Register for free to join our community of investors and share your ideas. You will also get access to streaming quotes, interactive charts, trades, portfolio, live options flow and more tools.
Register for free to join our community of investors and share your ideas. You will also get access to streaming quotes, interactive charts, trades, portfolio, live options flow and more tools.
Will this ARM deal go through ?
Liftoff: Rocket Companies Reports Record Volume
Is a better business model to thank for Rocket Companies' 47% rise since its mid-August IPO?
Brent Nyitray, CFA(TMFBrentNyitray)
Sep 9, 2020 at 9:20AM
With interest rates at rock-bottom lows courtesy of the Federal Reserve, the mortgage banking sector is having one of those once-in-a-decade years. One of the beneficiaries, Rocket Companies (NYSE:RKT), the parent company of Quicken Loans, Rocket Mortgage, and Amrock, went public in early August at $18 per share and its stock price is already up 47% since being put on the market.
Rocket has been dominating the mortgage space, with higher growth and profits per loan than its competitors. Technology and the Rocket Application certainly play a part, but Rocket's business is fundamentally different than the typical publicly traded mortgage aggregator. Let's find out a bit more about this IPO darling.
Photo of a mortgage document, a calculator, and a set of keysIMAGE SOURCE: GETTY IMAGES.
Huge uptick in volume and profitability
Rocket originated $72.3 billion in mortgages in the second quarter (ending June 30), which was up 40% from the first quarter and 126% from the prior-year quarter. The most striking number, however, was Rocket's margin: a whopping 5.19% gain on sale margin. That is gargantuan. To put that number into perspective, the Mortgage Bankers Association reported that the industry average was 4.29% for the second quarter. That said, Quicken is guiding for third-quarter margins to fall to 4.05% to 4.3%, although origination volume is expected to rise to $82 billion to $85 billion. Quicken's capacity goal is to get to $40 billion per month.
The company's bottom line was even more impressive. Quicken earned $3.4 billion in net income on $72.3 billion in origination, which works out to be a 4.84% net profit margin. The Mortgage Bankers Association reported that the typical independent mortgage bank made 1.67% in pre-tax income on its production. Note that Quicken is not a mortgage aggregator like its competitors PennyMac Financial Services or Mr. Cooper. Those companies buy production from smaller clients. Quicken originates most of its production in-house.
Rocket views servicing differently than its competitors
Rocket takes a different view of mortgage servicing than most of its competitors. A mortgage servicer performs much of the administrative tasks of handling the mortgage. The servicer will collect the monthly payments from the borrower, ensure that property taxes and insurance are paid, forward the payment to the ultimate holder of the mortgage, and handle delinquencies and foreclosures. The servicer will receive 0.25% of the loan balance as a fee for performing this service. Since it generally doesn't cost 0.25% to perform these duties, mortgage servicing rights generate cash flow and are booked as an asset.
Most mortgage originators retain servicing for two main reasons: first, it is a source of cash flow, and second, it will go up in value if interest rates rise. When rates rise, refinancing volume will dry up, but the value of the servicing asset will rise. It acts as a natural hedge. Rocket doesn't really hold servicing for that reason, however -- it actively tries to refinance the loans in the servicing portfolio.
On the one hand, it is losing the value of the servicing asset, but on the other, it is making a profit on the loan. Since the typical mortgage servicing asset is worth, say 1% of the loan amount, and the company is making anywhere from 4% to 5% on the refinancing, it would seem to be a smart decision. That said, most mortgage banks prefer to hold the servicing asset in hopes of earning profits when rates rise. This will leave the company somewhat more exposed than its competitors when rates eventually rise.
Technology versus loan officers
Quicken's view on rising rates is that it will take share at that point. The company has a goal of achieving 25% market share by 2030. As a technology-driven company, about 25% of its origination costs are variable; the rest is fixed. Quicken is adamant about protecting its margins, and technology gives it an advantage. Most originators employ loan officers who will always advocate for lower margins. Why? Because under current regulations, they are paid the same, whether the company makes a lot on a loan or a little.
So at most banks, you will see a tension between loan officers, who want the lowest rates possible, and the secondary desk, which wants to maximize profits on a loan. Since the loan officers are generally in control of the business, banks tend to cut margins to keep them from leaving for another bank. With Rocket, the technology controls the business, which allows the company to keep margins high. So when rates begin to rise, growth will come from taking market share.
Rocket is trading at 8.5 times expected 2020 earnings per share of $3.14. This is more expensive than PennyMac Financial (which trades at 3.3 times expected 2020 earnings). But Rocket's ability to take share may be a good reason for a premium multiple. The stock has certainly performed well. However, these are the best of times for originators, and the business is cyclical. That said, the Rocket probably deserves a premium multiple given its hard-to-replicate technology advantage and its competitive cost structure.
10 Top Stocks we like better than Rocket Companies, Inc.
When investing geniuses David and Tom Gardner have a stock tip, it can literally pay to listen. After all, they have consistently beaten the market for over 25 years!
Apparently So.
Bought the dip today in PM 27.89 ready to Rocket!!
Around 4:00 AM EST.
Thanks!!
Any opinions how this hurricane will affect ET?
Nvidia stock price target raised to $600 from $520 at BofA Securities
Tesla just caught another upgrade from Bank of America from 800 to 1750.
We just did a Re-Fi on paper With Quicken and they came to our home to do the closing. I found the experience very comfortable.
This is being kept range bound to avoid a need to cover if the news tomorrow is good.I have a feeling that firms like Goldman are Orchestrating a short move.
1- Rate a buy= Get all you can while the shares are cheap.
2- Rate a hold= we have all the shares we want and are ready to short.
3- Rate a sell= ok everyone's start shorting.
4- Thank you Mr President for the political unrest in China!!
5- All in what 2 Months?
JMO
I would say concerned. In my opinion they are way behind the curve and need to catch up badly.When these foren EV's start selling in the US they will Control a good portion of the market share.
I'm sure that will be addressed Tuesday.
Orders are being taken at Record levels.
To bad for them.
Well the way I see it, if all the EV makers in China including Tesla adopt the Battery swap technology it is a win win for NIO.
News out with nothing much to say about NIO and the stock jumps to +3%. Just proves how primed this stock is to move up. Cant wait till Monday/Tuesday.
Sold mine, waiting on 9 again.
Why did this blow up after hours? Can find any news.
I agree, this is the conformation they have been looking for.
CNBC posted NIO resuts, Stocks moving in Pre Market.
Could you please tell me when they be announced? I have looked everywhere and cant find a date.
An upgrade from a legitimate Brokerage would be good now.
Thank you good point, I'm thinking it will probably be an at home feature.
Does anyone have a link that shows the battery swap technology in action?
I would say yes. Florida shut down all Bars again today around 3:00 PM EST.
Dont think you will regret!! Due to bounce.
Not a lot of shares in the float, this could go either way real fast but in the long run this goes higher.GL
Just noticed that Oil is up,hopefully a lower Rig Count and the OPEC agreement will help it find a firm bottom.
Nice bounce from today's low, any news ?
I'm dreaming of the profit I took at 20.91.
Sub 10 again ?
I think this goes down the next several days, holding my powder.
Might get better than 7 at this rate.
Would like to get some more for 7 .
Considering 35% of the AAL shares are short as soon as the new car smell wears off about the airlines reopening,I feel this has a good chance of testing 15.00 again.
80 Million Shares traded before 9:45 and its light day. LOL
Ameritrade says post Market.