Real Opportunity Brewing in Mortgage Market Stocks
Insiders are buying Rocket, Fannie and Freddie are in court again, Impac announced a firm date for Preferred conversion.
If you take a look at just about any mortgage company right now, the stock prices are beaten down. Loan Depot (LDI), UWM Holdings Corporation (UWMC), Rocket (RKT), and Impac Mortgage (IMH) are great examples of companies trading near the bottom of their 52 week ranges. These companies originate mortgages and provide access to homeowners to borrow money. Opportunity may present itself in these companies soon and insiders are buying.
The reason for the stock weakness is that the mortgage industry is incredibly cyclical. Mortgage originators tend to do very well when rates are dropping and not so well when rates are increasing. A large part of overall mortgage production activity is refinance business. So, logically, it makes sense that activity drops when rates go up.
It’s very widely reported that mortgage rates are near a 22 year high currently, with the 30-year fixed rate mortgage over 7%. The gold standard for mortgages is the 30-year fixed rate mortgage because it is backed by the government sponsored entities Fannie Mae (FNMA) and Freddie Mac (FMCC). In this market, however, buyers may start looking to adjustable rate mortgages, interest only loans, and 40 year mortgages to get into the house they want.
In my last substack piece, I made the case that home prices would remain relatively stable due to constrained supply and buyers would demand more financing options due to higher rates. If you haven’t read the article, I encourage you to take a look. If you aren’t convinced, then go to the MBA’s website and read about mortgage credit availability and the NAR’s website and view historical data for housing supply. As a whole, our society tends to overreact to a crisis and this latest crisis in housing affordability came about due to a crisis in housing speculation from over a decade ago.
Rocket Mortgage
In August 2020, during the COVID pandemic and record low interest rates, Rocket Mortgage came public raising $1.8 billion. While interest rates remained low, the company performed well and the stock rose as high as $43 per share. They also declared two meaningful dividends over a $1 per share since IPO.
Should you be interested in buying this stock? Well, insiders certainly are interested in it. Jay Farner, CEO and Matthew Rizik, Director have purchased a combined 1.2 million shares since the beginning of September, at prices up to $7.98 per share.
Fannie Mae and Freddie Mac
As a former shareholder of Fannie and Freddie, I am keenly aware of the events of August 2012, when the government decided to amend the terms of the bailout and conservatorship of the entities. This is when they instituted a unilateral amendment to the terms of the preferred stock purchase agreements and instituted a net worth sweep. At the time, I had accumulated my life savings in the preferred stocks of the companies. I am no longer a shareholder, thankfully.
The interesting thing right now is happening with one of the lawsuits surrounding that action. These have been in and out of court for a decade now. The interesting case is being heard before a jury and the government has actually suggested that damages be limited to the damages caused by the drop in the stock prices after the net worth sweep was announced.
Katie Buehler is posting concise updates on the cases on Twitter and I recommend you follow her, if you are interested.
As a non-shareholder, I am mildly interested from the fact that this case once held so much importance for me that I went to DC to speak to Congressional representatives and wrote about it on Seeking Alpha. If the net worth sweep was never implemented, I am confident that I would be retired today. The day the net worth sweep was announced was the worst day of my life due to the strains it put on my family.
Impac Mortgage
Impac Mortgage (IMH) recently announced the results of their tender offers to Preferred B and C shareholders, successfully obtaining more than 66.67% of each class for a restructuring. On Friday, they announced that they would be converting all of the remaining shares on November 15th, which they are legally bound to do based on the terms of each share class. For those preferred shareholders that are affected, here is the information you may want to know.
Impac Preferred B (IMPHP) - Each share will receive 13.33 common shares and $3 worth of Preferred D, which could be called by the Board of Directors very soon. The Preferred D will not trade in the market and will carry a large dividend. Originally, shareholders agreed to a cash payment, but this option was not allowed by the Maryland statutes. If the Board of Directors calls the preferred, then shareholders will see cash show up in their accounts.
Impac Preferred C (IMPHO) - Each share will receive 1.25 common shares, 1.5 warrants with a strike of $5, and $0.10 worth of preferred D. Neither the warrants or the preferred D are tradable in the market. The warrants will be executable in 3 years and valid for 10 years.
I am a common shareholder of Impac Mortgage.