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Author: MayaMcD One star, 50 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 174  
Subject: future of FAF Date: 11/19/2005 12:11 AM
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All this talk about housing bubbles bursting, with the implication that this will bode poorly for FAF.

Now, I'm about as doom and gloom as you can get when it comes to the overleveraged public with no home equity and high mortgages. I was in a tiny Kansas town last week and saw the cutest 1930's bungalow with a 4 car garage and a double corner lot. It was in foreclosure for $24,500. (it needed about $12,000 in repairs). I was talking to the broker about this house, because--- well, because it was the cost of a car. He said that they've had record high foreclosures this past year, and it was only getting worse. They've been incredibly busy. The title insurance for all these homes was provided by FAF, who would travel to each small town to do the research.

That got me thinking...

I don't mean to profit by other people's pain, but if all these people won't be able to afford their homes, someone* is going to acquire it, right? Either through sale or foreclosure. It shouldn't really matter to the title companies how much the homes sell for. So, while I can think of other stocks that I might hesitate to invest in, I'm wondering if I even have to worry about my FAF...

What do you think?

-Maya
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Author: thenderson Two stars, 250 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 164 of 174
Subject: Re: future of FAF Date: 11/19/2005 1:13 PM
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I don't mean to profit by other people's pain, but if all these people won't be able to afford their homes, someone* is going to acquire it, right? Either through sale or foreclosure. It shouldn't really matter to the title companies how much the homes sell for. So, while I can think of other stocks that I might hesitate to invest in, I'm wondering if I even have to worry about my FAF...

Maya,

Well, maybe someone will buy that house.

However, I believe the concern falls into at least three areas.
1.As interest rates rise, mortgage refinancing will slow.
2.As interest rates rise, people may decide to stay put in their current home/apartment/parent's basement.
3.If home prices fall, revenues from title services rendered on deals that do go through will fall as policy premiums are based on property value.

This may all be true in the current environment of rising interest rates, and FAF CEO Parker Kennedy has stated that FAF is a somewhat cyclical company. This is something that FAF is trying to moderate as they move into other areas of information services. For an example of this diversification that specifically addresses the forclosure market see:
http://phx.corporate-ir.net/phoenix.zhtml?c=118425&p=irol-newsArticle&ID=774787&highlight=

New Study Investigates Residential Real Estate Foreclosures

ANAHEIM, Calif., Oct. 28 /PRNewswire-FirstCall/ -- First American Real Estate Solutions (RES(R)), the nation's largest provider of advanced property and ownership information, analytics and services, released a new study today that investigates the prevalence of foreclosure sales and the depth of discounts in 629 counties in 36 states, including the District of Columbia.

Entitled "Residential Foreclosures: The Prevalence, the Power and the Opportunity," the study by Christopher Cagan, Ph.D., director of research and analytics at First American Real Estate Solutions, quantifies the correlation between foreclosures as a percentage of total sales and the size of the discount buyers typically receive when purchasing foreclosure properties.

"Our clients are seeking advanced analytics to respond to trends, often in multiple markets," said George Livermore, president of The First American Corporation's Property Information and Services Group. "This comprehensive, nationwide analysis helps businesses identify areas where foreclosures are more frequent, and that helps them make more informed decisions."

During the last decade, First American RES has compiled the nation's largest database of property information and today utilizes it in conjunction with proprietary processes to improve operational efficiency and deliver new analytical products and services to its clients.


As stated by Philip Durell in Sept. 2004 issue of Inside Value: ( http://boards.fool.com/Profile.asp?uid=35610062)

First American has made considerable efforts to diversify its business portfolio away from a reliance on mortgage financing. However, its title insurance and mortgage information segments still make up 70% of net income. The biggest risk is that the real estate market could decline further than has been projected by the industry.

I'm keeping an eye on my FAF. As a matter of fact, I'm trying not to “fall in love” with it as it has been a great boost to the value of my portfolio, so far*. I will continue to be interested in seeing how the company deals with, and hopefully overcomes, any headwind from adverse real estate market trends.

Good fortune,

Tom H.

*Perhaps this price appreciation partly reflects the high level of pessimism felt by the market when I was buying.

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