Mortgage Originations Jump and This Stock Will Too
Gerelyn is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Mortgage originations in the commercial and multifamily categories climbed nearly 50% in the fourth quarter versus year-ago levels, according to the Mortgage Bankers Association. For all of 2012, the number of people getting new mortgages in these categories climbed nearly 25% versus 2011 levels.
The strength in mortgage originations is being driven by a combination of low rates and improving housing conditions, where borrowers are continually investing in properties for income. The momentum has positioned mortgage originations to levels the housing market has not experienced since 2007, according to the MBAA.
The news certainly bodes well for Ellie Mae (NYSE: ELLI), a company that automates the mortgage application process. Incidentally, Ellie Mae rang in the trading session on the Big Board last Monday. The exchange was celebrating the fact that shares of Ellie Mae had the highest-percentage gain of all NYSE Euronext stocks in 2012, when the stock advanced nearly 400%.
Ellie Mae's 3Q revenues were $27.5 million, which was an 87% increase versus the year ago period. The company is profitable, and had earnings of $9.5 million in its most recent quarter compared with $2 million last year. For all of 2012, the company projects revenues of up to $100 million.
In 2012, more than half of mortgages closed using the Ellie Mae platform were refinancings, according to company's data, while an average of 38% of mortgage originations were for new home purchases. Indeed, according to data revealed at a recent Needham & Co. investor conference in which Ellie Mae executives participated, one-in-three residential mortgage originations occur on the Ellie Mae platform. This company appears to be strategically positioned to benefit from the surge in mortgage originations even after the stock advanced by triple digits last year.
If mortgage originations continue to rise and drive banking income higher, shareholders stand to benefit. Wells Fargo (NYSE: WFC) which has a large stake of the mortgage origination business, has already increased its quarterly dividend this year. Wells Fargo increased its quarterly payout by 14% to $0.25 per share, which positions the company's dividend yield at approximately 2.8%, according to a Barron's calculation. Wells Fargo's dividend is still below pre-financial crisis levels when the bank paid $0.34 per share, but it is far better than the $0.05 per share investors were earning four years ago. Wells Fargo had a record 4Q with earnings of $4.9 billion. The stock is hovering at a 52-week high.
The spotlight is on the financial sector in the nation's capitol, where renewed fears of failure surrounding the largest financial institutions have surfaced amid an insufficient Dodd-Frank law. Wells Fargo is named among the financial institutions that regulators fear pose a systemic risk to the economy. Wells Fargo has assets of $1.4 trillion and is larger now than pre-financial crisis levels, according to a recent Bloomberg report.
JP Morgan Chase (NYSE: JPM) is also named in that report on the heels of the bank's $6.2 billion trading loss for 2012. Nonetheless, it was underlying strength in JP Morgan's mortgage business that helped fuel a 53% surge in 4Q profits to $5.6 billion. Mortgage-related income grew more than twofold in the quarter to $2.03 billion amid strong demand, versus $723 million last year.
The firm recently promoted its own Kevin Watters from overseeing home loan originations to chief executive of mortgage banking, where he will handle any trouble loans. JP Morgan's mortgage business has been a key revenue driver in light of the low-rate environment.
The firm has also expanded into the rental business, where JP Morgan joined a partnership that invested in thousands of single-family homes in Florida and in the west coast. The venture kind of works like a Real Estate Investment Trust. JP Morgan's high-net worth clients get to share rental income and sale proceeds while earning returns of 8% per year, according to Bloomberg. Shares of JP Morgan are hovering just below the 52-week high.
Ellie Mae defines itself as a software business, and claims to be a market leader in its niche for mortgage originations. Ellie Mae boasts of 30% market share based on the number of professionals using its software solutions. Of the 8,000 mortgage origination firms in its target market, the company has only captured 1,500 of those customers.
That Ellie Mae is in the software business is reminiscent of the Kayak Software story. Though Kayak is in the business of combining travel information among hundreds of service providers, founders characterize the company as a technology play. Kayak's value surrounds its proprietary software solutions and algorithms, which allow it to pull the most relevant data for users. Priceline thought well enough of the offering to acquire Kayak for $1.8 billion in November 2012, a deal that is scheduled to close this quarter.
As for Ellie Mae, the stock seems well positioned to continue to benefit from rising mortgage originations coupled with an increase in demand for an automated solution among mortgage professionals amid heightened regulation in that market. Whether this will translate to another year of triple-digit gains in Ellie Mae shares or not, however, remains to be seen.
GerelynT has no position in any stocks mentioned. The Motley Fool recommends Ellie Mae and Wells Fargo. The Motley Fool owns shares of JPMorgan Chase & Co. 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!