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Keep First American on Your Radar

Rising mortgage rates and falling refinancing volume could create an opportunity.

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Title insurance stocks are up dramatically over the past year as the firms have reaped the rewards of a refinance boom driven by historically low mortgage interest rates. However, mortgage rates are rising, and the inevitable end to the refinance craze appears to be in sight. No doubt the reduction in orders will hurt revenue in the short term, but we think the return of residential purchases and a recovery in commercial business will offset the refinance crash over the long run. Prudence may dictate sitting on the sidelines for a bit, as the market tends to overreact to near-term volume changes, but we think keeping title insurers like  First American Financial (FAF) and  Fidelity National Financial (FNF) on your radar also makes sense.

Title Insurers Rode the Refinance Wave, but That's Coming to an End
Since topping out at more than $2.5 trillion in originations in 2003, residential refinances have generally fallen, occasionally surging with reductions in mortgage rates. In 2012, for example, refinance originations increased 40% over the prior year, according to the Mortgage Bankers Association. Because every mortgage refinance in the United States requires title insurance, the title industry benefited.

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