How To Profit Most From The Mortgage Arena
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Today, fixed mortgage rates are at record lows. Although mortgage rates have been relatively stable over the last 30 years (a period characterized by low figures as it is), this week fixed mortgage rates hit their lowest point yet. Mortgage rates are at 3.43 percent, the lowest reported figure in history. As the mortgage arena is one in which companies like Citigroup (NYSE: C), Wells Fargo (NYSE: WFC), Bank of America (NYSE: BAC), JPMorgan Chase (NYSE: JPM), and US Bancorp (NYSE: USB) are all very active in, it is a good idea for investors to closely watch developments in this sector. In this article, I will examine how mortgage rates are affecting the investment opportunities of these five banks, with a primary focus on Wells Fargo.
Wells Fargo is not the cheapest when it comes to mortgage rates. However, what you can say for the company is that it is able to provide consistency. The mortgage rates it has offered of late have been low, relatively speaking, but the important thing is that they have consistently remained low, something that does not always happen. This gives people a better idea of what they can expect in terms of mortgage repayments. The company is, for example, offering the 30 year fixed rate deal from as low as 3.625% and APR of 3.963%. This has made it a popular choice, thereby increasing the company's value. Over the last year Wells Fargo's competitive mortgage rates can be correlated with the 18.7% increase in its share prices over that time.
Wells Fargo is also the bank stock that is most active in terms of lobbying in order to change mortgage rules. JPMorgan Chase, Citigroup, and Bank of America are also active in this regard, but Wells Fargo is by far the leader in this endeavor. This is an interesting finding. JPMorgan is, after all, the larger bank in terms of assets, yet Wells Fargo spends more on this form of lobbying than JPMorgan. In fact, the difference is substantial. JPMorgan spends $7.4 million on mortgage lobbying while Wells Fargo spends $7.8 million. Specifically what is notable in the Wells Fargo/JPMorgan relationship is that the former company has shown a greater surge in spending on lobbying than the latter. Also significant is the fact that Citigroup and Bank of America are also trailing behind Wells Fargo in terms of lobbying, despite the fact that they have "more diverse interests or bigger reputational challenges" than Wells Fargo. Overall, Wells Fargo is simply spending more than its competitors, making it "the largest US bank by market capitalization." The bank has also "taken a 34 per cent share of the mortgage market." It is essentially going to be the dominant power in the mortgage arena in this country. What has the market reaction been to this increase in spending? Well, if you look at Wells Fargo's spending spree you can surmise that it started in earnest approximately five years ago. Over the last five years the company's share prices have declined by 5.24%. A direct correlation has not been drawn at this point.
Last week, mortgage rates were slightly up. JPMorgan and Bank of America chose to increase their mortgage rates during this time. Let us have a look at what effects this may have had on the stock prices of each company. JPMorgan raised its conventional loan rate 11 bps last week for in terms of 30-year fixed rate mortgage rates and raised its 20-year rate four bps to 3.65 percent (with a drop four points in its 15-year rate). Bank of America raised its 30 year fixed rates by 1 basis point only. Bank of America stock peaked in April of this year and the share price is down 13% since, though still up year-to-date. JPMorgan, somewhat startlingly, is also up since the beginning of June. It still offers a good dividend yield (3.47%) and has managed, so far, to avoid any serious dips after its banking loss.
US Bancorp has also been relatively active in terms of making changes to its mortgage dealings. This company, along with Fifth Third Bancorp and BB&T, has boosted its residential mortgage loans since the year 2010. By the end of the first quarter of this year, US Bancorp had $38.4 billion in mortgage loans. This is significant in that it represents a 45% increase since 2010. Considering that US Bancorp currently has the highest P/E ratio (13.67) in comparison to its competitors (Wells Fargo at 11.54, Citigroup at 7.70, and JPMorgan at 7.97), I believe that it is safe to say that this is the bank stock to back, especially when considering its mortgage strategy.
There have been several changes to report in terms of mortgages and the effects that these changes have on the banking stocks mentioned here. As things stand I feel that US Bancorp remains the strongest option to consider if you wish to add a financial stock to your portfolio. If you are concerned that Wells Fargo may be implementing the wrong kind of strategy at present, there are other options for you to consider in this sector of the stock market, and it is important that you look into those options carefully when making a decision about what companies to add to your portfolio.
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