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Richard Cordray, New Mortgage Rules, and Bank Stocks: Should You Fret?

Nate is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

So, it looks like the new Consumer Financial Protection Bureau is finally getting around to placing controls on mortgage lenders. According to the reports I've read this morning (Jan 10, 2013) the CFPB, led by former Ohio Attorney General Richard Cordray, is planning a sweeping set of rules controlling the types of mortgage loans that will be allowable going forward.

Coming on top of yesterday's news that international bank regulators are working on easing bank requirements to improve loan capacity, it becomes sort of an interesting day for those with bank stocks in their portfolios. Trying to put together what it all means will be an interesting little analysis. But that's what I'm here for.

I don't think I necessarily have to cover the old ground about toxic mortgages. Here's a short primer, anyway. During the 2000s the mortgage lenders went nuts. All forms of new loans were created, or if not created, emphasized, that allowed people with less than good credit, and a doubtful ability to pay mortgages, to buy houses. That, combined with the lender's ability to shield themselves from the downside by packaging the loans and selling them to other banks, made for a mortgage climate that was more ruthless than any we'd seen. There was a disconnect between who profited from making the loan and who ended up holding the risk of the loan. A bunch of people got rich and, in the end, the economy got hammered. Thanks, guys.

But home loans have to happen. People want to buy houses so someone needs to pony up the dough. The new rules will help banks avoid the excesses of the past while providing stability for lenders and borrowers moving forward. Banks can't make crazy loans (such of my favorite, the NINJA loan. NINJA stands for No-Income-No-Job-or-Assets. Seriously, would you loan $10 to someone like that?) and buyers need to actually be able to pay for the loan. Crazy talk.

So the new rules are a compromise, banks are required to jump through more hoops while seeing more security in their loans. Borrowers can feel a bit more confident that, when a bank makes a loan, they know it will be paid back. It'll mean fewer loans to people at the low income level, and may harm home prices a bit, but that seems to me a small price to pay for stability in the mortgage banking sector.

So who benefits. Cui bono, to borrow the latin. Always ask who benefits from the actions of government. The major banking lobbyists were worried about Cordray being at the CFPB, I know that. But it looks to me like the screws aren't being tightened too much with these rules. So banks that have some money to loan, but have been leery of getting involved, can now commit to the new rules and move things forward. Here's a few:

Wells Fargo (NYSE: WFC): Outside of Fannie Mae and Freddie Mac (more about them at a later time), Wells Fargo, with their cute little horses, was the top 2010 holder of mortgages with a bit less than 25% of the market. The firm has come through the downturn fairly well and is now positioned to move into the new rules with strength. I'd give buying some a serious thought. The stock is up for the last year significantly and the board more than doubled its dividend a while back.

Bank of America (NYSE: BAC): Look, BoA took a beating yesterday on the announcement that it's paying some billions in fines over mortgage issues it inherited in its acquisition of Countrywide. But remember two things, first, it inherited those issues – it didn't create them, and second, it had the cash on hand. That's not a sign of weakness. BoA is only a little behind Wells Fargo in market share, has the cash to make loans, and will enjoy the protection afforded by the new rules. Its stock has almost doubled in the last year, even with yesterday's bad news. Not much of a dividend, though.

U.S. Bank (NYSE: USB): A smaller player in the mortgage market. However, U.S. Bancorp has come through the market trouble well and has seen itself grow over the last five years. In 2010 the firm only held a bit under 3% of the mortgage market. I'd expect that to climb as the firm is capable of doing much more. There's a lot of room for growth in US Bank, it's up to them to make it happen. The stock is up more than 10% in the last year. I'll never argue with that.

SunTrust (NYSE: STI): Another smaller player in the market, SunTrust has been protected from the dislocations of the last few years through its focus on retail banking and servicing existing clients. With a 2010 mortgage portfolio of only $5.6 billion there's plenty of room for SunTrust to move into the market aggressively now that the path forward is clear. Its stock has climbed almost 40% in the last 12 months, too.

I realize I'm being contrarian, here. There's going to be a LOT of people on television yammering about how the banks are being unfairly constrained by these new rules. Idiot politicians (the vast majority) will either praise or condemn them, not out of any real knowledge but out of ideology. It's my opinion, though, that what mortgage lenders lose in freedom to make unrestricted loans will be more than offset by the protection gained from having clear, straightforward guidelines for their programs. It'll be worth looking hard at mortgage stocks again. I know I'll be looking into it.

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Nate Wooley has no position in any stocks mentioned. The Motley Fool recommends Wells Fargo & Company. The Motley Fool owns shares of Bank of America and Wells Fargo & Company. 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!

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