A flattening yield curve and rising interest rates are usually indicators of a faltering financial sector. But the sector's performance has risen steadily since October. In fact, since then the S&P 500 financial sector has outperformed the S&P 500 – in contrast with the preceding 15 months.
Leading the comeback have been insurers and investment banks and brokerages. Insurers had a tough year in 2005 with the hurricanes, but 2006 could be a year of recovery. "Pricing power usually increases after a disaster," says Anthony Chan, chief economist for JPMorgan Private Client Services.
Meantime, Wall Street's steady if unspectacular performance has kept brokerages humming along. "To the extent that the equity market is not tanking on us, brokerages are having a reasonable year," Mr. Chan adds.
Banks may face a more challenging year, mainly because of rising interest rates and a cooling housing market. But a number of financial firms on the Hispanic Business 500 tied to the real estate industry are coming off record years poised for another strong showing this year.
Hispanic Homebuyers Buoy FEMBI
Miami-based First Equity Mortgage Bankers, doing business as FEMBI Mortgage (number 23 on the list), saw revenues grow to $276 million in 2005, up 44.5 percent. President Daniel Rodriguez says his company's preferred-lender status with some of Florida's largest homebuilders should keep business strong. "Even if the market flattens, we've established a presence," he says, and a slight drop won't erase the gains made during the industry's decade-long record run-up.
Moreover, he attributes FEMBI's strong revenue performance to its focus on serving the Hispanic homebuyer market – a major factor causing real estate to be "particularly strong in Florida." The company places "at least one Spanish speaker at every position in the company" so these buyers feel comfortable whatever their preferred language.
Help for Struggling Homeowners
Success is tied to real estate for Old Canal Financial Corp. also, but from a different angle. The firm (number 408 on the 500) purchases nonperforming real estate debt from banks, and works out payment plans with distressed borrowers. This focus enabled the company, founded in 2003, to grow revenues nearly 65 percent in 2005, to $8.65 million.
Greg Fernandez, Old Canal's president, expects his business to grow at a similar rate in 2006 as borrowers who used creative financing such as interest-only loans and adjustable-rate mortgages experience difficulties with rising interest rates. "So many loans are tied to fluctuating interest rates," and banks are often eager to sell non-performing debt, Mr. Fernandez explains. "After 90 days of no collection, a bank would rather get rid of that debt so it doesn't have to increase its loan loss reserve."
He emphasizes that though his company buys debt from banks, it rarely forecloses on a home. They bend over backward to help those who fall behind on payments "figure out how they can stay," he says.
Another reason for Old Canal's optimistic 2006 growth projections: They don't have much competition. "Barriers to entry are significant," Mr. Fernandez notes. "You need a ton of cash, and more than 200 licenses are needed, between origination, servicing, and collection licensing."
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