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Strategies & Market Trends : The Residential Real Estate Crash Index -- Ignore unavailable to you. Want to Upgrade?

To: biometricgngboy who wrote (12806)	8/21/2003 9:11:12 AM
From: biometricgngboy	Read Replies (1) \| Respond to of 306849

Hedging The Mortgage Market Decline forbes.com excerpt - ah what the heck. Have the whole article: Ari Weinberg, 08.20.03, 4:30 PM ET "NEW YORK - The mortgage tidal wave hit at the end of May. But, with interest rates on the rise, this tsunami is quickly rolling back out. A key index of U.S. mortgage loans compiled by the Mortgage Bankers Association of America fell 10.7% last week. The MBA's composite index, which covers both purchases and refinances, is down 54% from its record high. A key component of the index, which tracks refinancing activity, is down to its lowest level in over a year. That's because rates continue to climb. Interest on a 30-year fixed mortgage hit 6.22% last week, up from mid-June's record low of 4.99%. True, the massive blackout may have had an impact on last week's numbers, but that hardly explains the trend that has developed this summer. Rates are moving higher, so demand has tapered off. Lower originations, then, mean that major mortgage banks could be forced to pare staff as they look to servicing revenue to keep earnings up. On Aug. 18, the Mortgage Bankers Association lowered its estimate for total mortgage origination in 2003 to $3.19 trillion from $3.39 trillion. Originations next year are now expected to slip to $1.54 trillion from a prior estimate of $1.94 trillion. That more-than- 50% decline in originations will dent mortgage-related revenue at the top originators: Wells Fargo (nyse: WFC - news - people ), Bank of America (nyse: BAC - news - people ), Washington Mutual (nyse: WM - news - people ), Countrywide Financial (nyse: CFC - news - people ) and J.P. Morgan Chase (nyse: JPM - news - people ). But these firms--the top five residential mortgage servicers by total loans--also have the safety net of servicing income, the dollars collected from tracking and billing loans that they have initiated or bought from other originators. "Servicers had been hit by portfolio churn," says Jay Brinkmann, the MBA's vice president of research and economics in Washington, D.C. But servicers may be able to pick up new mortgages in the face of rising rates. Smaller originators and services may pass their books to larger firms. "Industrywide, we don't expect to see a significant decline," says Brinkmann. Paul Miller, a Friedman Billings Ramsey analyst who covers the mortgage market, says that Countrywide Financial, based in Calabasas, Calif., earns an "outperform" rating with its potential to grow earnings in a down cycle. At the end of July, the company had a servicing portfolio of $576 billion in loans, with both delinquencies (at 3.78%) and pending foreclosures (at 0.46%) at 13-month lows. Countrywide, which earned $2.74 per share in the second quarter, is expected to earn $4.41 per share in the third quarter and $13.70 this year, according to the analyst consensus compiled by FirstCall. Earnings, however, are expected to dip 16% in 2004. Miller says that a smoother way to play a decline in mortgage applications is through mortgage insurers. These companies provide insurance for lenders whose borrowers don't meet the lenders' required down payment. Industry leader MGIC Investment (nyse: MTG - news - people ) is already up 68% from its 52-week low. This stock tanked last fall after the firm said that refinancing-related revenue had dipped. Refinances came back strong in the spring, and so did MGIC's share price. But MGIC may have had its run. Miller rates the company a "market perform." He is looking for Radian Group (nyse: RDN - news - people ) and PMI Group (nyse: PMI - news - people ), both of which are sitting at 52-week highs, to stay strong as they collect on premiums from spring activity. So what about the increasing skepticism towards the operations of Fannie Mae (nyse: FNM - news - people ) and Freddie Mac (nyse: FRE - news - people ), the largest purchasers of mortgage loans from lenders? Miller says that while worries about Freddie Mac may have facilitated some of the uptick in rates, he doesn't think that the ongoing investigation into Freddie's accounting will have a major impact on the market. The damage, though, has already been done."