Did I just find my up-to-date favorite? FTSE250 Participation in a specialist mortgage lender OSB Group (LSE: OSB)? It certainly looks that way.

OSB accepts retail deposits through its Kent Reliance and Charter Savings Bank franchises and lends to specialist sectors of the mortgage market, such as buy-to-let, self-employed, credit-poor and commercial entities.

It’s a mid-sized company with a market capitalization of £1.47bn, but I hadn’t paid much attention to it until now. The stock is up 20% in the past year. It’s down 20% in the past month.

My ears always perk up when a good stock falls. However, recent experience has taught me to be careful with volatile stocks. Last year I bought Diageo, JD Sports FashionAND Burberry Group after profit warnings. Unfortunately, only JD Sports Fashion took a hit. Burberry fell a painful 40%.

Is OBS Group a bargain?

OBS’s crash was sparked by a badly received set of half-year results on 15 August, but there were positives. Underlying pre-tax profits more than doubled to £249.9m, while statutory profits trebled from £76.7m to £241.3m.

However, upon closer inspection, these numbers turned out to be somewhat misleading, as OSB had seen one-time unfavorable changes in the prior year.

There was another problem. Management had forecast full-year net interest margins of 250 basis points, but it lowered them to 230 to 240, amid increased competition in the mortgage market. That’s not a huge cut, but it’s a key metric.

The basic return on equity increased to 18%, but the growth of the net loan portfolio was moderate and amounted to 1.5%, “slightly lower than originally expected as we prioritized returns over growth”according to CEO Andy Golding.

High yield, low valuation

I am personally concerned about the prospects for the buy-to-let market, where OSB is the leader, providing 9% of all up-to-date mortgages. Labour’s forthcoming Tenants’ Rights Bill is scaring landlords and many are selling, while up-to-date entrants may be put off.

Golding says OBS has faces “increasing competition in a suppressed mortgage market”which also doesn’t bode well. So I understand why investors are concerned.

Its balance sheet remains sturdy, with a core tier 1 capital ratio of 16.2%, up slightly from 16.1% at the end of last year. This includes the impact of a £50m share buyback announced in March, most of which was completed by mid-August.

The shares look eye-wateringly low-cost, trading at just 5.13 times earnings. And the yield of 8.29% is eye-watering. Especially since the board raised the first-half dividend by 5% to 10.7p a share, in line with its policy. It also approved a up-to-date £50m share buyback, which began on September 6.

There is more risk than I expected, but given the low valuation and the high yield, I can live with that. I fear that the upcoming rate cuts may further squeeze margins, but given the projected net loan portfolio growth of 3% in 2024, I plan to buy it anyway. It seems too good to miss.