Higher interest rates will benefit mortgage service companies.
The Zhitong Finance App learned that Wedbush Securities said that rising interest rates will benefit mortgage service companies, especially when the yield on the benchmark 10-year US Treasury bond rises above 4.5%.
On Tuesday, the 10-year US Treasury yield broke 4.7% for the first time since the beginning of November last year. Higher than expected inflation and other US economic data prompted investors to sell bonds in a big way due to weakening expectations of interest rate cuts.
Wedbush Securities said mortgage service companies benefit from an environment where interest rates remain high for a longer period of time. This segment includes Mr.Cooper Group (COOP.US), PennyMac Financial Services (PFSI.US), and Rithm Capital (RITM.US).
“In addition to the positive impact of higher interest rates on the value (mortgage service rights), lower levels of refinancing have opened the door to lower amortization costs of mortgage service rights and higher overall operating margins,” Wedbush Securities said.
If the yield on 10-year US Treasury bonds falls below 4.5%, then most housing and housing finance companies covered by Wedbush will be at an “acceptable (albeit not very good)” level in terms of loan disbursements, profits, and operating margins.
However, as the yield on 10-year US Treasury bonds is higher than 4.5%, and interest rate fluctuations show no sign of abating, the company currently expects the scale of single-family and multi-family residential loans to be under increasing pressure, and the multi-family credit index will also face increasing pressure. For loan issuers including Guild Holdings (GHLD.US), Rocket (RKT.US), and UWM Holdings (UWMC.US), rising interest rates may slow down the buying market and “kill any signs of life” in the refinancing market, which may lead to a decline in sales margins.
According to Mortgage Bankers Association (MBA) data, mortgage applications fell 10% year over year in the first quarter of 2024, according to data from the Mortgage Bankers Association (MBA). This was mainly due to a year-on-year decline in purchasing activity of around 15%.
Wedbush recently downgraded Arbor Realty Trust (ABR.US), Walker & Dunlop (WD.US), and Redwood Trust (RWT.US) from “outperforming the market” to “neutral,” citing concerns that an environment where interest rates remain high for a longer period of time may have a “gradual negative impact” on multi-family bridge loan credit metrics, agent transaction volume, and single-family household loan volume.