First American Financial (NYSE:FAF)

InvestWhatWorks (43.88) Submitted: 1/8/2012 4:45:43 AM : Start Price: $12.69 FAF Score: +8.78

First American Financial Corporation (NYSE: FAF) is a title insurance company. Title insurance is a fairly easy business to understand. Title insurance is insurance against a loss arising from problems connected to the title to your real-estate property. If purchase a home and there are unpaid taxes or liens (among other things) associated with the property, that is where title insurance would come into play. Simply put; title insurance is insurance against what may have happened before you purchased your property.

Unlike other financial-entities involved with the housing market, title insurers have no major liabilities to threaten their business. Title insurance is relatively straightforward business and driven by fees generated by real estate sales and real estate refinancing. The title insurance is a transaction volume business. When real estate transaction volumes are high, profits are high. When real estate transaction volumes are low, profits are low. The type of transaction is also plays factor (lower-margin transactions verses higher-margin transactions; briefly mentioned later below). But generally speaking, title insurance is all about volume.

Obvious to say, but with the housing market crash in 2007, First American Financial and other title insurance have been hit hard over the last couple of years. That was, of course, bad news for investors who owned title insurers (or business involved with housing) in 2007. But this is very good news for potential investors looking at First American now in 2012.

2010 began a stabilizing trend for title insures, with 2011 remaining stable. This stability was mostly driven by residential-refinancing. Refinancing is a relatively low-margin business for First American Financial and other title insurers. As a true recovery in the real estate market begins, increased business in residential resale and commercial transactions will help First American Financial greatly (residential resale and commercial transactions being much higher margin businesses, compared to residential-refinancing).

A patient investor will benefit greatly from investing in First American Financial. With no major-liabilities and a trend of stability over the past two-years, First American Financial is a great way to play the eventual recovery of the housing market.