Stocks of several mortgage companies are trading at or near 52-week highs, but analysts say further gains are in store thanks to favorable interest rates.
Brett Pope, an analyst at Southwest Securities in Dallas, said the outlook for publicly traded mortgage companies is good, though the industry's origination volume is down a bit from last year.
"Long-term rates have gone up a little bit and are at a level where you don't see a tremendous amount of prepayment activity. That makes servicing more valuable," Mr. Pope said. When rates fall, customers are more likely to pay off their mortgages quicker, leading to a decline in the value of a servicing portfolio as loans run off.
Mr. Pope covers Capstead Mortgage Corp., a Dallas real estate investment trust that services about $38 billion of mortgages. At midday Friday, Capstead was trading at $24.75, after setting a 52-week high of $25.125 last week. Capstead does not originate loans.
Countrywide Credit Industries Inc. and HomeSide Inc. also are thriving in the current rate environment, analysts said. Countrywide services more than $163 billion of home loans. HomeSide has a portfolio of $93 billion.
Loan servicers get fee income for providing customer service, collecting mortgage payments, performing default management, and foreclosure activities.
On Friday Countrywide was trading at $32.625. The Calabasas, Calif.- based lender's stock soared after being added to the Standard & Poor's 500 index last week. HomeSide, which went public in January at $15, set a high of $20.75 Thursday and was at $19.75 Friday.
Other mortgage companies that don't have the benefit of large servicing portfolios have been looking at the subprime market-originating loans to consumers with poor credit-to increase income.
North American Mortgage Co. began originating B and C loans late last year. Its stock set a 52-week high of $23.875 Thursday and was at $22.875 at midday Friday.
Another large conventional lender, Resource Bancshares Mortgage Group, has made inroads in the subprime market. It started its own B and C division last summer and this April announced it was merging with Walsh Holding Co., a Parsippany, N.J.-based subprime lender.
Resource's stock slumped as low as $12.875 shortly after the deal was announced because investors were disappointed that Resource itself had not been acquired, analysts said. But the stock has rebounded and was trading at $15.125 Friday afternoon, $2 off its 52-week high.
Gary Gordon, an analyst at PaineWebber Inc., said there have been positive signs on the origination side of the business for Countrywide and HomeSide as well. Production margins for conventional loans increased in the first quarter, he said. Both companies, which have fiscal years ending in February, reported first-quarter earnings last week.
Mr. Gordon, who described the interest rate environment as "favorable if not perfect," said margins rising while origination volume is slipping indicate "more rationality" in the pricing of loans.
Countrywide's production margins were also boosted because of increased home equity and subprime loan business."Countrywide has been extraordinarily successful in introducing new products that have higher profits," said Jonathan Gray, an analyst at Sanford C. Bernstein & Co.
Mr. Gordon said even though Countrywide and North American offer subprime loans and HomeSide also is planning to, the crux of their business remains conventional mortgage lending.
As a result, these companies are less risky investments than the subprime lenders.
The tradeoff is that they do not have the same sex appeal, Mr. Gordon said. "These are not necessarily growth stocks. The heart of their business is really a commodity-like business."