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Stock Strategist Industry Reports

These Companies Are Riding a Mortgage Refinancing Wave

But investors should consider what could happen when that wave recedes.

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Four companies we cover-- CoreLogic (CLGX),  Lender Processing Services (LPS),  First American Financial (FAF), and  Fidelity National Financial (FNF)--depend, at least in part, on the volume of residential mortgage transactions (both sales and refinancings) to generate revenue, as they provide services that take place at the point of origination. As a result, these companies struggled after the collapse of the housing bubble. While record-low rates and the resulting surge in mortgage refinancings have benefited these companies' top lines, investors should be aware of the potential impact of a decline in refinancing volume, especially as the market has shown a tendency to overreact to current volume.

First American and Fidelity provide title insurance services whenever a residential property is sold or refinanced. Mortgage processors CoreLogic and LPS provide tax, flood zone, and appraisal services at the time of sale or refinancing. These companies could be viewed as tollbooths in the mortgage industry, although their revenue can fluctuate significantly depending on current volume of transactions, and fixed costs can magnify the impact on the bottom line. Still, we view these companies as having economic moats, as they are leaders in scalable businesses.

Brett Horn does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.