In a one-week period between June 10 and June 17, 11 publicly traded mortgage companies lost a collective $6.14 billion in market capitalization. As investors fled the space, their valuations declined 17.4% to $29 billion in aggregate, according to a HousingWire analysis of stock data.
And it’s unclear when – or if – they’ll recover from the sell-off.
The companies include Finance of America Companies, Flagstar Bancorp, Guild Holdings Company, Home Point Capital, loanDepot, Mr. Cooper Group, New Residential Investment Corp., Ocwen Financial Corporation, Pennymac Financial Services, Rocket Companies, and UWM Holdings Corporation.
“People are reluctant to invest in the mortgage space at the moment because it’s unclear how long the downturn is going to last,” Bose George, mortgage finance analyst at Keefe, Bruyette & Woods (KBW), said. “You don’t know how much money these companies will lose and what their book values will look like once this is done.”
The bear stock market began on Friday, June 10 when the U.S. Consumer Price Index showed an 8.6% increase year-over-year in May, 30 basis points above the consensus estimates and the highest mark in four decades.
Consequently, the Federal Reserve raised the federal funds rate by 75 basis points on Wednesday, a hike not seen since 1994. Chairman Jerome Powell also signaled the possibility of raising an additional 75 bps at the Fed’s next meeting in July.
Investors last week scrambled to sell riskier assets amid growing fears that the Fed will send the U.S. economy into a recession this year. In a note published Monday, a team of Goldman Sachs economists increased their outlook for a U.S. recession, citing concerns that the Fed will act aggressively to control inflation, even if economic activity weakens. The Goldman Sachs economists now see a 30% probability of entering a recession over the next year, versus 15% previously, and a 25% probability of entering a recession in the second year if it is avoided in 2022.
All the turbulence in the markets pushed purchase mortgage rates up 55 bps over the last week, the largest one-week increase since 1987, to 5.78%, according to the Freddie Mac PMMS. Other indexes showed rates north of 6% last week. Well-qualified buyers in the non-qualified mortgage space were locking rates in double-digits, several LOs told HousingWire.
“In terms of the mortgage originators, refis are already largely gone, so the question is whether this rate move is enough to slow purchase more meaningfully. It’s a little early to tell,” George said. “We are pretty negative on the industry, and we have not recommended taking any of these names.”
Who was hit harder?
Investors are fleeing from mortgage companies that are struggling to generate cash – meaning those not delivering profits. They are also punishing the classes of 2020 and 2021, a group of lenders that went public at high valuations, often on the strength of lower mortgage rates and refi euphoria.
Nonbank heavyweight loanDepot suffered the biggest decline in valuation during the one-week period. The company lost 37.7% in market capitalization to $538 million on Friday, HousingWire’s analysis found. The stock debuted in 2021 at $14 a share and closed on Friday at just $1.52 a share.
The Orange County-based lender, founded by Anthony Hsieh, reported a net loss of $91.3 million in the first quarter due to a steep decline in origination volume and expense reductions that did not keep up with the rapidly changing environment. Company executives said they don’t expect to have a profitable fiscal year, citing pressures on margins and lower market volume.
Among the six mortgage companies that went public during the Good Times – besides loanDepot – Rocket (-19.4%), UWM (-16.4%), Home Point Capital (-8.7%), and Guild (-5.35%) also experienced sizable losses in their valuations over the last week. Notably, FoA, with a decline of 9.55%, closed at $1.80 a share on Friday, joining loanDepot in the $1 club.
The remaining companies also had declines in their valuations due to the havoc in the financial markets: New Residential (-20.4%), Ocwen (-14.4%), Pennymac (-11.3%), Mr. Cooper (-9.85%), and Flagstar (-6.3%).
The turmoil in the markets caused the Wedbush Securities’s team of analysts to cut estimates for several mortgage companies.
“Mortgage rates have spiked to near 6% levels, after hovering ~3% for the last couple of years, at an unprecedented pace, rapidly evaporating the rate & term refinance market,” Jay McCanless, Brian Violino, and Henry Coffey said in the report.
“While purchase volumes remain fairly strong from a historical perspective, purchase rate locks are starting to see some pressure and total volume projections from the big three (Fannie, Freddie, and the MBA) for 2022 and 2023 have continuously moved lower throughout the year.”
Wedbush reduced Flagstar’s price target from $50 to $48, maintaining its neutral rating. For UWM, which also has a neutral recommendation, the analysts reduced the price target from $5 to $4.
Pennymac’s price target dropped from $65 to $55, with an outperform rating; the Wedbush analysts expect the total return to outperform relative to the median projected by analysts over the next 6-12 months.
Wedbush has an outperform rating for Guild (price target $12), Home Point ($5.50), and Mr. Cooper Group ($60). The analysts also have a neutral target for Rocket, with the price target at $7.
The worst since 2008?
A number of industry observers said the mortgage market is facing its worst downturn since the financial crisis in 2008.
On June 10, the day the inflation data came out, the mortgage-backed securities (MBS) market went “no-bid,” according to longtime mortgage broker Louis Barnes. Investors asked for higher premiums to invest in these assets amid a flight to quality caused by the expectation of higher U.S. Treasury rates.
“It’s a tough time in the market right now because you don’t know what rates to offer borrowers,” Kevin Heal, senior analyst and fixed income strategist at Argus Research, said.
He added: “From the mortgage side, there are still securitizations happening – the worry is if you’re issuing a security at 5.5%, but it could be the next day, you walk in, and then you’re underwater.”
Heal expects that the gain-on-sale margin will decrease dramatically for mortgage originators over the coming quarters just because of the volatility and the fact that lenders will have to sell loans in the secondary market with lower gains.
He estimates margins in the retail channel could go down to 2% on average, compared to 3% in the previous quarters.
However, there is no reason for panic: analysts agree originators are in a better position than in the past because they cashed in during the refi boom of 2020 and 2021.
Only three in the group of 11 companies had a reduction in the cash position in the first quarter of 2022, compared to the Q4 2021, among them Home Point, Mr. Cooper and Flagstar. Some socked away tremendous gains from the boom – Rocket has more than $2.3 billion in cash, and New Residential has more than $1.6 billion. Finance of America had a 60.6% increase in the cash position quarter-over-quarter, and Pennymac’s cash position rose 44% during the same period. Many of those companies also bought back stock that investors were shedding.
Lenders have already started to reduce costs, protecting what’s left of their diminishing margins. The Wedbush analysts said in their report that, although most mortgage companies have begun to trim back their workforces to account for an excess capacity issue, “it will likely take a quarter or two before excess capacity is flushed out of the system.”
In addition, with originations going down, some lenders can also boost their earnings by taking advantage of the strong demand for their servicing portfolios. Mortgage servicing rights (MSRs) values tend to increase as mortgage rates rise, and borrowers are less likely to refinance or prepay their loans.
“There’s a long-term trend reflected on many days, including Friday, in the mortgage industry towards higher rates, less refinance, and seemingly downward pressure on the purchase money market,” said Henry Coffey, a mortgage and housing analyst at Wedbush. “In this context, we expect the servicing portfolio to be bringing more profits to mortgage companies in the coming quarters.”
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