fact, the Mortgage Bankers Association (MBA) predicts that mortgage originations will fall by 50% in 2022, and the trend will continue through 2023, albeit at a slower pace. Also, 30-year fixed-rate mortgage rates are expected to end at 6.7% in 2022, up from 3.1% in 2021. These are expected to hamper composition volume and revenue growth for industry participants with production operations.

Tournament pickup: according to weather According to the MBA, US single-family home mortgage debt is expected to trend upwards over the next few years. This is expected to be primarily due to higher housing prices. This typically translates into growth in the single-family mortgage portfolio for industry players, although total applications have declined. Therefore, the competitive environment in the mortgage industry is likely to heat up and participants are expected to resort to lower prices. This can significantly reduce the sales margin for the space as a whole. With margins shrinking, many originators could struggle to sustain profits in the next period, especially if interest rates continue to trend upwards.

Service segment performance to improve: With gain-on-sale margins dropping significantly and loan origination volumes declining, industry players are likely to rely more on the servicing segment for profitability. In an environment of rising interest rates, the servicing segment provides a natural operational hedge for the origination business. Prepayment speeds are expected to be slow due to the tailwind for Mortgage Servicing Rights (MSRs). Mortgage originator profitability declined as primary-secondary mortgage spreads tightened. This motivates MSR sales to generate cash returns. MSR investments are therefore poised to deliver significant value appreciation and offer attractive unleveraged yields. Such an increase in MSR could push up the book value.

Industry players relying on capacity reduction: The mortgage industry remains labor-intensive despite efforts to increase automation and reduce costs. Employment trends within the industry are therefore an important indicator of origination trends. Assuming mortgage rates continue to rise, homeowners will be less enthusiastic about buying or refinancing. This may force companies to cut excess headcount as they readjust to the market downturn. A greater focus on industry consolidation and cost-cutting plans is expected to ease the pressure on earnings.

Zacks industry rankings reflect positive outlook

The Zachs mortgage and related services industry is housed within the broader Zachs finance The sector currently holds the Zacks Industry Rank #98, placing it in the top 39% of over 250 Zacks industries.

of the group Sachs industry rank, which is essentially the average of the Zacks ranks of all member stocks, shows a promising short-term outlook. Our research shows that the top 50% of industries ranked by Zacks are more than twice as good as him than the bottom 50%. Positioning the industry in the top 50% of Zacks-ranked industries is a result of positive revenue. Outlook of constituent companies.

Industry underperforms sector and S&P 500

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

The industry as a whole fell 39.5% over the period, compared with a 16.9% sector decline last year and a 21.2% decline for the S&P 500 Composite Index.

1 year price performance

Image Source: Sachs Investment Research

Industry Current Rating

Based on the price-to-book ratio (P/B) commonly used to value mortgage loan providers, the industry is currently trading at 1.35x versus 5.27x for the S&P 500.

As the chart below shows, over the last five years the industry has traded at a high of 2.53x, a low of 0.78x and a median of 1.79x.

Price to Book Ratio (TTM)

Zacks Investment Research
Image Source: Sachs Investment Research

Comparing mortgage companies to the S&P 500 may not make sense to many investors, as financial stocks generally have low P/B ratios. But comparing his P/B ratio for the group to his P/B ratio for the broader sector ensures that the group is trading at a decent discount. As the chart below shows, the Zacks Finance sector’s 12-month P/B of 3.20X over the same period outperformed the Zacks Mortgage & Related Services industry.

Price to Book Ratio (TTM)

Zacks Investment Research
Image Source: Sachs Investment Research

3 Purchase of Mortgage and Related Services Stocks

UWM Holding: The company is the largest wholesale mortgage lender for eight consecutive years and the largest buying lender in the country. The company leverages its own proprietary licensed technology platform, best-in-class service, and focused partnerships with the independent mortgage broker ecosystem.

The notable influx of retail loan officers into wholesale over the past year is consistent with their focus on increasing market share in the broker channel. This is expected to boost growth momentum amid a slowdown in the overall mortgage market.

UWMC expects fourth quarter 2022 originations of $19 billion to $26 billion, with an origination margin of 40 basis points to 70 basis points. Contrary to its peers, the company has no intention of laying off employees, and reassured them that they will resort to controlling expenses through technological efficiency.

The Zacks Consensus estimates for earnings in 2022 and 2023 are unchanged from last month. Ongoing and next year earnings are expected to decline by 31.5% and 3.86% respectively. The company currently has Zacks Rank 2 (Buy).

you can see See the full list of today’s #1 (strong buy) Zachs stocks here.

Price: UWMC

Zacks Investment Research
Image Source: Sachs Investment Research

Pennymac Finance: This Zacks Rank 2 stock is a specialist finance company with a comprehensive mortgage platform and integrated business focused on mortgage origination and servicing, in addition to managing investments related to the U.S. mortgage market. Service company. The company is based in Moorpark, California.

The company’s production technology seems to be working well. The company’s mortgage producing business may be impacted by industry headwinds, but its growing service portfolio may provide support. Slower prepayment speeds reduce amortization expense and increase PFSI’s pre-tax profit. Its efficient, low-cost operating platform and strong capital levels will help it navigate today’s volatile waters.

Stocks have revised up their earnings this year by 17.5% in the last 30 days. Estimates for 2023 were revised upward by 6.4% for the same time frame.

Price: PFSI

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Image Source: Sachs Investment Research

Sixth Street Specialty Lending, Inc.: This specialist finance company focuses on lending to medium-sized businesses. TSLX generates its current income through direct origination of senior secured and mezzanine loans and investments in corporate and equity securities.

The company’s senior floating-rate focused portfolio looks attractive as macro headwinds persist. In fact, 90.4% of his portfolio consists of first lien debt investments and 98.9% are floating rate debt investments. The top line is expected to rise as the interest rate environment rises.

Buoyed by strong liquidity, the company announced a 7% increase to its quarterly dividend in November. The dividend increase underscores the company’s confidence in its core profitability despite the unfavorable industry environment.

Zacks’ second-ranked company is expected to see a 9.7% decline in full-year revenue, but a 12.7% improvement in 2023.

Price: TSLX

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Image Source: Sachs Investment Research

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The views and opinions expressed herein are those of the authors and do not necessarily reflect those of Nasdaq, Inc.

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