The housing market is showing some green shoots, though it’s not out of the woods. Why liquidity is imperative for your mortgage-lending investment today
Housing is showing signs of a cautious recovery …
April was a brutal month for the housing sector. Homebuilder confidence, as measured by the National Association of Home Builders’ monthly confidence index, suffered a record-breaking decline, falling to its lowest reading since June 2012.
But on Monday, the latest numbers show the index climbing seven points. In fact, all of the underlying components of the index rose in May.
For example, the indicators measuring current sales conditions, sales expectations, and even prospective buyer traffic all posted solid gains.
The good news continued this morning as the Mortgage Bankers Association reported that mortgage applications rose 6% last week from the prior week.
The report went on to show that purchase volume was just 1.5% lower than this time last year. That’s a remarkable improvement from a month ago, when purchase volume was down 35% annually.
This is a much-needed dose of optimism for mortgage lenders who have been under heavy pressure on two fronts: one, fewer mortgage originations, and two, millions of Americans unable to pay their existing mortgages.
On that second point, over 4 million Americans are skipping their mortgage payments today. This represents 8.16% of all mortgages being in forbearance as of May 10.
And while we’ll cross fingers this number will fall quickly as the nation reemerges from lockdown, a report from Oxford Economics estimates that 15% of homeowners will fall behind on their monthly mortgage payments.
When you put all of this together, we see a mortgage-lending sector still under pressure, despite green shoots. And that means one thing …
A clear separation between the fundamentally strong companies and all the rest.
Today, let’s dig deeper into this sector with the help of Louis Navellier, and then look at his pick for the mortgage lender best-positioned to ride out the pressure and emerge as the clear market leader as the world returns to normal.
***Homeowners gets forbearance, but what about the help for the lenders?
In Louis’ Market 360 update last week, he noted the millions of homeowners now in forbearance, in other words, legally not paying their mortgages thanks to the CARES Act.
He then pointed toward the impact of this on the lending sector:
This is a point of contention for mortgage servicers, who cannot skip their own payments to the government bondholders backing these mortgages.
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.
It was back in our April 6th Digest that we highlighted this cash-crunch in the mortgage lending sector.
From that Digest:
Two weeks ago, Treasury Secretary Mnuchin formed a task force within the Financial Stability Oversight Council (FSOC) to address how to ease this cash crunch and prevent a meltdown. Mnuchin had asked his task force to offer recommendations by March 30, but as I write, no such recommendations have come.
Here we are nearly two months later, and still no recommendations have come. It raises eyebrows how the Fed has rushed to backstop practically every corner of the U.S. financial system yet has been unwilling to commit to any relief for lenders.
From The New York Times:
… there is growing concern that a critical corner of the housing industry has been overlooked, putting mortgage companies in a precarious position as millions of borrowers delay payments …
Lawmakers in both parties have begun warning about a looming crisis and are urging the Federal Reserve chair, Jerome H. Powell, and Treasury Secretary Steven Mnuchin to take swift action …
Yet there is little agreement among policymakers about what, if anything, the government should do to help these firms …
As a result, a game of chicken has ensued between federal regulators and dozens of mortgage firms that are not affiliated with any bank but play a big role in keeping the $11 trillion residential mortgage market humming.
This points toward one critical requirement for mortgage-lenders — liquidity.
That’s where Louis’ top pick for 2020, PennyMac Financial (PFSI), comes in.
***The strongest lender in the sector
Here’s Louis from back in December, describing PFSI:
PennyMac Financial Services (NYSE:PFSI) is certainly one of my favorite picks for the coming year.
Why? Because it is perfectly positioned to take advantage of one of the biggest trends in the U.S. economy: housing …
… the Federal Reserve has spent the whole year reverting to a very accommodative monetary policy. Low interest rates are here to stay and banks are lending.
This all bodes well for both the housing industry and home buyers. Even renters that are looking to upgrade will benefit from lower construction costs, since more availability means more price competition …
But as we all know, this bullish housing market didn’t materialize as the coronavirus ravaged the economy. Instead, it has left lenders in a dangerous position in which what matters most today is liquidity.
So, where is PFSI on that note?
Earlier this month, PFSI beat earnings estimates. And in the ensuing earnings call between the executive team and analysts, we learned why the company is likely to continue to perform well, even in this challenging environment.
From CEO, David Spector:
PFSI’s strong balance sheet, low leverage and disciplined approach to liquidity management have been critically important in this market environment.
And our strong risk management discipline has resulted in an increase in our total liquidity since February …
While lower-quality lenders have been anxious about a cash-crunch, PFSI has actually increased its liquidity despite record number of Americans in forbearance.
***While PFSI’s stock was caught up in the fear-based sector selling in March, it has roared back
From its February high to its March low, PFSI sold off 44% as you can see below …
But after retesting its low in early April, PFSI’s stock has soared, up 84%.
Why has it rebounded so strongly?
Back to Louis:
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.
As I write Wednesday morning, PFSI’s stock price is approaching $32. Louis thinks a good entry price would be anything up to $38.
In other words, you’re able to get Louis’ top pick of 2020 at a 15%+ discount to what he believes is still a good price to pay.
If you’ve been searching for opportunities in the lending sector, give PFSI a look.
***PFSI is a great example of how Louis’ system finds strong stocks that recover with faster speed … and speed is exactly what Louis is focusing on today
From Louis’ Monday update:
… I’ve spent my career helping investors discover quality high-growth stocks that can deliver extraordinary returns …
But during all this, I have remained obsessed with improving one piece of my method: speed.
And by speed, I mean faster gains.
I want to get my clients to reap the same kinds of big returns — double and triple-digit gains — but in months instead of years.
Louis’ focus on speed led him and his team to experiment with their quantitative algorithms — in other words, their computer programs that scour the markets looking for Louis’ next recommendations. In something they named the Accelerated income Project, the team sought to find which combination of inputs helped them find stocks poised to push higher … faster.
It turns out, Louis believes he’s found a way to generate substantial, consistent, hold-in-your-hand cash payouts from the markets … starting with only a small initial investment … in a much-shorter period.
Today, at 4 PM ET, he’s holding an Accelerated Income Project event to provide the details. It’s free to attend, just click here to join.
Here’s Louis on what’s in it for you:
I will reveal my Accelerated Income Project — a bold new initiative I guarantee will hand you 20 payout opportunities of $2,500 ($50,000 in total) or more over the next 12 months.
Join us for free to find out the details. Hope to see you there.
Have a good evening,
Jeff Remsburg
