Report Expresses Concern about MI Stocks
A research report from Sanford C. Bernstein & Co. finds potential downside for mortgage insurance stocks, especially if home prices start to decline.
Analysts Jonathan Gray and Adam Weinrich downgraded two mortgage insurers they cover, Radian Group and PMI Group, to "market perform" from a previous rating of "outperform." The analysts also reduced earnings-per-share estimates, citing "sluggish volume growth" in the mortgage insurance business and increased losses resulting from regional downturns in home prices.
The Wall Street firm had previously reduced its rating on the nation's largest mortgage insurer, MGIC, to "market perform" a year ago.
The mortgage insurance industry finds itself in something of a quandary, according to the report.
"The MIs need lenders to become frightened of credit loss on home loans once again in order to revive their market share and volume growth. Unfortunately, the triggering event would likely be declines in home prices, and this will sap investor enthusiasm," the analysts wrote.
The report finds few other bright spots in the universe of mortgage stocks, citing challenges such as rising interest rates, lower mortgage volume, increased competition and the potential for home price corrections in some markets. At the same time, the government-sponsored enterprises "are being squeezed by their enemies in Washington."
Sanford C. Bernstein & Co. reduced its rating on Freddie Mac to "market perform" while it continues to rate Fannie Mae as "outperform," citing current stock price levels. The analysts give Fannie Mae a target price of $74 and Freddie Mac a target of $72.
One mortgage stock that does remain in favor with the analysts is Countrywide Financial Corp. Countrywide, the nation's largest originator and servicer of home loans, continues to receive an "outperform" rating, with the analysts expecting a 25% to 30% rebound in earnings for 2006. The analysts give Countrywide a $46 price target.
One other mortgage lender that gets an "outperform" rating is Golden West Financial, the "Rolls Royce of the mortgage finance industry," according to the report.
Golden West is credited with outperforming the broader market consistently for three decades.
Sanford C. Bernstein & Co. is a subsidiary of Alliance Capital Management.
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