Safe Stocks to Buy: Invest in Mortgage Finance Stocks in 2022

The mortgage market has historically seen cycles of boom and bust. The Great Depression, the housing bubble of the mid-2000s, and the lending crisis of the early 2010s are all proof that this industry is volatile. However, this industry also has a high potential for growth—especially in the next five years. Investors who understand these cycles have the opportunity to invest in mortgage finance stocks that offer stability and growth with a low risk profile. When analyzing potential investments, it’s essential to have a strict risk threshold and analyze all risks before investing. Keeping these tips in mind can help you make smart decisions as an investor and secure your future.

What is Mortgage Finance?

Mortgage finance is the business of lending money for the purchase, refinancing, or construction of real estate. Major lenders include banks, credit unions, and mortgage companies. Mortgage finance companies are responsible for originating loans, underwriting, and funding the loans with capital from investors. Investors in mortgage finance stocks get a portion of their return from monthly payments from homeowners, called principal and interest, and from collateralized mortgages repaying the investor after a set period of time. Mortgage finance is also referred to as real estate financing or residential financing. Real estate investors use financing to purchase properties and generate income from rents, lease payments, and other sources of revenue generated on the property. Residential financing is available through banks, credit unions, mortgage brokers, and other financial institutions. The loan process is similar to auto or student loan financing.

Why is Mortgage Finance Worth Investing In?

The mortgage finance industry’s core business is generating cash flows from loan repayments. This steady stream of income is vital for the industry’s existence. When markets are in a downturn, the availability of capital and loans could be limited. The real estate market is cyclical and moves in tandem with the economy. The mortgage finance industry is the primary engine that propels the real estate market forward. When economic growth is strong, household formation increases and people look to buy homes. This leads to an increase in the demand for mortgage products. During times of growth, jobs are plentiful and households have higher incomes. This allows people to buy homes with low down payments or obtain cash-out refinances that generate larger payments.

Tips Before You Invest in Mortgage Finance Stocks

Before you jump into buying mortgage finance stocks, it’s important to assess your financial situation and investing risk threshold. This will help you determine which stocks are the best fit for your portfolio. – Be familiar with the mortgage finance industry – The mortgage industry is large and complex, with many moving parts. Knowing how the industry works will help you understand how its actions affect the overall market. – Assess your financial situation – Make sure you have enough money saved for emergencies and a retirement fund. Your risk threshold should be based on your overall financial situation. – Choose stocks with low volatility – Evaluate the stocks you’re considering for purchase and look for low volatility. Volatility is a measure of risk and includes the standard deviation of daily stock price changes. – Factor in macroeconomic factors – Macroeconomic factors such as interest rates, employment rates, housing inventory levels, and the economy are critical to the mortgage finance market.

Morgan Stanley MS

Headquarters: New York, NY Business Summary: Investment banking and securities, asset management, and financial services. Investing in mortgage finance stocks isn’t always easy, but it’s worth the effort to find the right companies. One of the best stocks to buy in the mortgage finance industry is Morgan Stanley. This company is a leading global financial services firm. It offers a diverse range of products and services such as investment banking, securities, and asset management. Morgan Stanley generates the majority of its revenue from net interest income generated from its lending activities, equity earnings from its wealth management and brokerage businesses, and investment management fees from its asset management unit. The company’s investment banking segment generates a portion of its revenue from advising companies on mergers and acquisitions. Its securities segment includes its trading operations, which provide liquidity and capital raising activities, and asset management. The company’s financial services segment offers various products and services such as mortgages and mutual funds to individual and institutional investors. Reasons to Invest: The mortgage finance market is expected to grow as the economy and housing market continue to expand. In addition, the Federal Reserve Bank’s (Fed) recent increase in interest rates has created a positive outlook for lenders. These factors are expected to boost revenue and earnings at Morgan Stanley, increasing the value of its stock. The company also has a strong track record of generating revenue and profits during economic upturns and downturns. The company has ample liquidity, diversified revenue streams, and a strong balance sheet. These traits make Morgan Stanley a desirable stock to buy and hold for long-term growth. Threats to the Business: One of the biggest threats to this company’s business is new regulations. As the mortgage finance industry continues to grow and be heavily regulated, Morgan Stanley may encounter difficulties managing compliance burdens. The company’s revenue could also be negatively affected if the Fed continues to increase interest rates. Higher interest rates are expected to decrease the number of mortgage refinancing and home equity loans, decreasing revenue for lenders.

Wells Fargo WFC

Headquarters: San Francisco, CA Business Summary: Banking, mortgage finance, insurance, and wealth management. Another great company to invest in the mortgage finance industry is Wells Fargo. The company is a diversified financial services company that provides banking, mortgage finance, insurance, and wealth management products and services to individuals, businesses, corporations, and government entities. Wells Fargo generates the majority of its revenue from lending activities due to its large mortgage finance segment. The company’s lending activities include originating, acquiring, and servicing residential mortgage loans. The company also provides mortgage insurance through its mortgage insurance segment. Its insurance products include mortgage insurance, flood insurance, home equity conversion policies, and other specialty insurance products. The company’s insurance activities generate revenue from the premiums charged for the policies. The company’s insurance operations are primarily focused on the U.S. market. Lastly, Wells Fargo’s wealth management segment provides asset management services, brokerage services, and trust and fiduciary services. The company’s wealth management activities generate revenue from managing assets for individuals, corporations, and other customers. The company’s investment management activities include managing equity and fixed income mutual funds, private equity funds, and hedge funds. Reasons to Invest: The U.S. mortgage finance market is expected to expand as the economy continues to grow and the government introduces new home buying incentives. Wells Fargo is well positioned to benefit from these factors due to its diverse mortgage finance portfolio. The company’s mortgage segment generates more than half of its revenue from mortgage loans. This large percentage of mortgage-related revenue makes Wells Fargo susceptible to changes in the market. However, the company is well prepared to handle changes in the market and has a strong track record of managing risk. Wells Fargo is also well positioned to benefit from the expansion of home buying incentives. The government has introduced new programs geared towards first-time home buyers and people looking to refinance their mortgages. These programs are expected to increase the demand for home loans, benefiting Wells Fargo. Threats to the Business: One of the biggest threats to Wells Fargo is the possibility of rising interest rates. The company’s mortgage segment generates most of its revenue from variable rate mortgages. If interest rates increase, the company would have to increase its mortgage rates to keep operating profitably. The company’s mortgage segment may also experience a slowdown in origination if the mortgage refinance activity decreases. This could occur if the government tightens regulations on the refinance process or if home prices fall.

American Express AXP

Headquarters: New York, NY Business Summary: Financial services company that provides various credit and travel-related products and services. American Express is a leading financial services company that offers travel, credit, and financial products and services to customers around the globe. The company’s products and services include a wide range of credit and travel-related products such as charge cards, travel-related services, and online financial services. 

Leave a Comment