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2 Stocks to Buy in the Thriving Mortgage & Related Services Industry
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The Zacks Mortgage & Related Services industry is in the recovery phase with declining mortgage rates. The Federal Reserve's indication of a rate cut beginning in September could indirectly put even more downward pressure on mortgage rates, benefiting industry players. Improving trends in purchase originations and refinancing volumes will also act as tailwinds.
With rising competition, mortgage servicers continue to be under pressure as they are required to resort to price-cutting, leading to reduction in sales margin. Nonetheless, with the interest rates coming down, the demand for mortgages will rise, thereby aiding industry players like Velocity Financial Inc. (VEL - Free Report) and Onity Group Inc. (ONIT - Free Report) .
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 Out For
Declining Rates & Remote Working to Aid Originations: The housing market is witnessing a rising trend as the U.S. weekly average 30-year fixed mortgage rate had its biggest one-week decline of the year, falling to the lowest level in 15 months. The average rate on the 30 year fixed-rate mortgage dropped to 6.47% per the latest August data from 6.73% a week ago. A year ago, the metric averaged 6.96%.
Moreover, flexibility to work remotely and apprehensions of a rise in home prices due to slow supply growth might accelerate home sales as borrowers would want to offset this downside by taking advantage of declining rates. Thus, the demand for mortgage loans is likely to improve.
There are indications that the housing market is shifting back toward favoring buyers over sellers. With this turnaround, mortgage originations will likely witness a positive trend. This will reduce operational and financial challenges for originators and increase the gain on sale margin and new investment activity.
Refinancing Activities Witnessing Improving Trend: As the Federal Reserve has indicated to cut rates beginning in September, housing affordability challenges are expected to decline with a fall in mortgage rates. With rates trending lower and balanced supply/affordability playing out in the mortgage market, demand is set to increase in the coming days.
The decline in mortgage rates does increase prospective home buyer’s purchasing power and also allow existing homeowners to refinance. The increase in refinancing activities will support industry players' top-line growth.
According to the latest data from the Mortgage Bankers Association’s (MBA) Weekly Applications Survey for the week ending Aug 9, 2024, applications to refinance a home loan surged 118% compared with the year-ago period’s tally.
Competition Picking Up: Per an MBA forecast, mortgage debt outstanding is expected to see an increasing trend in the upcoming years. This is anticipated to be primarily driven by house price appreciation. However, customer acquisition in the mortgage services industry is becoming more competitive due to increasing demand and gradually improving affordability. The competitive landscape in the mortgage industry is likely to intensify and participants are expected to resort to price-cutting to combat rising competition. This might result in a significant reduction in sales margins across the space. With tighter margins, many originators may struggle to be profitable in the upcoming period.
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 #89, which places it in the top 36% 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 encouraging prospects in the near term. 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 an outcome of the positive earnings outlook for the constituent companies.
Before we present a couple of stocks 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 the S&P 500
The Zacks Mortgage & Related Services industry has underperformed the broader Zacks Finance sector and the S&P 500 composite in the past year.
The industry has gained 9.7% in this period compared with the broader sector's growth of 30% and the S&P 500 composite’s rise of 29.4%.
One-Year Price Performance
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 9.72X compared with the S&P 500's 8.52X.
Over the last five years, the industry has traded as high as 9.80X, as low as 0.80X and at the median of 1.82X, as the chart below shows.
Price-to-Book Ratio (TTM)
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 3.59X for the same period is below the Zacks Mortgage & Related Services industry's ratio, as the chart shows below.
Price-to-Book Ratio (TTM)
2 Mortgage & Related Services Stocks to Bet on
Velocity Financial: Based in Westlake Village, CA, the company is a vertically integrated real estate finance firm that offers and manages investor loans for 1-4 unit residential rental and small commercial properties. VEL originates loans across the United States through its extensive network of independent mortgage brokers.
In second-quarter 2024, core earnings per share of 45 cents surpassed the Zacks Consensus Estimate of 43 cents on strong net interest income. Book value per share of $14.52 as of the second-quarter 2024 end increased 15.5% year over year. Also, the total loan portfolio increased 20% to $4.5 billion as of Jun 30, 2024.
Robust portfolio performance and recent origination volume levels are expected to continue in the near term. This, along with a favorable outlook for book value growth and embedded gains in the investment portfolio, is a positive.
The Zacks Consensus Estimate for VEL's 2024 earnings has been revised 4.4% upward in the past month. The company sports a Zacks Rank of 1 (Strong Buy) at present. You can see the complete list of today’s Zacks #1 Rank stocks here.
Price and Consensus: VEL
Onity Group: Based in West Palm Beach, FL, the company operates in the United States, the U.S. Virgin Islands, India and the Philippines. It is a non-bank mortgage servicer and originator providing solutions through its primary brands, PHH Mortgage and Liberty Reverse Mortgage.
In second-quarter 2024, earnings adjusted for non-recurring costs were $4.07 per share, outpacing the Zacks Consensus Estimate of $1.37. Moreover, book value per share of $56.8 as of the second-quarter 2024 end increased 9% from the prior-year quarter’s tally. Originations volume of $7 billion increased 51% on a sequential basis.
Increased adjusted return on equity and enhanced book value per share, along with improved debt-to-equity ratio, are expected to benefit the company in the upcoming period.
The Zacks Consensus Estimate for ONIT’s 2024 earnings has been revised 70% upward in the past 60 days. This marks an increase of 59% from the prior year's reported figure. The company sports a Zacks Rank of 1 at present.
Price and Consensus: ONIT
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2 Stocks to Buy in the Thriving Mortgage & Related Services Industry
The Zacks Mortgage & Related Services industry is in the recovery phase with declining mortgage rates. The Federal Reserve's indication of a rate cut beginning in September could indirectly put even more downward pressure on mortgage rates, benefiting industry players. Improving trends in purchase originations and refinancing volumes will also act as tailwinds.
With rising competition, mortgage servicers continue to be under pressure as they are required to resort to price-cutting, leading to reduction in sales margin. Nonetheless, with the interest rates coming down, the demand for mortgages will rise, thereby aiding industry players like Velocity Financial Inc. (VEL - Free Report) and Onity Group Inc. (ONIT - Free Report) .
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 Out For
Declining Rates & Remote Working to Aid Originations: The housing market is witnessing a rising trend as the U.S. weekly average 30-year fixed mortgage rate had its biggest one-week decline of the year, falling to the lowest level in 15 months. The average rate on the 30 year fixed-rate mortgage dropped to 6.47% per the latest August data from 6.73% a week ago. A year ago, the metric averaged 6.96%.
Moreover, flexibility to work remotely and apprehensions of a rise in home prices due to slow supply growth might accelerate home sales as borrowers would want to offset this downside by taking advantage of declining rates. Thus, the demand for mortgage loans is likely to improve.
There are indications that the housing market is shifting back toward favoring buyers over sellers. With this turnaround, mortgage originations will likely witness a positive trend. This will reduce operational and financial challenges for originators and increase the gain on sale margin and new investment activity.
Refinancing Activities Witnessing Improving Trend: As the Federal Reserve has indicated to cut rates beginning in September, housing affordability challenges are expected to decline with a fall in mortgage rates. With rates trending lower and balanced supply/affordability playing out in the mortgage market, demand is set to increase in the coming days.
The decline in mortgage rates does increase prospective home buyer’s purchasing power and also allow existing homeowners to refinance. The increase in refinancing activities will support industry players' top-line growth.
According to the latest data from the Mortgage Bankers Association’s (MBA) Weekly Applications Survey for the week ending Aug 9, 2024, applications to refinance a home loan surged 118% compared with the year-ago period’s tally.
Competition Picking Up: Per an MBA forecast, mortgage debt outstanding is expected to see an increasing trend in the upcoming years. This is anticipated to be primarily driven by house price appreciation. However, customer acquisition in the mortgage services industry is becoming more competitive due to increasing demand and gradually improving affordability. The competitive landscape in the mortgage industry is likely to intensify and participants are expected to resort to price-cutting to combat rising competition. This might result in a significant reduction in sales margins across the space. With tighter margins, many originators may struggle to be profitable in the upcoming period.
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 #89, which places it in the top 36% 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 encouraging prospects in the near term. 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 an outcome of the positive earnings outlook for the constituent companies.
Before we present a couple of stocks 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 the S&P 500
The Zacks Mortgage & Related Services industry has underperformed the broader Zacks Finance sector and the S&P 500 composite in the past year.
The industry has gained 9.7% in this period compared with the broader sector's growth of 30% and the S&P 500 composite’s rise of 29.4%.
One-Year Price Performance
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 9.72X compared with the S&P 500's 8.52X.
Over the last five years, the industry has traded as high as 9.80X, as low as 0.80X and at the median of 1.82X, as the chart below shows.
Price-to-Book Ratio (TTM)
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 3.59X for the same period is below the Zacks Mortgage & Related Services industry's ratio, as the chart shows below.
Price-to-Book Ratio (TTM)
2 Mortgage & Related Services Stocks to Bet on
Velocity Financial: Based in Westlake Village, CA, the company is a vertically integrated real estate finance firm that offers and manages investor loans for 1-4 unit residential rental and small commercial properties. VEL originates loans across the United States through its extensive network of independent mortgage brokers.
In second-quarter 2024, core earnings per share of 45 cents surpassed the Zacks Consensus Estimate of 43 cents on strong net interest income. Book value per share of $14.52 as of the second-quarter 2024 end increased 15.5% year over year. Also, the total loan portfolio increased 20% to $4.5 billion as of Jun 30, 2024.
Robust portfolio performance and recent origination volume levels are expected to continue in the near term. This, along with a favorable outlook for book value growth and embedded gains in the investment portfolio, is a positive.
The Zacks Consensus Estimate for VEL's 2024 earnings has been revised 4.4% upward in the past month. The company sports a Zacks Rank of 1 (Strong Buy) at present. You can see the complete list of today’s Zacks #1 Rank stocks here.
Price and Consensus: VEL
Onity Group: Based in West Palm Beach, FL, the company operates in the United States, the U.S. Virgin Islands, India and the Philippines. It is a non-bank mortgage servicer and originator providing solutions through its primary brands, PHH Mortgage and Liberty Reverse Mortgage.
In second-quarter 2024, earnings adjusted for non-recurring costs were $4.07 per share, outpacing the Zacks Consensus Estimate of $1.37. Moreover, book value per share of $56.8 as of the second-quarter 2024 end increased 9% from the prior-year quarter’s tally. Originations volume of $7 billion increased 51% on a sequential basis.
Increased adjusted return on equity and enhanced book value per share, along with improved debt-to-equity ratio, are expected to benefit the company in the upcoming period.
The Zacks Consensus Estimate for ONIT’s 2024 earnings has been revised 70% upward in the past 60 days. This marks an increase of 59% from the prior year's reported figure. The company sports a Zacks Rank of 1 at present.
Price and Consensus: ONIT