DISCLOSUREAPPENDIXATTHEBACKOFTHISREPORTCONTAINSIMPORTANTDISCLOSURES,ANALYSTCERTIFICATIONS,LEGALENTITYDISCLOSUREANDTHESTATUSOFNON-USANALYSTS.USDisclosure:CreditSuissedoesandseekstodobusinesswithcompaniescoveredinitsresearchreports.Asaresult,investorsshouldbeawarethattheFirmmayhaveaconflictofinterestthatcouldaffecttheobjectivityofthisreport.Investorsshouldconsiderthisreportasonlyasinglefactorinmakingtheirinvestmentdecision.4January2019Americas/UnitedStatesEquityResearchMortgageFinanceMortgageFinanceSECTORFORECASTResearchAnalystsDouglasHarter,CFA2125385983douglas.harter@credit-suisse.comSamChoe,CFA2123255957samuel.choe@credit-suisse.comJoshBolton,CFA2123258963joshua.bolton@credit-suisse.com2019Outlook:IncreasedVolatilityFromRates,Economy;NRZ,COOP,STWDTopPicksTheMortgageFinancesectorislikelytofaceheightenedvolatilityin2019giventheuncertaintyaroundthepathofinterestrates,healthoftheeconomy/realestatemarkets,andpotentialchangescomingfromthenewFHFAdirector.Wearecomfortablewiththehealthofboththeresidentialandthecommercialrealestatemarketsgivenfavorablesupply/demandtrendsaswellasamaintenanceofunderwritingtrends.Thatbeingsaidtheebbandflowoftheseconcernswillbetheprimarydriverofvaluationsforthesectors.Belowwewalkthroughourthesisforthe5subsectorsofourcoverage.Acrossourcoverageourtoppicksfor2019are:NRZ,COOP,STWD,RESI,andCWK.■TargetPrices:Wearechangingtargetpricesfor16ofourcompaniesinthisreport,aswetookafreshlookattherisksanduncertaintiesthatmayunfoldin2019,aswellastheupside/downsidetoourtargets(intheformofupdatedblueskyandgreyskyscenariosanalysis).■ResidentialMortgageREITs:2018wasachallengingyearforthemREITswitha2.4%estimatedeconomicreturnfortheyear.Manyofthechallenges(Fedbalancesheetunwind,increasedrecessionaryconcerns)thatwerepresentin2018willremainin2019andkeepexpectedreturnsbelowthelongtermaverage.Therecentsell-offinthesectorhasimprovedvaluationsandputstherisk/rewardforthesectorasmorebalanced.DespitethelikelyFedpause,wearenotmorepositiveonthesectorgiventheexpecteddeclinei...
