5 Stocks to Avoid as Mortgage Demand Hits a 22-Year Low

NYSE: WD | Walker & Dunlop, Inc  News, Ratings, and Charts

WD – The faster-than-expected rise in mortgage rates, high home prices, and the lack of home listings have led to mortgage demand hitting a 22-year low. Amid this backdrop, we think it could be wise to avoid mortgage stocks Walker & Dunlop (WD), Hercules Capital (HTGC), Ellington Financial (EFC), Mr. Cooper (COOP) and PennyMac Financial Services (PFSI). Let’s discuss.

The mortgage rates have started increasing again after a brief reprieve in May. The average contract interest rate for the 30-year fixed-rate mortgages rose from 5.40% to 5.65% last week. The average rate hit 6.28% after increasing ten basis points earlier this week.

The rising mortgage rates have caused a sharp turnaround in the housing markets as mortgage demand has plunged. Mortgage demand was at its lowest level in 22 years. Last week, the total mortgage application volume was 52.7% lower than the same week a year ago. MBA economist Joel Kan said, “The purchase market has suffered from persistently low housing inventory and the jump in mortgage rates over the past two months. These worsening affordability challenges have been particularly hard on prospective first-time buyers.”

The fast-rising mortgage rates and high home prices amid a lack of listings have affected the mortgage demand. Home sales have declined for six straight months. Last week, the demand for refinancing fell. It was 75% lower than the same week a year ago.

To support the pandemic-affected economy, the Federal Reserve bought the mortgage-backed bonds, which had kept the mortgage rates at record lows for quite some time. However, with the economic recovery and surging inflation, the Fed announced that it would cut down its purchases of bonds and start offloading its holdings. This has led to a rise in mortgage rates, following in the footsteps of the treasury yields. With further aggressive monetary tightening by the Fed in the offing, mortgage demand is expected to fall further.

Given this backdrop, we think it could be wise to avoid mortgage stocks Walker & Dunlop, Inc. (WD), Hercules Capital, Inc. (HTGC), Ellington Financial Inc. (EFC), Mr. Cooper Group Inc. (COOP), and PennyMac Financial Services, Inc. (PFSI).

Walker & Dunlop, Inc. (WD)

WD provides commercial real estate and financial services. The company originates, sells, and services a range of commercial real estate debt and equity financing products and provides multifamily property sales brokerage and valuation services.

WD’s total revenues declined 21.5% sequentially to $319.44 million for the first quarter ended March 31, 2022. The company’s net income decreased 10.9% sequentially to $71.20 million. Also, its EPS came in at $2.12, declining 12.4% sequentially.

The stock has lost 38.1% year-to-date to close the last trading session at $93.32.

WD’s POWR Ratings reflect these bleak prospects. It has a D grade for Value. The POWR Ratings are calculated by taking into account 118 different factors, with each factor weighted to an optimal degree.

It is ranked #24 out of 106 stocks in the D-rated Financial Services (Enterprise) industry. Click here to see the other ratings of WD for Growth, Momentum, Stability, Sentiment, and Quality.

Hercules Capital, Inc. (HTGC)

HTGC is a specialty finance company that provides senior secured loans to venture capital-backed and institutional-backed companies in various technology, life sciences, and sustainable and renewable technology industries.

For the fiscal first quarter ended March 31, 2022, HTGC’s total investment income declined 5.2% year-over-year to $65.15 million. The company’s net assets resulting from operations loss came in at $3.33 million, compared to net assets resulting from operations income of $64.16 million. Its net assets resulting from operations loss per share came in at $0.03, compared to net assets resulting from operations EPS of $0.55.

For fiscal 2022, HTGC revenue is expected to decline 7.9% year-over-year to $285.06 million. Over the past year, the stock has lost 22.7% year-over-year to $13.09.

HTGC’s weak prospects are reflected in its POWR Ratings. It has an F grade for Growth.

Within the F-rated Private Equity industry, it is ranked #28 out of 35 stocks. To see the other ratings of HTGC for Value, Momentum, Stability, Sentiment, and Quality, click here.

Ellington Financial Inc. (EFC)

EFC is a real estate investment trust (REIT). The company acquires and manages mortgage-related, consumer-related, corporate-related, and other financial assets. The company invests in various financial assets, including residential mortgage loans, residential mortgage-backed securities, commercial mortgage-backed securities, consumer loans and asset-backed securities, collateralized loan obligations, mortgage-related and non-mortgage-related derivatives, and strategic investments, and other investments, including corporate debt and equity securities and corporate loans.

EFC’s total net interest income declined 3.6% sequentially to $37.05 million for the first quarter ended March 31, 2022. The company’s net loss attributable came in at $9.90 million, compared to a net income attributable of $34.27 million in the quarter ended December 31, 2021. Also, its loss per share came in at $0.17, compared to an EPS of $0.61 in the quarter ended December 31, 2021.

Analysts expect EFC’s EPS for the quarter ending June 30, 2022, to decline 13.7% year-over-year to $0.44. Its revenue for fiscal 2023 is expected to decline 0.9% year-over-year to $162.10 million. It failed to surpass the Street EPS estimates in three of the trailing four quarters. Over the past year, the stock has declined 27.4% to close the last trading session at $13.87.

EFC’s POWR Ratings reflect these bleak prospects. It has an overall D rating, equating to a Sell. EFC has a D grade for Growth, Stability, and Sentiment.

EFC is ranked #84 in the Financial Services (Enterprise) industry. Click here to see the other ratings of EFC for Value, Momentum, and Quality.

Mr. Cooper Group Inc. (COOP)

COOP provides servicing, origination, and transaction-based services related to single-family residences. The company operates through two segments: Servicing and Originations. The Servicing segment performs activities for underlying mortgages, including collecting and disbursing borrower payments, investor reporting, customer service, and modifying loans. The Originations segment originates residential mortgage loans through its direct-to-consumer channel and purchases loans from mortgage bankers and brokers.

For the first quarter ended March 31, 2022, COOP’s servicing segment’s operational revenue declined 6.4% sequentially to $365 million. The company’s operating ROTCE came in at 8.2%, compared to 14.9% in the quarter ended December 31, 2021. Also, its originations segment’s revenue declined 45.5% year-over-year to $324 million.

For the quarter ending June 30, 2022, COOP’s EPS and revenue are expected to decrease 98.4% and 39.2% year-over-year to $0.03 and $418.26 million, respectively. Over the past three months, the stock has lost 17.9% to close the last trading session at $38.90.

COOP’s weak prospects are reflected in its POWR Ratings. It has a D grade for Growth, Stability, and Sentiment.

Within the Financial Services (Enterprise) industry, it is ranked #64. To see the other ratings of COOP for Value, Momentum, and Quality, click here.

PennyMac Financial Services, Inc. (PFSI)

PFSI is a specialty financial services firm that operates in the production, servicing, and investment management segments. The production and servicing segments are in the mortgage banking business. The production segment performs loan origination, acquisition, and sale activities, while the servicing part does the servicing of loans, execution, and management of early buyout loan transactions.

PFSI’s total net revenue decreased 30.3% year-over-year to $657.50 million for the first quarter ended March 31, 2022. The company’s net income declined 53.9% year-over-year to $173.59 million. Also, its EPS came in at $2.94, representing a decrease of 42.9% year-over-year.

Analysts expect PFSI’s EPS and revenue for the quarter ending September 30, 2022, to decrease 63.2% and 37.6% year-over-year to $1.40 and $491.14 million, respectively. The stock has lost 40% year-to-date to close the last trading session at $41.86.

PFSI’s POWR Ratings reflect these bleak prospects. It has an F grade for Growth and a D grade for Sentiment.

Again, it is ranked #54 in the same industry. Click here to see the other ratings of PFSI for Value, Momentum, Stability, and Quality.


WD shares were trading at $88.82 per share on Thursday morning, down $4.50 (-4.82%). Year-to-date, WD has declined -40.54%, versus a -22.61% rise in the benchmark S&P 500 index during the same period.


About the Author: Dipanjan Banchur


Since he was in grade school, Dipanjan was interested in the stock market. This led to him obtaining a master’s degree in Finance and Accounting. Currently, as an investment analyst and financial journalist, Dipanjan has a strong interest in reading and analyzing emerging trends in financial markets. More...


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