Back to Main

Ocwen, Nationstar: Bears See Risks In Mortgage Space

By: Investor's Business Daily
Posted: 10/17/2013 6:21:00 PM
Referenced Stocks: BAC;JPM;NSM;OCN;WFC

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 key names.

The $1.2 billion BlackRock Small Cap Growth Equity , for example, started a stake inOcwen Financial ( OCN ) in its latest disclosure.

The $3.4 billion Lord Abbett Developing Growth opened a position inNationstar Mortgage Holdings ( NSM ) 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 ( WFC ),JPMorgan Chase ( JPM ),Bank of America ( BAC ) andU.S. Bancorp (USB) because they are more than mortgage stories," said Erik Oja, U.S. banks analyst for S&P Capital IQ.

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 says.

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 out."

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 available.

"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.