2022 has not been kind to mortgage stocks. For more than a decade, mortgage rates have been historically low and homebuyers took advantage of it. Now mortgage rates are on the rise, which makes mortgages less affordable for homebuyers and the market has slowed.

Why Are Mortgage Stocks Down?

As the US recovered from the COVID pandemic, mortgage rates were low and the US economy was in recovery mode. That’s when the Federal Reserve vowed to end its easy money stance and begin to raise interest rates in 2022. Earlier in June, the Fed raised rates 75 basis points—more than expected. Mortgage rates rose accordingly.

At the beginning of 2022, homebuyers could get a mortgage rate around 3% on average. By June, mortgage rates were approaching 6%. Another data point for the mortgage market is mortgage applications. Applications can be an indicator of demand for mortgages. Mortgage applications fell 6.5% in the beginning of June this year.

Mortgage stocks also make refinance mortgages. Because mortgage rates were so low for so long, most homeowners have already refinanced their mortgages at these low rates. As mortgage rates keep rising, the market for refinancing looks pretty bleak.

On the other hand, the red-hot housing market has lifted home values to new highs. That means home equity is also on the rise. As the equity in a home rises, homeowners have the chance to take out home equity loans. Home equity loans could be a source of new sales for mortgage stocks this year. Just like other types of mortgages, home equity loans face rising rates, which will likely make potential borrowers think twice about taking out a home equity loan.

Best Mortgage Stocks on the Market

Rocket Companies (NYSE: RKT) and Lendingtree (NASDAQ: TREE) are two mortgage stocks to consider.

Rocket Companies is the #1 home lender in the US. It runs the popular mortgage app Rocket Mortgage. According to its most recent presentation, it has processed over $1.5 trillion in mortgages since it started. Though, the company has gain notoriety over the last few years, it has been in business for 36 years.

In addition to home loans, Rocket Companies also does car loans. With its recent buyout of Truebill, the company also has a personal finance platform. The platform handles everything from lowering bills, cancelling subscriptions, tracking spending, managing budgets and improving credit. Truebill has over $100 million of recurring sales.

Rocket Companies stock IPO’d in August of 2020 and has fallen nearly 70% since then. In 2022, the stock is down 47% and now trades at a P/E ratio of 12x. The stock does not pay a dividend.

Lendingtree is also a leader in online mortgages. The company also sells insurance, which has grown in its overall sales. In addition, Lendingtree makes personal loans and issues credit cards to its customers. The company focuses on borrowers with good credit. For instance, customers with personal loans have an average credit score of 620. In addition, mortgage customers have an average credit score of 690.

Lendingtree stock does not pay a dividend and has a P/E ratio of 17.5x

Mortgage Stock Giants

Bank of America (NYSE: BAC) and JPMorgan Chase (NYSE: JPM) are two bank mortgage giants with struggling stock prices.

Bank of America is a leader in personal banking. In addition to mortgages, the company does business lending, credit cards and wealth management. According to its most recent presentation, mortgage loan balances have recovered briskly since their pandemic lows. Its customers are also in great shape. For instance, past due customers are below their pre-pandemic levels of 2019. In addition, charge-offs have been cut in half since the first quarter of 2021.

For banks, net interest income plays an important role in a company’s net income. Net interest income is the difference between the rate a bank pays a customer for their checking and savings deposits and the rate it charges loan and credit card borrowers. For Bank of America, net interest income is up from the first quarter of 2021 to $11.7 billion.

Bank of America stock is down 30% this year and trades at a P/E ratio of just over 9x. The stock also pays a dividend yield of 2.6%.

JPMorgan Chase is one of the largest banks in the US. According to its most recent presentation, mortgage loans are up 55% since 2019. Though the presentation noted that JPMorgan thinks new home mortgages will be flat and refinances will fall in 2022.

The company thinks its net interest income will be over $56 billion in 2022. JPMorgan and Chase stock is down 27% this year and trades at a P/E ratio of under 9x. The stock also pays a dividend yield of 3.4%.

Mortgage REITs

Arbor Realty Trust originates and services loans for multifamily real estate. In its first quarter 2022 presentation, the company states, “Arbor Realty Trust is one of the nation’s premier real estate finance companies, offering the most comprehensive, customized and creative financing platforms in the commercial real estate industry. Arbor’s diversified lending solutions are bolstered by its economic foundation as a real estate investment trust; however, it prides itself on conducting business as not just another mortgage REIT, but as a firm that builds long-term client partnerships with a results-oriented approach that produces innovative and efficient financial solutions.”

During the first quarter of 2022, Arbor Realty Trust raised its dividend to $.38 per share. It has increased its dividend for eight straight quarters. The stock is down 26.5% this year now has an eye-popping dividend yield of 11%.

Annaly Capital Management is one of the largest mortgage REITs. According to its first quarter 2022 slide deck, the company invests in mortgage-backed securities that are guaranteed by government agencies. It also invests in mortgage servicing rights, which provide the right to service residential loans in exchange for a portion of the interest payments made on the loans. Annaly stock is down over 21% this year and now fetches a dividend yield of nearly 14%. The stock also trades at a P/E ratio of 3.6x.

Investing in Mortgage Stocks

Mortgage rates are as high as they have been in recent past. In fact, the home buying market has compltly flipped in the past year. Therefore, it’s important to do your due diligence before investing in mortgage stocks.

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