The mortgage finance industry has been a constant source of investment opportunities in the U.S. stock market for decades. The housing market has its ups and downs, but that hasn’t stopped investors from putting their money on companies that are involved with mortgages in one way or another. Mortgage finance stocks generally fall into one of two main categories: Those that directly finance homes, such as mortgage real estate investment trusts (REITs), and those that provide financing services to other types of organizations that fund mortgages, such as mortgage lenders and brokerages. These sub-industries include several notable publicly traded companies, each with its own niche. Whether you’re looking to invest in a particular type of mortgage finance stock, or want to build a diversified portfolio with these types of investments at its core, here are five great safe stocks to buy in the sector for 2022 and beyond.
What to Look for in a Mortgage Finance Stock?
First, we’re going to examine the different types of mortgage finance stocks to see if any of them are a good fit for your investment objectives.
There are many facets to the mortgage finance business, including financing, servicing, origination, and investing in mortgage-backed securities. If you have a particular area of the industry that interests you, make sure to only invest in stocks that are involved with that aspect of the business. If you buy a company whose operations are too diverse, risks could cause you to lose your entire investment.
MREITs tend to be very stable stocks during market downturns and downturns in the housing market because they earn money from the interest on the loans they originate. Mortgage lenders, on the other hand, can be hit very hard by a downturn. If people can’t qualify for new loans, then the lenders can’t make money from origination fees. However, lenders may benefit from higher demand for refinancing. Brokerages are also hit hard when the housing market is slow, but they can benefit as borrowers refinance their mortgages.
Mortgage real estate investment trusts, or MREITs, are investment companies that focus on originating mortgages. These are generally government-backed mortgages to low- and moderate-income (LMI) borrowers. The trusts purchase these loans, pool them together, and then sell shares in the trust. This gives investors access to the interest payments from the underlying mortgages. Since MREITs are REITs, they pay out most of their income as dividends, making them very attractive for income-focused investors. MREITs that specialize in mortgages to LMI borrowers are generally very stable stocks, since there are always people who need to borrow money to purchase a home. MREITs that focus on jumbo mortgages or commercial mortgages are generally less stable, but they can still be good picks for investors looking for income.
A mortgage lender originates mortgages by providing funding to people who want to purchase a home. The lender might fund the loan itself or sell it to another financial institution. Mortgage lenders generally have a direct relationship with the borrower and usually only make loans to those who can provide a significant down payment. These companies come in two types: wholesale and retail. Wholesale lenders make loans to other financial institutions that then sell to retail lenders. Retail lenders make loans directly to the public. Wholesers generally make shorter-term loans and provide funding for a modest down payment. Retail lenders may lend to people with a small down payment or even no down payment, but they generally make longer-term loans. Mortgage lenders overall are fairly stable, but retail lenders are generally more volatile.
Brokerages make money off of mortgage origination fees and by providing other services, such as appraisals and property inspections, to borrowers. They also make money from fees charged on mortgages they sell to investors, such as government-backed mortgages. The majority of mortgage brokers, however, only deal with commercial mortgages. Brokers also facilitate loans between banks and other financial institutions, so they may not actually be lending money themselves. Despite the large number of small mortgage brokerages across the U.S., most of them are only regional or local operations. All of these factors mean that mortgage brokerages are relatively unstable and unpredictable. The housing market is cyclical, and borrower credit standards are always changing.
Mortgage finance industries have proven a productive and reliable source of investment opportunities in the U.S. stock market for decades. The sub-industries that make up the mortgage finance business are each unique, but they all share one thing in common: They provide money to people who want to purchase a house. These industries are cyclical, and they’re affected by changes in the economy and in the housing market. These industries are also highly regulated, so changes in the regulatory environment can have a significant impact on their operations. Nevertheless, the mortgage finance industries are large and diverse enough to withstand even the worst economic conditions. These industries will always be in need of capital to fund new home purchases, and they will always need financing to get that capital.