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FBR sees better year for big banks, homebuilders in 2012

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Big banks, including Wells Fargo (WFC: 26.29 0.00%) and U.S. Bancorp (USB: 26.04 0.00%), are likely to outperform the rest of the financial services market in 2012, and homebuilders could see a "start of the return to normal," according to a report from FBR Financial Services (FBRC: 2.04 0.00%).

The investment bank predicted new mortgages will total .1 trillion next year.

Other banks receiving an outperform rating included Fifth Third Bancorp (FITB: 12.23 0.00%) and PNC Financial Services Group (PNC: 54.62 0.00%).

The banks recommended by FBR have all shown loan growth, according to the report, along with a strong deposit base and capital levels. The report said another round of originations through the Home Affordable Refinance Program will likely give mortgage bankers a boost. The outlook forecasts about 0 billion in HARP originations for next year.

Its .1 trillion new mortgage estimate for 2012 is rosier than the 0 billion predicted by the Mortgage Bankers Association. The group previously estimated about .2 trillion in mortgage originations for next year.

For homebuilders, the report said eased unemployment and relaxed lending standards will hold the key for 2012. Solid definitions of qualified mortgages and qualified residential mortgages will make it easier for homebuyers to get financing.

Homebuilders Lennar Corp. (LEN: 19.53 0.00%) and Standard Pacific Corp. (SPF: 3.19 0.00%) received outperform ratings.

Qualified residential mortgages exempt from the Dodd-Frank Act's risk-retention rule will require a 20% down payment. Regulators continue to work on the risk-retention rule included in the Dodd-Frank Act.

"While many investors believe there is still time to wait on the builders as the housing picture incrementally improves, we believe now is the time to buy homebuilders to fully participate in the eventual market recovery," the outlook said.

The report also said regulatory issues will continue to weigh on mortgage insurance groups, and the "extremely profitable" new business drawn in will take time to make a mark on balance sheets. FBR gave an outperform rating to MGIC Investment Corp. (MTG: 3.69 0.00%), and said Radian Group (RDN: 2.22 0.00%) will perform at market levels.

In respect to real estate investment trusts, the report said hybrid models offer "potential stock price appreciation," though recommended investing in a mix of agency, hybrid and commercial REITs. Starwood Property Trust (STWD: 18.56 0.00%) received an outperform rating.

The 2012 election will likely have a big impact on the financial services sector as well. The report said a Republican in the White House, along with GOP majorities in the House and Senate, would likely result in outcome "viewed favorably for financials."

The report, however, expressed concern on how a Republican-controlled government would handle reform of the government-sponsored enterprises. Sen. Johnny Isakson, R-Ga., introduced a bill Thursday that would privatize Fannie Mae and Freddie Mac.

Another recession, the report said, would lead to fewer home purchases and mortgage originations, as well as heightened default rates.

Write to Andrew Scoggin.

Follow him on Twitter @ascoggin.


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