IBD's Finance-Mortgage & Related Services industry group
is near the penthouse of all 197 groups.
It was ranked No. 4 going into Thursday. That was way up from
No. 126 three months ago.
That's due in large part to mutual fund support for certain
The $1.2 billion BlackRock Small Cap Growth Equity , for
example, started a stake inOcwen Financial (
) in its latest disclosure.
The $3.4 billion Lord Abbett Developing Growth opened a
position inNationstar Mortgage Holdings (
) in its latest disclosure.
But some analysts and managers see storm clouds on the horizon
for the group. Some prefer banks that are diversified away from
sole dependency on mortgages.
"I prefer banks likeWells Fargo (
),JPMorgan Chase (
),Bank of America (
) andU.S. Bancorp (USB) because they are more than mortgage
stories," said Erik Oja, U.S. banks analyst for S&P Capital
As of Q3, mortgage banking as a portion of total net revenue
at each of those banks was well down from a year earlier, he
Mortgage servicer bulls cite a sharp decline in residential
foreclosure filings and delinquent mortgages. But those numbers
don't tell the space's full story, bears warn.
Many foreclosed homes have been bought by hedge funds and
wealthy individual investors. Their plans were to rent out homes
profitably. But a glut of rental homes has hurt that play's
profitability, says Tom Forester, manager of $138 million
Forester Value .
"Many hedge funds paid full price and more, leading to a price
spurt," Forester said. "Many of the early funds are getting
Surge In Defaults?
Also, lenders have reworked mortgage terms for many
financially distressed homeowners, lowering their monthly nuts.
But servicers tell Forester that many homeowners still can't
afford their payments.
"Most of those loans are likely to default within three
years," Forester said.
U.S. Bancorp is the only bank, lender or servicer in
Forester's fund, which holds only 29 stocks.
"We own (USB) because they have a strong balance sheet and
good underwriting," he said. "Loans in their portfolio don't have
credit problems. But their mortgage component is a (potential)
head wind for them."
In addition, rising interest rates and fear of rising rates
have caused a slowdown in refinancings. And refis are profitable
for lenders, which get upfront fees and then a gain on loans they
sell. Home purchase volume is not big enough to make up for the
decline in refis, Forester says.
Still, between hedge funds retreating and banks that are
divesting themselves of mortgages due to stiffer capital reserve
rules, about $1 trillion in additional mortgages are becoming
"That's a lot of new opportunities for Ocwen," said Jack
Plunkett, CEO of Plunkett Research. More volume leads to improved
operating efficiencies, he adds.
"Ocwen's growth may not remain as exciting as it was in the
past year, but it remains exciting," he said.
For servicing companies to continue to do well, interest rates
must rise slowly to avoid dampening demand and raising servicers'
costs, Forester says.