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Mortgage IPO Boom Faces Market Turbulence

Nonbank mortgage lenders face a turbulent risk.
(Fabio Balbi)
(Fabio Balbi)
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“Mortgage lenders hoping to take advantage of a surprisingly prosperous year are facing a big challenge: rising market turbulence,” WSJ writes.

Two years ago, nonbank mortgage lenders were under “significant pressure.” But the August IPO of Quicken Loans parent Rocket Cos. sparked a “flurry of planned public listings for mortgage companies.”

  • According to Inside Mortgage Finance, “at least six of the 30 largest U.S. mortgage lenders have gone public this year or are seeking to.”
  • Mortgage lenders are expected to “originate a record $3.2 trillion worth of mortgages” in 2020, according to the Mortgage Bankers Association. It’s a 41% increase from last year.

Housing demand and the broader financial markets have been “remarkably resilient during a recession that has put millions of Americans out of work.”

  • Lenders are reaping profits from a low-rate-driven refinancing boom. In July, average rates on a 30-year fixed mortgage fell below 3% for the first time in 50 years.
  • A record surge in IPOs also created “ideal conditions” for nonbank mortgage lenders to raise capital publicly.

Mortgages and refinancings are cyclical. The MBA says refinancings will make up 55% of mortgage originations this year, a key business component for nonbanks such as Quicken.

  • The massive demand is also creating a short supply of homes. As a result, home prices are rising and recently hit a median of $311,800.

There’s still a ton of risk looming, underscored by the wonky last few months. Caliber Home Loans Inc. and AmeriHome Inc. planned to IPO last Thursday but delayed the proceedings “as major U.S. stock indexes suffered through their sharpest retreat since the early days of the pandemic.”

  • Government-mandated loan forbearance resulting from the pandemic created a challenge for nonbank lenders, but the government did take steps to protect mortgage companies.

Down The Line: Some of the recent public offerings have given way to “ambitious growth targets.” Rocket wants to control a quarter of the mortgage market within a decade. It currently has less than 10%, breeding some skepticism.

Justin Oh:

Rocket Companies ($RKT) is trading at about 13x forward EBITDA, considering that its revenue is expected to drop next year after they burn through this refinancing wave. Looking at their historical growth, it’s very choppy, so it seems like they have been taking advantage of specific periods to gain market share.

Almost all Wall Street analysts have a Buy rating on the stock, with an average price target of about $27 per share. I believe Rocket will continue to gain market share, having closed on my latest mortgages with them. But with so much uncertainty around interest rates, mortgage delinquencies, upcoming government policies, and the overall housing market, it’s hard to gain enough confidence to dive into the stock myself.

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