Since bottoming out in May, mortgage rates have since moved higher. Fewer Americans are refinancing, which is crimping bank profits.
Wells Fargo announced that it expected a 30% decline in mortgage activity due to higher rates and fewer refinances. JPMorgan Chase , 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.
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:
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.
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 and Fidelity National Financial 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.
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The article 1 Housing Subsector Untouched by Rising Rates originally appeared on Fool.com.Fool contributor Jordan Wathen has no position in any stocks mentioned. The Motley Fool recommends First American Financial and Wells Fargo. The Motley Fool owns shares of Citigroup, JPMorgan Chase, and Wells Fargo. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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