Track the companies that matter to you. It's FREE! Click one of these fan favorites to get started: Apple; Google; Ford.



1 Housing Subsector Untouched by Rising Rates

Since bottoming out in May, mortgage rates have since moved higher. Fewer Americans are refinancing, which is crimping bank profits.

Wells Fargo (NYSE: WFC  ) announced that it expected a 30% decline in mortgage activity due to higher rates and fewer refinances. JPMorgan Chase  (NYSE: JPM  ) , the second-largest mortgage banker, noted that it expected to lose money on its mortgage unit, forecasting a third-quarter 40% decline in mortgage volume.

The banks later slashed employee headcount. Wells Fargo erased 2,300 jobs, Citigroup (NYSE: C  ) cut 2,200 employees, and JPMorgan is setting employees loose all over the country.

One brightspot in mortgage banking
Even as countless mortgage brokers and servicing agents are getting the ax, one industry closely tied to the mortgage business is doing just fine. In fact, business is only getting better.

Since the beginning of September, an unlikely group of title insurers have strongly outperformed the S&P 500 index:

FNF data by YCharts.

You'd think that in a cooling refinance market, the title-insurance companies would be taking a bath. This isn't the case. Even though refinance applications are coming in at a snail's pace, August's existing home sales built on a positive, upward trend. More and more people are buying homes.

Source: Calculated Risk Blog.

Home sales are significantly more profitable for title insurers. In a refinance transaction, title insurers often sell only one policy. A sale transaction results in two new policies: one for the buyer, and one for the mortgage financier.

Cashing in on a "new normal"
First American Financial (NYSE: FAF  ) and Fidelity National Financial (NYSE: FNF  ) cut back in 2008 and 2009 to rightsize for a slowing real estate sector. Now their businesses are sized perfectly to capitalize on the boom in new-purchase activity, which pushes up profit margins in a very consolidated industry. First American Financial and Fidelity National Financial control more than half of the title-insurance market combined.

That makes them a great play on a continued real-estate recovery, no matter how low refinancing activity goes.

More purchases aren't the only positive for title-insurance companies. As sales volume picks up, home prices are rising in tandem. Higher-priced homes require bigger title-insurance policies, delivering bigger premiums to the two leading title insurers.

First American Financial remains the best play in the space, trading for just under two times tangible book value. Fidelity National Financial lacks the pure-play exposure to home-transaction volume after acquiring a chain of restaurants and unrelated businesses.

While title-insurance firms are highly cyclical, and demand will rise and fall over the cycles, there isn't any good alternative to title insurance to protect a homeowner against an unforseen claim on his or her property. Thus, while demand will ebb and flow with real estate activity, title insurance is a product the world will always need. That's an investment thesis on its own. 

More great banking and housing stocks
Have you missed out on the massive gains in bank stocks over the past few years? There's good news: It's not too late. Bargains of a lifetime are still available, but you need to know where to look. The Motley Fool's new report "Finding the Next Bank Stock Home Run" will show you how and where to find these deals. It's completely free -- click here to get started.


Read/Post Comments (0) | Recommend This Article (3)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Be the first one to comment on this article.

Compare Brokers

Fool Disclosure

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 2673625, ~/Articles/ArticleHandler.aspx, 9/28/2016 11:29:41 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

Today's Market

updated 1 hour ago Sponsored by:
DOW 18,339.24 110.94 0.61%
S&P 500 2,171.37 11.44 0.53%
NASD 5,318.55 12.84 0.24%

Create My Watchlist

Go to My Watchlist

You don't seem to be following any stocks yet!

Better investing starts with a watchlist. Now you can create a personalized watchlist and get immediate access to the personalized information you need to make successful investing decisions.

Data delayed up to 5 minutes

Related Tickers

9/28/2016 4:00 PM
C $46.87 Up +0.50 +1.08%
Citigroup CAPS Rating: ***
FAF $40.24 Up +0.28 +0.70%
First American Fin… CAPS Rating: *****
FNF $37.41 Up +0.20 +0.54%
Fidelity National… CAPS Rating: *****
JPM $66.71 Up +0.35 +0.53%
JPMorgan Chase CAPS Rating: ****
WFC $45.31 Up +0.22 +0.49%
Wells Fargo CAPS Rating: ****