It’s earnings season again. And with each new earnings statement release, analysts from all corners of the industry attempt to read the tea leaves and determine where the mortgage market is headed in the future.
Analysts from Keefe, Bruyette & Woods have joined the party and released their own prognostications for what the first quarter earnings will look like and what that means for the rest of the year.
Here are KBW’s five predictions for the mortgage market:
1. Q1 mortgage volume will come in $20 billion under KBW’s initial prediction
KBW’s analysts predict the mortgage volume for Q1 to be roughly $225 billion. That is under their previous estimate of $245 billion. The $225 billion estimate is in line with the latest estimates from Fannie Mae and the Mortgage Bankers Association.
While the MBA mortgage applications index is down an average of roughly 5% in Q1, it was down by nearly 25% quarter-over-quarter for the period from mid-November 2013 to mid-February 2014, which should drive Q1 closings.
2. Two big title insurers will deliver lower earnings than expected
KBW’s analysts have downgraded their estimates of the earnings for First American Financial (FAF) and Fidelity National Financial (FNF). When FAF releases its earnings on April 24, KBW analysts are predicting EPS of $0.10, down from their estimate of $0.16.
When FNF takes its turn on April 30, KBW predicts that EPS will be $0.16 instead of the $0.24 it had predicted.
KBW downgraded its estimate based on slightly lower order counts and lower margins.
3. Mortgage banks’ earnings will be down, but the decline isn’t overwhelming
While KBW’s analysts are modeling a 25% decline in industry mortgage volume, they are modeling more modest declines for most mortgage banks. KBW believes that the decline in industry volumes has disproportionately hurt the larger lenders that have a higher percentage of refinance activity.
Smaller mortgage originators also continue to grow share. So KBW’s analysts are expecting only modest reductions in volume for mortgage banks.
KBW is assuming modest reductions in gain-on-sale margins. This is consistent with market commentary on pricing and the relatively stable spread between primary and secondary mortgage rates during the quarter.
4. Two of the big three nonbank service companies will deliver lower than expected earnings but each company will continue to grow its market share
KBW is predicting lower than expected earnings for Ocwen Financial (OCN) and Walter Investment Management (WAC). Earnings for Nationstar (NSM) are expected to come in at KBW’s previously estimated level. KBW’s analysts said that they had already assumed a somewhat slower pace of growth for the sector so the projected earnings adjustments are not material. They expect the servicers to continue to grow their mortgage origination market share.
KBW has trimmed its estimate for Ocwen’s EPS from $0.98 to $0.93 based on slightly lower GOS income, down from $49 million in 2013 Q4 to $45 million in 2014 Q1. KBW does predict that the company will add $48 billion in acquisitions in 2014.
For Walter, KBW is reducing its estimate from $0.95 to $0.91. This is due to only $10 billion in gross servicing acquisitions for the company, down from an estimate of $20 billion. KBW does note that on March 31, Walter announced the closing of $40 billion in earlier announced acquisitions that will board over the course of the year.
KBW is maintaining its earnings estimate for $0.62 for Nationstar. KBW’s analysts note that their operating EPS estimates have not changed, but they have adjusted our assumptions to incorporate lower servicing additions from mortgage banking and modestly increased our gain-on-sale margin expectation.
5. The news for CoreLogic is decidedly positive
KBW is raising its estimate for CoreLogic’s (CLGX) from $0.09 to $0.13. KBW reiterated its “outperform” rating for CoreLogic. KBW is predicating that the CoreLogic’s mortgage volume to be within the company’s expected range $1 trillion to $1.1 trillion.
KBW does note that the primary risks for CoreLogic relate to its high level of exposure to the residential mortgage and housing markets. These risks include a greater-than-expected decline in mortgage origination volumes, material home price depreciation, and a reversal of the positive economic trends that have been experienced recently.
Despite those risks, KBW is still setting a price target of $37 for CoreLogic.
