5 things the Rocket Companies IPO tells us about the mortgage market
In an IPO that could be worth tens of billions of dollars, mortgage giant Quicken Loans recently filed its S-1 prospectus with the Securities and Exchange Commission. The company plans to issue shares on the New York Stock Exchange and do business under the Rocket companies (NYSE: RKT).
Now the largest mortgage lender in the United States, Rocket Companies has provided more than $ 1,000 billion in mortgages since its launch and currently holds a 9.2% market share in the annual $ 2,000 billion market. . As part of S-1, Rocket Companies disclosed a lot of information that was previously not public. Due to the massive presence of the lender, it provides a lot of information about the current state of the mortgage market. Here are five things we learned:
1. Levels of abstention
The company revealed that approximately 98,000 customers were on forbearance as of June 30, representing 5.1% of the company’s managed loans. As part of these plans, the Rocket Companies are to advance loan principal and interest payments for up to four months on mortgages guaranteed by government sponsored entities (GSEs) like Fannie Mae and Freddie Mac, and longer on other government guaranteed mortgages. The company also noted that some people can extend the forbearance for up to a year.
While it is certainly a substantial amount, it is not as large a number as I would have imagined, given the total forbearance plans, according to Black Knight, reached 8.8% of all mortgage loans active as of June 23. Rocket Companies said the abstentions have yet to have a significant impact on its cash flow, but they expect the abstentions to increase over time and could potentially have a significant impact on its cash flow. the company’s cash flow.
2. How liquidity could dry up for mortgage services
At the start of the coronavirus pandemic in March, there was talk of a potential liquidity tightening among non-bank mortgage services like Rocket Companies because these companies do not have the same access to the Federal Reserve as traditional banks. While the industry seems to be doing well at the moment, Rocket Companies explained how a liquidity crunch could still occur.
Essentially, companies like Rocket Companies primarily sell most of the mortgages they make to GSEs, but then continue to manage those mortgages for GSEs, who bundle them into mortgage-backed securities that they sell to investors. Investors are paid by cash flow from mortgage payments. So even though people went into forbearance, mortgage agents were still required to continue making those payments to investors who bought mortgage-backed securities.
Rocket Companies said it was using prepayments and mortgage payments from other people not subject to forbearance to fund principal and interest payments for those subject to forbearance. As a result, the company was not required to dip into its cash or borrowings to fund the forbearance payments. However, if this cycle continues long enough, it may need to tap into these sources, which would reduce its liquidity and could impact its position with its own lenders.
3. Strong mortgage activity
There may be a lot of abstentions, but mortgage activity looks strong if you look at Rocket Companies’ first quarter results. The company reported total revenue of $ 1.36 billion, supported by strong gains on loan sales, which include revenue from loan origination fees and secondary market loan sales. . If the company can maintain this pace for the remainder of the year, it would exceed total revenue for each of the past five years. The company issued $ 51.7 billion in residential mortgages in the first quarter, an increase of 131.7% from the first quarter of 2019, and Rocket Companies CEO Jay Farner previously told CNBC that the company expected to make $ 75 billion in mounts in the second quarter.
The big flaw of the quarter was that, because the Fed cut interest rates so quickly, which also caused 10-year cash flow to drop quickly, Rocket Companies ended up reporting a $ 991 million cut in the fair value of mortgage management rights. This is a massive drop from the company’s previous markdowns. Lower rates increase refinancing activity, resulting in the prepayment of many mortgages. This means that Rocket Companies loses any future income it would have earned from the management of these mortgages, causing a change in fair value. But even still, Rocket Companies reported a profit of $ 97 million in the first quarter, compared to a loss of nearly $ 300 million in the first quarter of 2019.
4. The mortgage market is highly fragmented
While there is a lot of talk about breaking up big banks, one trend that has materialized over the past decade is the fragmentation of the retail mortgage market. Rocket Companies said the top five retail mortgage lenders issued just 17.3% of all retail mortgages in 2019, a massive change from 2009 when the top five retail mortgage originators issued 62.4% of all retail mortgages. Compared to other industries, it’s nothing if you look at the market share of the two largest companies. It also shows that there is significant room for growth for the Rocket companies or other players:
5. Strong origination activity
Citing data from the Mortgage Bankers Association, Rocket Companies points out that high levels of mortgage origination are expected to continue, with $ 2.7 trillion expected this year, a seven-year high. That number is then projected to be $ 2.1 trillion in 2021 and $ 1.9 trillion in 2022, which remains solid from annual levels of the past decade.