It is amazing how much the mortgage market has changed over the past five years. Mortgage heavyweights Washington Mutual, Wachovia and Countrywide have been absorbed by major banks. Hundreds of small mortgage lenders and originators have gone out of business. Even government sponsored heavyweights Fannie Mae and Freddie Mac have been humbled and brought low (unfortunately they haven't been reformed). The one financial institution that not only survived the collapse of the housing market and financial crisis relatively unscathed but also used the opportunity to become the undisputed king of the mortgage market is Wells Fargo (WFC). It is ideally positioned to continue to be a primary beneficiary of the housing recovery and the shares are still relatively cheap. To understand how huge Wells Fargo has become in the mortgage market, one should consider some of these excerpts from a story in the Wall Street Journal this morning:
- It issued 28.8% of all home loans nationwide in 2012, this is up from just 11.2% in 2007.
- Wells Fargo home-loan production last year totaled a monstrous $524B, the highest level ever recorded by one lender. To put in perspective, this is a higher total than the next five top players in the market combined.
- In lucrative Manhattan, it issued 20% of all home loans. Particularly impressive given the company only entered the market there two years ago.
- The company recorded income of $11.6B from mortgage banking in 2012, this is up 50% from 2011. There are some concerns that the company could be see impacts if Fed raises interest rates and refinancing slow down, but it appears we are years away from that given current Fed policies.
- The acquisition of Wachovia in 2008 looks like a huge bargain in retrospect. It added 3400 branches to the company's existing network, and gave it a presence for the first time in nine states, including New York.
4 additional reasons WFC is a solid bargain at $36 a share:
- The company has an A+ rated balance sheet and yields 2.7%. It plans to increase this to over 3% as part of its capital return plan. I would look for dividend payouts to increase significantly over the next few years as the housing market continues to recover and the Fed relaxes some constraints on returning capital to shareholders.
- The bank will be much less impacted by full implementation of Dodd-Frank than competitors JP Morgan (JPM) or Bank of America (BAC) due to its lack of trading operations. It also stays off the front pages more than these banking brethren.
- WFC is selling at just 9.5x 2014's projected earnings.
- The company has had 12 straight quarters of EPS growth. It also has slightly beat consensus earnings estimates for five straight quarters.