Zacks Industry Outlook Highlights PennyMac Financial, Lending Tree and Finance of America Companies

Chicago, IL – February 6, 2025 – Today, Zacks Equity Research discusses PennyMac Financial Services, Inc. PFSI, Lending Tree, Inc. TREE and Finance of America Companies FOA.

Industry: Mortgage & Related Services

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The Zacks Mortgage & Related Services industry continues to be impeded by the volatility in mortgage rates, given several evolving macroeconomic factors. With the relatively higher mortgage rates, purchase market tightening and declining refinancing volumes have cast a shadow over the industry’s speedy recovery.

Amid the ongoing economic headwinds, diversified business operations and encouraging scenarios for the servicing segment will help industry players like PennyMac Financial Services, Inc., Lending Tree, Inc. and Finance of America Companies.

The Zacks Mortgage & Related Services industry comprises providers of mortgage-related loans, refinancing and other loan-servicing facilities. Numerous banks have been retreating from the mortgage business due to higher compliance and capital requirements. This allowed non-banks to increase their capacity to gain market share in the mortgage loans business, which accounts for the largest class of U.S. consumer debt.

Players in the industry are dependent on the interest rates determined by the Federal Reserve, as prevailing rates influence customers’ decisions to apply for mortgages. The companies also generate investment income from several financial assets, such as residential or commercial mortgage-backed securities and asset-backed securities. The firms make equity investments in mortgage-related entities, among others.

Relatively High Mortgage Rates Keep Homebuyers on the Sidelines: Despite the Fed’s aggressive monetary policy easing, the mortgage rates did not decline significantly. The 30-year fixed rate has been hovering between 6% and 7% for most of the last two and a half years. Due to relatively higher rates and a persistent supply shortage, affordability hurdles still exist for many homebuyers, thus keeping them on the sidelines. This continues to affect mortgage demand, origination and refinancing.

Mortgage rates are likely to stay elevated this year as the fundamentals of the U.S. economy, such as employment and GDP growth, are outpacing expectations, resulting in higher long-term interest rates. Given this, mortgage originations and refinancing activities will likely witness a negative trend. This will increase operational and financial challenges for originators, and reduce the gain on sale margin and new investment activities, hurting industry players’ top-line growth.

Competition Picks Up: Per an MBA forecast, U.S. single-family mortgage debt outstanding is expected to see an increasing trend in the upcoming years. This is anticipated to be primarily driven by house price appreciation. While this typically results in growth of the single-family mortgage portfolio for industry players, the competitive landscape of the mortgage services industry is likely to be a deterrent. Numerous companies have hinted at significant declines in gain-on-sale margins across the space. With tighter margins, many originators may struggle to be profitable in the upcoming period.

Servicing Segment to Offer Support: With significant declines in gain-on-sale margins and lower loan origination volume, industry players are likely to increase their reliance on the service segment for profitability. In a relatively high rate environment, the servicing segment offers a natural operational hedge to the origination business.

Slow prepayment speed is expected to create tailwinds related to mortgage service rights (MSR). Hence, MSR investments are poised to deliver significant value appreciation and offer attractive unleveraged yields. With the U.S. single-family mortgage debt outstanding projected to reach $14.7 trillion by 2025-end, there are massive growth opportunities in the servicing portfolios.

The Zacks Mortgage & Related Services industry, housed within the broader Zacks Finance sector, currently carries a Zacks Industry Rank #141, which places it in the bottom 43% of more than 249 Zacks industries.

The group’s Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates drab near-term prospects. Our research shows that the top 50% of the Zacks-ranked industries outperform the bottom 50% by a factor of more than 2 to 1. Looking at the aggregate earnings estimate revisions, it appears that analysts are losing confidence in this group’s earnings growth potential. Since October 2024, the industry’s earnings estimates for the current year have been revised 7.1% lower.

Before we present a couple of stocks you may want to consider for your portfolio, let us look at the industry’s recent stock-market performance and valuation picture.

The Zacks Mortgage & Related Services industry has underperformed the broader Zacks Finance sector and the S&P 500 composite in the past year.

The industry has gained 13.8% in this period compared with the broader sector’s growth of 28.8% and the S&P 500 composite’s rise of 25.2%.

On the basis of the price-to-book ratio (P/B), which is commonly used for valuing mortgage and related services companies, the industry currently trades at 4.77X compared with the S&P 500’s 8.89X.

Over the last five years, the industry has traded as high as 11.62X, as low as 1.18X and at the median of 3.61X.

As finance stocks typically have a lower P/B ratio, comparing mortgage and related services companies with the S&P 500 may not make sense to many investors. However, comparing the group’s P/B ratio with that of its broader sector ensures that the group is trading at a premium. The Zacks Finance sector’s trailing 12-month P/B of 4.16X for the same period is below the Zacks Mortgage & Related Services industry’s ratio.

PennyMac: The company is a specialty financial services firm with a comprehensive mortgage platform and integrated business focused on the origination and servicing of mortgage loans, along with the management of investments related to the U.S. mortgage market. The company is based in Moorpark, CA.

The company’s top line is benefitting from continued strength in its servicing business and a solid contribution from the production segment despite higher mortgage rates. Its efficient and low-cost operating platform and strong capital levels are other tailwinds. PFSI’s multi-channel approach to loan production drives strong competitive advantages over peers.

The Zacks Consensus Estimate for PFSI’s 2025 earnings is $14.02 per share, indicating a 21.7% rise from the year-ago period’s reported level. PFSI currently has a Zacks Rank #3 (Hold) and a market capitalization of $5.21 billion.

Lending Tree: This parent company of LendingTree, LLC, is headquartered in Charlotte, NC, and has been operating solely in the United States since July 1998. Its online marketplace provides clients with access to product offerings from more than 600 partners.

LendingTree is focusing on improving purchase conversion rates, while assisting in meeting its customers’ demands for home equity loans. The company’s market-leading position and flexible business model provide further diversified solutions for a wider array of lenders, will enable it to navigate through fluctuating macroeconomic situations and comparatively higher interest-rate environments.

TREE is committed to boosting revenues by diversifying its non-mortgage product offerings, particularly in the Consumer segment. Over the past years, the company has increased its services, such as credit cards, and widened loan offerings to personal, auto, small business, and student loans. With the launch of the LendingTree WinCard in partnership and an Upgrade in February 2023, the company provided its first branded consumer credit offering.

The Zacks Consensus Estimate for TREE’s 2025 earnings is pegged at $3.37 per share, indicating a 26.4% rise from the year-ago period’s reported level.

TREE currently has a Zacks Rank #2 and a market capitalization of $589.1 million.

Finance of America: It is a diversified, vertically integrated consumer lending platform. FOA’s product offerings include mortgages, reverse mortgages and loans to residential real estate investors distributed across retail, third-party network and digital channels.

Finance of America offers HomeSafe Second — a second-lien loan specifically designed for more than 55 homeowners seeking a better and more flexible way to tap their home’s growing equity. It allows homeowners to borrow against their home but leave their primary mortgage intact, maintaining any favorable rate secured previously. In October 2024, the company enhanced the HomeSafe Second product, including expanded state availability and lower interest rates. Further, Finance of America’s shift toward digital-first marketing strategies is driving growth.

The Zacks Consensus Estimate for FOA’s 2025 earnings is pegged at $2.67 per share, indicating a 256% upsurge from the year-ago period’s reported level.

The company sports a Zacks Rank of 1 (Strong Buy) at present and has a market capitalization of $243.1 million. You can see the complete list of today’s Zacks #1 Rank stocks here.

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