One Big Caveat Before You Buy Mortgage Stocks

There's a key factor that will allow SOME mortgage stocks to thrive - while others may well fail

Source: Shutterstock

It sure is an interesting time for mortgage stocks these days. The Federal Reserve is doing everything it can to keep rates low and stimulate the U.S. economy. With 10-year Treasury bonds (a common benchmark) yielding just 0.64%, mortgages are cheaper for the companies to buy – and easy to sell. After all, mortgage rates are near their all-time low, now averaging 3.57%. That’s a once-in-a-lifetime opportunity for many homebuyers.

They say “there’s no such thing as a free lunch,” though. The ultralow mortgage rates often come with much “tighter” requirements, like higher minimum credit scores. And that’s not just a function of higher demand for the mortgages, either.

While some Americans are rushing out to obtain mortgages (often refinances), others find themselves unable to make payments because they’re out of work amid COVID-19 outbreaks.

Naturally, mortgage companies are anxious to see how this will impact their bottom line. Analysts at CoreLogic (NYSE:CLGX), a real-estate research firm, created a model to predict delinquent payments, based on the possibility that U.S. unemployment will hit 12% this quarter, then stay above 8% for four more quarters.

From that, CoreLogic is expecting that delinquency will peak in the first quarter of 2021, at 5.1%. That’s roughly 3 million borrowers at any given time:

Source: CoreLogic via Forbes

As you see above, CoreLogic’s other, “Pessimistic” model (in blue) shows that the fallout could be much higher than 5% delinquencies.

As of April 30, 3.8 million homeowners (7.3%) were in “forbearance” per the U.S. federal bailout and stimulus bill, the CARES Act. In other words, these nearly 4 million Americans are delaying their mortgage payments until they regain their financial footing.

The bill allows them to do so for up to one year. This is also a point of contention for mortgage servicers, who cannot skip their own payments to the government bondholders backing these mortgages.

Now, if these loans are backed by U.S. housing authorities Fannie Mae or Freddie Mac, their new guidelines only require their servicers to make those payments for four months.

But the bottom line is, mortgage companies will need enough cash reserves to “ride out the storm.” Otherwise, they could be in serious trouble.

This is why you may have seen mortgage stocks selling off since politicians started debating the bailout bill in March:

I’m pleased to report that my choice for the InvestorPlace Best Stocks for 2020 contest, PennyMac Financial Services (NYSE:PFSI), has begun to recover much more quickly than other peers. The chart above shows the performance gap suffered by Impac Mortgage Holdings (NYSEAMERICAN:IMH) and New York Mortgage Trust (NASDAQ:NYMT).

But, other than that chart, what makes PFSI stock a better investment now?

Well, take a look at its Report Card in my Portfolio Grader:

Despite everything, PennyMac rates an A on its Quantitative Grade and its Fundamental Score. That includes a “B” for Cash Flow.

NYMT stock, for example, can’t quite clear that bar, as you see here:

Overall, NYMT stock is a C-rated “Hold.” But in this bear market, like any other, there are still “Strong Buys” like PFSI stock. And as others continue to stumble and fall, they’ll gobble up even more investor capital.

Given how many American families are struggling during the pandemic, the key for mortgage stocks (and many, many others) is a large cash reserve. This allows these companies to survive and continue to thrive, going forward.

And that’s just one thing I look for in crafting my Growth Investor recommendations. I always want the best buys, and I’m willing to jettison even my favorite stocks when they don’t fit with the proven strategy I’ve relied on throughout my career.

So, if you’d like to see what makes the grade now, click here to try my Growth Investor service and see my latest buy and sell recommendations.

Louis Navellier had an unconventional start, as a grad student who accidentally built a market-beating stock system — with returns rivaling even Warren Buffett. In his latest feat, Louis discovered the “Master Key” to profiting from the biggest tech revolution of this (or any) generation. Louis Navellier may hold some of the aforementioned securities in one or more of his newsletters.


Article printed from InvestorPlace Media, https://investorplace.com/2020/05/one-big-caveat-before-you-buy-mortgage-stocks/.

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