Weak Third Quarter Expected for Mortgage Banks

Investment bank FBR Capital Markets released its preview of third-quarter earnings for major U.S. banks Monday, with a cloudy outlook for mortgage banking. In general, bank stocks have underperformed the broader market by about 2 percent over the third quarter; and zeroing in on the mortgage market, FBR is not optimistic about Q3 results.

“We believe mortgage banking results will be weak, with volumes coming in low,” FBR stated.

FBR’s third-quarter mortgage originations estimate is $349 billion, a 29 percent decline over the quarter.

The abating refinance market is a major drag on the mortgage industry, and, “[w]e do not believe that there will be a strong enough increase in the purchase market this quarter to offset the loss in refi volume,” FBR stated.

FBR estimates a 46 percent decline in refinances in the third quarter and a 2 percent rise in purchase originations.

Rising interest rates have made refinancing less attractive for homeowners, even after a recent drop of almost 40 basis points.

Looking ahead, FBR expects declines in purchase originations over the following two quarters before a significant uptick in the third quarter of 2014.

While rising rates have cut into gain-on-sale margins, FBRnoted a recent uptick in margins after the Federal Reserve’s announcement that it will not soon scale back its bond purchases.

Mortgage servicing portfolios benefited from the rising interest rates but not enough to counteract meager originations and low gain-on-sale margins, FBR said.

FBR expects special servicers have fared best in the recent quarter, naming Nationstar Mortgage HoldingsWalter Investment Management Corp., and HomeStreet as high performers for the quarter.

While FBR does expect an increase in real estate investment trusts (REITs) this quarter, it says REITs “may underwhelm expectations.”

FBR expects government-supported REITs to increase 2 percent and hybrid REITs to increase about 1.5 percent.

“However, we are concerned that the increase in book value may not come in as high as our estimates suggest,”FBR stated. “Our book value estimates assume relatively static portfolios, but for most names, portfolios are anything but that.”

Portfolio hedging will detract from some of the recent strength in the mortgage backed securities market, according to FBR.

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