The housing finance stocks to own in 2024, according to Wedbush

Looking to 2024, Wedbush anticipates it will be a “purchase-centric” market in home finance once again, as even with the projected drop in rates, most outstanding mortgages will be well out of the money to refinance. The firm continues to favor the mortgage companies with larger servicing operations, including Mr. Cooper (COOP), PennyMac Financial (PFSI), and Rithm Capital (RITM), which could stand to benefit from some growth in purchase originations while maintaining solid servicing profits. Meanwhile, its top pick in the multifamily lender space remains Walker & Dunlop (WD).

LOWER RATES HELP, HEADWINDS REMAIN: Wedbush notes that 30-year mortgage rates are down nearly 100 basis points from their recent peak in October, and following the Fed pivot in December, Fed fund futures are now calling for about 150 points of rate cuts in 2024. While the firm does expect that lower rates will have some positive impact on the mortgage origination market in 2024, housing affordability and supply issues aren’t likely to go away anytime soon. Wedbush anticipates that 2024 will be a purchase-centric market once again, as even with the projected drop in rates, most outstanding mortgages will be well out of the money to refinance.

Plus, mortgage spreads remain well above historic levels, which the firm attributes to a combination of increased prepayment risk on newly originated mortgages, along with reduced MBS buyer demand. Given the current macro environment, Wedbush does not anticipate that these factors will alleviate anytime soon, which could keep 30-year mortgage rates elevated for some time. That said, it expects mortgage market trends through at least the first half of 2024 to largely mimic what was seen in 2023.

SINGLE-FAMILY MORTGAGE OUTLOOK: In general, Wedbush believes that projected rate cuts this year will not be enough to ease the current “lock-in effect” being seen across the housing industry. That said, purchase mortgage volumes should be incrementally better in 2024 compared to 2023, and it anticipates non-banks will continue to gain market share as Basel III endgame regulations become more finalized. However, the firm believes that much of this benefit is already priced into the valuations of the larger public mortgage originators, including Rocket Companies (RKT) and UWM Holdings (UWMC). Wedbush continues to favor the mortgage companies with larger servicing operations, including Mr Cooper, PennyMac Financial, and Rithm Capital, which could stand to benefit from some growth in purchase originations while maintaining solid servicing profits.

MORTGAGE REITS, MULTIFAMILY LENDER OUTLOOK: On the commercial side of the mREIT equation, Wedbush believes the decline in rates should help stimulate higher levels of agency multifamily financing activity, but stock performance will likely be a function of how well or poorly companies are positioned to manage any pressure on their multi-family portfolios through to mid-summer, and some reserve building is expected amongst lenders in this group. Although not an mREIT, its top pick in the multifamily lender space remains Walker & Dunlop.

TARGET CHANGES: The firm raised its price targets for Outperform-rated Guild Holdings (GHLD) to $17 from $15, Outperform-rated MFA Financial (MFA) to $13 from $12, Outperform-rated Mr. Cooper Group to $80 from $70, Neutral-rated PennyMac Mortgage (PMT) to $15 from $14, Outperform-rated Rithm Capital to $13 from $12, Neutral-rated Rocket Companies to $13 from $8, Neutral-rated United Wholesale Mortgage to $7 from $6.50.