Mortgage Stocks
Over the last few years the housing market scorched in the United States. As a result, the mortgage industry expanded at an unheard of rate, and so did the amount of players in the sector.
Alongside the big banks in the industry came a great number of specialty lenders that dealt only with originating home loans. While these companies racked in profits in the last few years during the refinance boom, many have seen their sales drop more than 50%, with floundering growth and massive mortgage layoffs.
Many investors might see this as on opportunity. The low PE ratios. The fresh 52-week lows. The huge earnings. Just one little problem. No growth. And we all know the stock market relies on growth to boost ticker prices.
The problem is that the market got spread too thin when every bank in town wanted a piece of the hot mortgage market. And now housing growth has slowed, rates have risen, and mortgage applications are down. That’s why these mortgage companies look attractive if you simply look at their PE ratio and present earnings.
But what you need to understand is that mortgage originating companies don’t hold onto the loans for much longer than a month or so, and only make their money on the yield spread and associated one time fees they receive from the quick sale to investors.
Some publicly traded loan originating companies of note that have suffered from the lack of new mortgage applications and secondary mortgage market woes include:
Accredited Home Lenders
Flagstar Bancorp
Impac Mortgage Holdings
Indymac Bancorp
New Century Financial Corporation
NovaStar Financial
These companies are losing out while other larger lenders and banks service the loans these companies originate. These same companies have also been criticized for having bad accounting practices which can send stocks into a tailspin as well.
Some of the largest banks and mortgage lenders that both originate and service mortgage loans include:
Washington Mutual
Wells Fargo
Countrywide Financial
Bank of America
Downey Savings
Wachovia Bank
The two mortgage companies that buy residential mortgage loans and mortgage-related securities from mortgage lenders and securities dealers (also known as GSEs, or government-sponsored entities):
Fannie Mae
Freddie Mac
The key to the success of the companies that originate and service mortgage loans is that though loan origination may slow, they can fall back on the servicing of the loans. And when production slows, loan servicing picks up speed as homeowners hold onto their mortgages longer, increasing the amount of interest earned which boosts profits.
That being said, all banks involved in mortgage are likely to suffer in a cooling housing market, but especially the originators as they have little diversification, if any at all. And the larger banks have a variety of income streams that will offset any major losses in one sector.
So be sure to look at mortgage stocks carefully. You need to understand the complexities of the industry before diving in. They all do different things, and will benefit or suffer accordingly. After all, there’s a reason they are at 52-week lows with minuscule PE ratios.
Below is a list of unsorted mortgage-related stocks. You’ll notice low PEs and huge earnings, but tread cautiously.
Amer First Tax Exempt Inv
America First Apartment Investors
American Home Mortgage Inv
Annaly Mortgage Management
Anworth Mortgage Asset
Capital Alliance Income Trust
Capital Trust
CharterMac
Delta Financial Corporation
Doral Financial Corporation
Hanover Capital Mortgage Holdings
HomeBanc Corporation
Income Opportunity Realty Investors
iStar Financial
JER Investors Trust
Luminent Mortgage Capital
MortgageIT Holdings
Newcastle Investment
New York Mortgage Trust
Rait Investment Trust
Sunset Financial Resources
Transnational Financial Network
United PanAm Financial Corporation
Some of the above may now be closed mortgage companies or in bankruptcy proceedings at this point.
