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Originations Will Increase 17% in 2Q, KBW Says

JUL 21, 2014 6:06pm ET
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Mortgage origination volume for the second quarter will come in at $275 billion, a 17% increase from the previous quarter driven by a seasonal increase in purchase activity, according to Keefe, Bruyette & Woods analysts.

The KBW estimate is in line with the Mortgage Bankers Association, but lower than Fannie Mae and Freddie Mac expectations for the quarter, analysts note.

The first quarter's $235 billion in volume "looked like the trough quarter," analysts wrote in a research note Monday, adding that the MBA's mortgage applications index is 2% higher compared to the first quarter, but up by about 15% when factoring in a 45-day lag between loan application and loan closing.

Mortgage loan growth levels vary by company, as the decline in industry volumes "has disproportionately hurt larger lenders that have a higher percentage of refinance activity," analysts wrote. Judging from the already reported quarterly results from some of the largest banks, volumes are "largely in line with our estimates," even tracking a little on the upside.

For example, Wells Fargo and Bank of America saw 25% increases from the previous quarter, while JPMorgan Chase reported flat volumes due to lost market share, KBW said, while loan interest margins have declined slightly from the previous quarter.

Based on reported earnings results analysts are making some modest alterations to previous mortgage banking estimates. Some companies, such as Stonegate, "are meaningfully growing market share through acquisition," analysts wrote. The company's estimated mortgage origination volume is at $3.15 billion, down from KBW's previous estimate of $3.4 billion, but up from $2.4 billion in the previous quarter. The forecast for Stonegate's gain-on-sale margin is 121 basis points, up slightly from an estimated 118 basis points in the previous quarter.

KBW's estimates for PennyMac Mortgage Investment Trust's 2Q14 earnings per share remained unchanged at 55 cents per share, and $2.21 for the full year and $2.40 for 2015. Of the mortgage banks KBW covers, analysts wrote that PennyMac "remains the most attractive name based on valuation, as the shares trade at a modest premium to book value."

For Redwood Trust, which recently announced a partnership with the Federal Home Loan Bank of Chicago to create a conduit for jumbo mortgages, KBW is also maintaining earnings per share estimates for Redwood Trust at 27 cents per share for the second quarter; $1.07 per share at yearend 2014; and $1.42 for yearend 2015.

Evaluating the stocks of publicly traded mortgage firms, the analysts wrote, "We remain cautious on the mortgage servicers going into earnings since we think there could be downside risk based on higher-than-expected operating expenses. We are more constructive on the mortgage banks since we think the downside risk is more limited."

 

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