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Residential Mortgage Market Rebounds: 3 Stocks to Buy

After battling an existential crisis, the residential mortgage market has witnessed one of the most robust recoveries since the peak of the pandemic sell-off in March that continued into April.

Along with solid second-quarter earnings performance, resilience of the U.S. housing market, favorable regulatory changes and continued Fed purchases of mortgage bonds have fueled the recent rebound.

Factors That Set the Stage for a Rebound

Coronavirus-related forbearance levels continue to improve: After remaining unchanged for the last few weeks, the volume of mortgages in active forbearance, in which borrowers are permitted to postpone monthly payments, dropped about 1 million or 21% since the highest level in May, according to new data from Black Knight’s McDash Flash Forbearance Tracker.

In fact, as of Sep 1, 3.8 million mortgages remained in active coronavirus-related forbearance plans, accounting for 7.1% of all active mortgages. This indicates a fall from 7.4% as of Aug 25. These active coronavirus-related forbearances represent $804 billion in unpaid principal.

Notably, the decline was backed by a fall of 75,000 in portfolio-held loans. Moreover, Fannie Mae FNMA and Freddie Mac FMCC mortgages witnessed a 49,000 decline in the number of active forbearance plans. The drop in the number of homeowners in mortgage bailout plans depicts borrowers’ ability to make mortgage payments. This is encouraging as it shows the continued resilience of the housing market.

GSEs refinance fee rolled forward until December: In late August, the Federal Housing Finance Agency directed Fannie Mae and Freddie Mac to delay the implementation date of their 50-basis points (bps) adverse market refinance fee on essentially all refinance loans until Dec 1, 2020. The fee was previously slated to take effect from Sep 1, 2020. 

The fee was being charged to cover the expected cost of managing the forbearance programs and issues related with the CAREs Act and coronavirus-led business disruptions. The implementation would have affected gain on sale margins of mortgage originators by 50 bps.

Therefore, the delay comes as a breather for mortgage originators, specifically for those with a focus on agency refinance activity. This is because originators will not be required to pay the fee on loan pipeline delivered to the GSEs after Sep 1 and it will provide them ample time to adjust pricing. Additionally, the delay is likely to reduce mortgage rates temporarily for borrowers of loans that will close by late November.

3 Stocks Worth Betting On

The worst seems to have been over for the residential mortgage industry and now may be is an opportune time to add the following three stocks that are poised to benefit from the rebound. 

These stocks carry a Zacks Rank #1 (Strong Buy) or 2 (Buy), delivered positive earnings surprise for the second quarter and are witnessing upward estimate revisions for 2020 earnings, indicating analysts’ bullish view. You can see the complete list of today’s Zacks #1 Rank stocks here.

PennyMac Financial Services, Inc. PFSI: The company is a specialty financial services firm with a comprehensive mortgage platform and integrated business focused on the production and servicing of U.S. mortgage loans and the management of investments related to the U.S. mortgage market. It currently sports a Zacks Rank of 1. The company reported second-quarter earnings per share of $4.39 that surpassed the Zacks Consensus Estimate by 44.4%. Moreover, over the past 30 days, the estimate for current-year earnings has been revised 42.2% upward to $16.52.

Mr. Cooper Group Inc. COOP: This Zacks Rank #1 company provides servicing, origination and transaction-based services principally to single-family residences primarily in the United States. Its home-loan offerings are focused on delivering services and lending products, services and technologies to homebuyers, home sellers, real estate agents and mortgage companies. In the previous quarter, the company delivered earnings surprise of 103.6%. Moreover, over the past 60 days, the estimate for current-year earnings has been revised 85.3% upward to $7.80.

Annaly Capital Management, Inc. NLY: This mortgage real estate investment trust primarily owns, manages and finances a portfolio of real estate related investment securities. With substantial investment in Agency and non-Agency residential mortgage assets, the company is well poised to benefit from the resilience in the mortgage market. Annaly reported second-quarter 2020 core earnings, excluding premium amortization adjustment, of 27 cents per share that outpaced the Zacks Consensus Estimateby 17.4%. Further, over the past two months, the estimate for 2020 earnings has been revised 12.4% upward to $1. It carries a Zacks Rank of 2, at present.

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Fannie Mae (FNMA): Free Stock Analysis Report
Freddie Mac (FMCC): Free Stock Analysis Report
Annaly Capital Management Inc (NLY): Free Stock Analysis Report
PennyMac Financial Services, Inc. (PFSI): Free Stock Analysis Report
MR. COOPER GROUP INC (COOP): Free Stock Analysis Report
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