Housing, mortgage-related stocks take a hit
10:20a ET October 21, 2009 (MarketWatch)
BOSTON (MarketWatch) -- The pullback in stocks tied to the U.S. housing and mortgage markets the past month is a worrying signal that residential real estate will see more pain as delinquencies and foreclosures rise.
Companies linked to the mortgage-insurance business like Radian Group Inc. , MGIC Investment Corp. , PMI Group Inc. and MBIA Inc. have been among the market's worst performers over the past four weeks. The overall financial sector has been slightly positive over the period in volatile trading.
Shares of mortgage-finance giants Fannie Mae and Freddie Mac sold off this week after some Wall Street analysts said the firms' common and preferred shares are likely worthless even if the troubled companies are recapitalized by the banking industry. The stocks were recovering somewhat on Wednesday.
Additionally, home-builder stocks such as KB Home and Pulte Homes Inc. have seen pullbacks in the range of 20% over the past month.
On Monday, a builder trade group said its industry confidence index posted an unexpected decline in October.
Builder stocks traded lower Tuesday after the Commerce Department reported housing starts were roughly flat in September. "The looming expiration of the homebuyer tax credit has likely begun to affect new construction at this point," wrote Adam York, an economist for Wells Fargo Securities. Building permits for single-family homes dropped 3%.
A busy week for housing data will wrap up on Friday with a report on existing home sales for September.
The decline in builder confidence "confirms the view that the late spring and summer was a period of strong momentum for the housing market, but that this momentum has slowed recently across the country," said Deutsche Bank analyst Nishu Sood.
Pointing to the expiration of the $8,000 tax credit as the most obvious factor, he said it's also likely that pent-up demand from late 2008 and early 2009 is largely exhausted.
"This has exposed the weak foundations for organic housing demand, which is being constrained by a difficult employment situation, depressed consumer sentiment and an ongoing transition back to more normalized mortgage-lending standards," Sood wrote in a note to clients this week.
Mortgage insurers
The outlook is similarly bleak for the mortgage insurers. Shares of MGIC lost 12% on Friday after the company said its third-quarter net loss grew to more than $500 million as delinquencies rose.
Commenting on MGIC's results, Morningstar analyst Jim Ryan said on the basis of fundamentals, things should be looking up for the company.
"After all, penetration into new mortgage originations is on the rise as lenders seek mortgage insurance in lieu of creative financing schemes for borrowers with low down payments," he wrote in a research note. "Falling home prices prolong the time a borrower must continue making mortgage insurance payments, thereby extending the life of a policy and the revenue stream to MGIC."
At the same time, underwriting standards have grown stricter after the credit crunch, which reduces the risk to mortgage insurers, while the price of mortgage insurance has risen over the past year, Ryan said.
"But all of the positives cannot circumvent the primary issue: MGIC is on the verge of running out of capital to support writing new insurance, and existing capital may not be sufficient to cover claims from existing insured mortgages," the analyst said.
MGIC said losses incurred in the third quarter rose to $971 million from $788.3 million in the same quarter the prior year, primarily due to an increase in delinquencies.
"Mortgage delinquencies have exploded as borrowers lured into unaffordable mortgages default at record pace. Housing prices have cratered, leaving an expanded group of homeowners with no equity in their homes," Ryan said. "And though the economy may be somewhat on the mend, an overextended, overleveraged, and tapped-out consumer will find it difficult to manage his or her budget, including mortgage payments."
Credit trends
As more mortgage insurers report quarterly results, analysts will be looking for any improvement in delinquencies and defaults.
"We expect this quarter could prove a bit more challenging as prime credit trends continue to worsen in conjunction with unemployment trends," said Nathaniel Otis at Keefe, Bruyette & Woods in an earnings preview for the group. "In the end, third-quarter results should provide another important data point to help further clarify ultimate losses."
Although most mortgage-insurance companies have seen a modest slowdown in subprime delinquencies, Otis said prime borrowers are an area of growing concern as the economy weakens.
"With the prime segment representing approximately 80% of the risk in force for the companies, we believe that small shifts in the trends in this segment can have a material impact on the ultimate loss expectations for the companies," the analyst said.
"With job losses in the overall U.S. economy continuing to mount, albeit at a slower pace, and with the expectation that job growth is likely to be a very slow process once overall economic growth resumes, we believe delinquencies in the prime segment may continue to increase at an elevated pace," Otis added.
Millions of Americans are falling behind on their mortgage payments, which is putting serious stress on the government's mortgage-modification programs designed to stem foreclosures.
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