Mortgage Company Stocks Lower As Investors Use Caution
Shares of subprime lenders closed lower Monday along with the overall market as investors await two key housing reports later this week, the Houston Chronicle reports.
Today, the National Association of Home Builders will report on October existing-home sales, and on Wednesday, the Commerce Department plans to release new home sales data for the month.
The health of a mortgage lender is tightly linked to housing prices and interest rates, and investors are struggling in this volatile market to figure out whether housing prices will weaken or stabilize.
“There are some legitimate fears the housing reports will be worse than anticipated,” said Roth Capital Partners’ Richard A. Eckert.
Until a few months ago, everyone in the subprime mortgage space was happy. As housing prices surged, lenders devised exotic loans to encourage buyers with risky or limited credit to take out loans.
Such loans often began with low mortgage rates, scheduled to reprice higher in 2-3 years. If a borrower had trouble paying off a loan, they refinanced their home loans using their rapidly appreciating houses as collateral.
Consumers loved it because they found cheap home mortgages to buy houses gaining in value, and mortgage lenders benefitted by growing their loan base. Bond investors who buy mortgages in the secondary market were happy because mortgage-backed securities bore safe, reliable yields.
And it seemed it could last forever, as long as housing prices continued skyrocketing and interest rates stayed close to zero.
But as the housing market sags and the Fed has raised interest rates to combat inflation, investors have soured on subprime mortgage companies. Stocks now reflect expectations for higher rates of foreclosure, more competition for borrowers and lower home values.
While borrowers haven’t begun defaulting in droves quite yet, they may once the home mortgage rates on many loans issued in 2005 reset higher. Because houses are no longer gaining in value as quickly, borrowers will find it tougher to pay off loans through refinancing.
The investors who buy home loans have begun sending back loans for early payment defaults or other term breaches, and many lenders have increased their reserves to prepare for more of these loan returns.
Investors already know going into 2007 the mortage market won’t be as friendly as it was at the end of last year. The housing reports this week may reflect just how bad things will get.
Countrywide shares were down 3.1 percent on the NYSE, and Accredited Home Lenders Holding Co. dipped 3.2 percent, while Thornburg Mortgage fell 35 cents to end at $24.67 on the NYSE. Elsewhere in the sector, American Home Mortgage Investment Corp. slipped 67 cents, or 2 percent.