Wednesday, August 22, 2007

As Mortgage Shops Keep Closing, Big Banks Look Better & Better

The past week has seen a slew of mortgage lender close the door or dramatically scale back operations due to tightening credit markets. So, who will benefit?

Citigroup (C), Bank of America (BAC) and Wells Fargo (WFC) look to be the best bets. Why? People, despite reports to the contrary are still buying homes and borrowing money. Their options are dwindling daily as to where they can get those loans, but they are still applying for and getting the them. In the past month despite the "credit crisis" two homes in my neighborhood have sold and a third is on the way. I doubt these are cash deals. The lenders who will have the liquidity to offer the most competitive rates will be the institutions that have depository bases and that is the aforementioned group.

Citigroup and Bank of America said today they drew $500 million from the Fed that in turn was loaned out at higher rates. That means they are printing money. The mortgage business is a very profitable one and banks have seen their profit margins and the multiples on their shares fall the last few years as that business went to the Countrywides (CFC) of the world. With that option closing rapidly for scores of borrowers, they will turn to institutions they can trust to be there. If you were buying a home now would you go to Countrywide with the possibility they may not be lending in 3 weeks? I know the chance is very small but it is still there and if you are buying a home, why risk it? Everyday we get news of another mortgage lender closing shop and any loans that were "in the works" go up in smoke with them. I know Citi, Bank of America and Wells Fargo will have no problem funding a loan and will be here long after I am gone so that is where I would be going were it I needed one.

It may be a bit late for this trend to make a difference in the current quarter but I would expect large changes here by the end of the year.

Expect a rate cut (a token one, but that will be enough for the street) before the end of the year and that will benefit financials. This loan trend should push earnings well above estimates. Now would be the time to be loading up on any of the three.

The best part? The current dividend yields of the three are all hovering around 5% so you will be paid a nice little return to sit back and wait for the stock price appreciation. Recently I picked up more Citigroup on two separate occasions and currently am looking at Bank of America.

Don't be one of those folks who look back at Christmas this year and curse themselves saying "if only I had bought back then". I won't.


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