3 Mortgage & Related Services Stocks to Buy on Industry Recovery
The Zacks Mortgage & Related Services industry is poised to benefit from expectations of interest rate cuts, which is anticipated to propel mortgage production activity. Continued pullback of banks from mortgage lending due to new capital requirements for mortgage-related assets and bright prospects of the reverse mortgage industry is likely to aid gains-on-sale (GOS) margins.
As the industry recovers from a high interest-rate scenario, it might be wise to focus on mortgage service providers like PennyMac Financial Services PFSI, Federal Agricultural Mortgage AGM and Ocwen Financial OCN.
Industry Description
The Zacks Mortgage & Related Services industry comprises providers of mortgage-related loans, refinancing and other loan-servicing facilities. Numerous banks have been retreating from the mortgage business due to higher compliance and capital requirements. This allowed non-banks to increase their capacity to gain market share in the mortgage loans business, which accounts for the largest class of U.S. consumer debt. Players in the industry are dependent on the interest rates determined by the Federal Reserve, as prevailing rates influence customers' decisions to apply for mortgages. The companies also generate investment income from several financial assets, such as residential or commercial mortgage-backed securities and asset-backed securities. The firms make equity investments in mortgage-related entities, among others.
3 Mortgage & Related Services Industry Trends to Watch
Anticipated Rate Cuts to Propel Originations: The Fed has indicated rate cuts this year once it sees evidence of inflation falling sustainably back to its 2% target. Over time, a rate reduction would likely lead to lower mortgage rates, thereby propelling mortgage transaction volumes. Notably, MBA Mortgage Finance forecasts mortgage originations to increase 22.1% to $2 trillion in 2024, supported by growth in both purchase and refinance volumes. This is likely to drive mortgage production income for industry players and augers well for top-line growth.
GOS Margins to Recover: Increased regulatory scrutiny and a higher possibility for stringent capital requirements for the banking sector have resulted in certain banks reducing their footprint in mortgage products and business lines. This has provided an attractive opportunity for industry players to capture further market share in the mortgage space and has reduced competition in certain channels. This retrenchment from banks is also expected to improve jumbo loan volumes and reduce industry supply. Moreover, the aging U.S. demographics and a desire to age in the same place will continue to drive consumer adoption of reverse mortgage production, making a case for attractive long-term growth prospects of the industry. These factors are likely to drive GOS margins toward long-term averages.
Servicing Segment to Offer Support: With companies having recorded declines in GOS margins, reliance on the service segment for profitability has increased. In a high-rate environment, the servicing segment offers a natural operational hedge to the origination business. Delinquency rates across servicing portfolios, which influence the cost-to-service assumption, remain near all-time low levels. This is expected to limit servicing operating expenses. Also, with mortgage service rights valuation declines, companies are expected to grow their servicing books on the back of bulk purchase strategies and organically originating volume in excess of run-off. With the U.S. single-family mortgage debt outstanding to reach $14.3 trillion by 2024 end, there are massive growth opportunities in the servicing portfolios.
Zacks Industry Rank Reflects Bright Prospects
The Zacks Mortgage & Related Services industry, housed within the broader Zacks Finance sector, currently carries a Zacks Industry Rank #51, which places it in the top 20% 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 bright near-term prospects. Our research shows that the top 50% of the Zacks-ranked industries outperform 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 a positive earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, it appears that analysts are gaining confidence in this group’s earnings growth potential. The industry’s bottom-line estimate has improved 4.5% from that reported in December 2023.
Before we present a few stocks that you may want to consider for your portfolio, let’s 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 the S&P 500 composite over the past year.
The industry has declined 23.7% in this period against the broader sector's growth of 24.7% and the S&P 500 composite’s rise of 30%.
One-Year Price Performance
Image Source: Zacks Investment Research
Industry's Current Valuation
On the basis of the price-to-book ratio (P/B), which is commonly used for valuing mortgage and related services companies, the industry currently trades at 5.01X compared with the S&P 500's 6.35X.
Over the last five years, the industry has traded as high as 5.63X, as low as 0.78X and at the median of 1.73X, as the chart below shows.
Price-to-Book Ratio (TTM)
Image Source: Zacks Investment Research
As finance stocks typically have a lower P/B ratio, comparing mortgage and related services companies with the S&P 500 may not make sense to many investors. However, comparing the group's P/B ratio with that of its broader sector ensures that the group is trading at a premium. The Zacks Finance sector's trailing 12-month P/B of 3.50X for the same period is below the Zacks Mortgage & Related Services industry's ratio, as the chart shows below.
Price-to-Book Ratio (TTM)
Image Source: Zacks Investment Research
3 Mortgage & Related Services Stocks to Buy
Federal Agricultural Mortgage: The company, also known as Farmer Mac, is a federally chartered corporation that combines private capital and public sponsorship to create a secondary market for various loans made to rural borrowers.
Farmer Mac’s business lines include agriculture finance (consisting of farm and ranch, and corporate AgFinance), rural infrastructure finance (consisting of rural utilities and renewable energy) and treasury (funding and investment).
The company is expected to enjoy strong pipelines and volumes in the upcoming years, given the expected rise in agricultural productivity to meet the global demand, a growing U.S. agriculture mortgage market and a significant scope of improvement in renewable electricity capacity. Moreover, the expanding corporate AgFinance and renewable energy business lines carry higher margins than other operations.
The Zacks Consensus Estimate for AGM’s 2023 and 2024 earnings has been revised 3.3% upward over the past month. The Zacks Rank #2 (Buy) company’s earnings for the ongoing year and 2025 are expected to rise 8.6% and 9.4% year over year, respectively. Revenues for 2024 and 2025 are expected to grow 8.8% and 9%, respectively.
You can see the complete list of today's Zacks #1 Rank (Strong Buy) stocks here.
Price and Consensus: AGM
Image Source: Zacks Investment Research
Ocwen Financial: The company is a pre-eminent non-bank mortgage servicer and originator that provides solutions through its primary brands — PHH Mortgage and Liberty Reverse Mortgage. Its balanced and diversified business model — diversified origination sources and servicing business — provides a competitive advantage against peers.
Growth in the company’s capital-light subservicing portfolio will drive its top line in the upcoming period. Ocwen Financial has been reducing expenses and taking right-sizing actions. Favorable demographics and home price appreciation are expected to drive continued growth in the reverse mortgage market. Also, strategic partnerships will offer revenue stability.
The Zacks Consensus Estimate for OCN is pegged at $6.58 and $7.83 for 2024 and 2025 earnings. Earnings estimates have been revised marginally upward over the past month. Also, for the ongoing and the next years, its revenues are expected to increase 0.8% and 4.5%, respectively. The company carries a Zacks Rank of 2 at present.
Price and Consensus: OCN
Image Source: Zacks Investment Research
PennyMac Financial: The company is a specialty financial services firm with a comprehensive mortgage platform and integrated business focused on the origination and servicing of mortgage loans, along with the management of investments related to the U.S. mortgage market.
PFSI’s production technology seems to be working well. The company’s mortgage production business will likely be driven by low interest rates. Its growing servicing portfolio is another positive. Its efficient and low-cost operating platform, and strong capital levels are other tailwinds.
The Zacks Consensus Estimate for PFSI’s 2024 and 2025 earnings has been unrevised over the past month. For the ongoing year, earnings are expected to increase 94.3% year over year on a 37.4% increase in revenues. Also, in 2025, earnings are projected to grow 21.5% on 18.9% revenue growth. The company carries a Zacks Rank of 2 at present.
Price and Consensus: PFSI
Image Source: Zacks Investment Research
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PennyMac Financial Services, Inc. (PFSI) : Free Stock Analysis Report
Ocwen Financial Corporation (OCN) : Free Stock Analysis Report
Federal Agricultural Mortgage Corporation (AGM) : Free Stock Analysis Report
