The quick rise in mortgage rates that burst the refinancing bubble is beginning to cause pain for some finance firms that feasted on consumer demand for low-interest loans.
Last week, one of the West Coast's biggest private mortgage lenders, Capitol Commerce, closed its doors after failing to anticipate the rapid spike in bond yields. And now some financial services fund managers are beginning to jump ship on some of the mortgage industry's strongest players, fearing the halcyon days for these stocks are over.
Many mortgage-related stocks are down an average of 20% from the 52-week highs they hit in June. Some of the biggest losers over that stretch are
( CFC), down 20% to $65.30;
, off 18% to $41.44;
New Century Financial
, down 29% to $24; and
( NFI), off 29% to $53.
Until recently, these stocks had been some of the financial sector's strongest performers this year.
Michael Stead, the portfolio manager for Wells Capital Management's SIFE Financial Services Fund, said he's been shying away from mortgage lenders and financial firms that generate much of the earnings from home lending. Even if interest rates stabilize, Stead said, the best days for many of these stocks have passed, because investors and traders have begun to look elsewhere to put their money.
"It's been great while it lasted," said Stead. "With rates going up and the mortgage refinancings going down, these stocks are vulnerable."
Stead recently unloaded his portfolio's entire holding of Doral even though the big Puerto Rico-based mortgage lender had been one of his top performers this year. While Stead thinks Doral's business model is fundamentally sound, he fears that investors are no longer discriminating among mortgage firms and generally are selling the entire group.
"I got out not for any fundamental reason, but the psychology of the investor is such that the stock could possibly weaken further," said Stead.
New data help explain the indiscriminate selling. The Mortgage Bankers Association of America reported Wednesday that applications for home mortgages fell for a second straight week to their lowest level in more than a year. Refinancing applications also are back down to year-ago levels.
The drop in mortgage applications comes at time when the interest rate on the 30-year fixed rated mortgage has jumped to 6.22%, from 4.99% back in mid-June. Meanwhile, yields on the bellwether 10-year Treasury have soared to 4.5% from just over 3%.