FBR: Mortgage banking will rejuvenate in 2015

Specialty servicers face headwinds

Mortgage banking is projected to overcome the significant headwinds it faced last year and instead bring in a profit in 2015, according to Paul Miller, an analyst with FBR Capital Markets.

“We expect the profitability of the mortgage banking sector to turn around as origination capacity rationalizes, gain-on-sale margins stabilize, and originations improve somewhat,” said Miller.

Since valuations have likely bottomed out and the outlook for the sector has improved, Miller said he continues to believe that small to mid-sized originators like HomeStreet (HMST), PennyMac Mortgage Investment Trust (PMT) and Stonegate Mortgage Corporation (SGM) stand to benefit most from a rationalized market.

FBR Capital’s current origination expectations sit at $1.3 trillion for FY15 and $1.5 trillion for FY16 thanks to a sustained low rate environment, increased refinance activity and continued purchase market recovery.

And this estimate could grow even if regulators make concrete steps to expand the credit box, including lightening distressed servicing standards and clarifying rules for the liability attached to servicing and originating loans.

On the servicing front, Miller said, “We believe that they will face an uphill battle in FY15 as regulators remain focused on the sector, new capital rules are likely to be announced, and the overall profitability of the business remains in question.”

But it’s not all bad news. There is potential for continued growth through 2015 from a good amount of legacy products residing at the banks that could be sold.

“Given increased regulatory scrutiny and possible capital requirements, we maintain that the ultimate profitability of the specialty servicing sector is in question, which causes us to remain on the sidelines,” Miller said.

However, Miller is still positive on names like New Residential Investment (NRZ) and PennyMac that are well positioned to benefit from an improving housing market but do not face the same regulatory headwinds.

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