The mortgage financing industry has long been associated with prudent financial management and conservative accounting practices. This is mainly because mortgages are secured loans which can be difficult to collect in situations where the borrower defaults. In a declining housing market, many mortgage lenders struggled to stay profitable and avoid bankruptcy due to excessive risk taken during the boom years. Nevertheless, the importance of this industry cannot be underestimated given its role in American home ownership. The mortgage finance industry directly employs more than one million people and generates approximately $300 billion in annual revenue. Understanding the complexities of these companies, their competitors, and potential risks can help investors identify stocks that might offer a prudent investment opportunity at this stage of the market cycle.

What is mortgage financing?

Mortgage financing is a broad term that refers to both the process of increasing the availability of mortgage debt as well as the individual companies that facilitate this process. The real estate industry is one of the most important sectors in the global economy, and the mortgage finance industry plays a key role in making this possible. Given the huge amount of capital required to finance the acquisition of real estate, mortgage finance institutions play a vital role in the housing market by facilitating the growth in the availability of mortgage debt. This debt allows households to purchase homes while generating significant revenue for lenders through interest payments. The mortgage finance industry includes a wide range of financial institutions such as commercial banks, investment banks, government sponsored enterprises (GSEs) and insurance companies. These institutions primarily facilitate the growth of mortgage debt availability through the issuance of mortgage-backed securities (MBS).

Wells Fargo

Wells Fargo & Company (WFC) is the parent company of one of the largest mortgage lenders in the United States. As one of the “big four” banks, WFC has a long and storied history, as well as a track record of prudent risk management. As such, the company has traditionally been one of best actions buy for cautious investors who seek relative safety in their investment portfolio. WFC’s mortgage operation is one of the largest in the industry with approximately $1 trillion in outstanding mortgage debt. This line of business generated nearly $29 billion in revenue in the company’s last fiscal year. WFC’s investment in mortgages is highly dependent on the US housing market. As such, business performance is strongly correlated to the health of the mortgage industry as a whole.

American Express

American Express Company (AXP) is a diversified financial services company with a long history of prudent risk management and conservative financial management. Over the past two decades, AXP has successfully transitioned from a credit card company to a diversified financial services company with robust insurance and investment management operations. While AXP’s credit card operations have generated significant revenue over the years, the company’s mortgage lending business has historically generated the majority of its revenue. AXP’s mortgage portfolio currently stands at over $46 billion, which includes both its own mortgage portfolio and mortgage-backed securities purchased from third-party investors. Although AXP’s mortgage lending business generates significant revenue, its significant growth in recent years suggests that the company has adopted an increasingly risky profile in its efforts to grow this business.

Coincident Research Corp.

Coincident Research Corp. (CCRT) is a relatively small company that specializes in analyzing various aspects of the mortgage financing industry. Although CCRT does not provide mortgages directly to borrowers, it does provide information and analysis to mortgage lenders and other businesses involved in the mortgage financing industry. Accordingly, CCRT’s activities are generally not sensitive to fluctuations in the general economic environment, but rather depend on the health of the mortgage industry. Consequently, CCRT revenues are often negatively correlated with the overall health of the US economy, as the health of the mortgage industry is often an important leading indicator of the economy in general. As such, the CCRT offers a unique asset to investors focusing on this industry, as it provides insight into the health of the mortgage industry.

Mortgage Resolution Advisors

Mortgage Resolution Consultants (MRC) is a company that primarily focuses on recovering mortgage debt from borrowers who have fallen behind on their mortgage payments. Although MRC’s operations are not directly related to mortgage origination, the company’s activities have a significant impact on the broader mortgage financing industry. MRC operations are primarily based on the use of a controversial practice called “loan modification”. This practice allows the MRC to recover from defaulting borrowers by modifying their contract to allow the company to simply take possession of the property. While this practice has proven to be very effective, it also comes with a significant downside in the form of potential regulatory actions against the company. The MRC’s success in recovering from delinquent borrowers is, in part, attributable to the pervasiveness of the practice of loan modification.

Conclusion

The mortgage finance industry is an important component of the overall real estate industry. The mortgage lending process is critical to the growth in the availability of mortgage debt, and as such, mortgage finance institutions play a key role in driving homeownership among Americans. Although mortgage finance stocks are not the most attractive investments, they can be a reliable source of income for investors. For conservative investors looking for a relatively safe place to invest their money, these companies may be worth considering.

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