Rocket mortgage is in a dangerous phase of the cycle



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Most investors have a very short memory and tend to enjoy the positive trends of making money in the current market conditions. Worse, today’s young investors looking for growth and trading style are oblivious to leveraged market crash for example, 2008. One company that can evoke memories in young traders is Rocket companies (NYSE:RKT) warehouse.

Promotional mortgage RKT opened on a smartphone

Source: Laurie Butcher /

Rocket is a Detroit-based company that helps its clients “fulfill the American dream of home ownership and financial freedom.”

In addition to its core mortgage and refinancing business, the company expanded into related industries such as retail lending and car sales. The main business income comes from the issuance, processing, underwriting and servicing of mortgage loans, which are mostly GSE-compliant, which are sold in the secondary market.

The number of mortgage applications is slowing down

According to the seasonally adjusted index of the Mortgage Bankers Association, the number of applications for mortgages and refinancing has recently decreased by 1.8%. This was the lowest level since early 2020 before the Covid-19 pandemic hit the US economy.

Interestingly, refinancing and purchase applications declined despite mortgage rates declining.

Home refinancing declined 2% weekly and 8% year over year. According to the MBA, over the past four months, refinancing applications have dropped lower than in 2020. The number of applications for the purchase of housing for the week decreased by 1% and amounted to 14% compared to last year.

Joel Kahn, MBA Deputy Vice President for Economic and Industry Forecasting, said:

“The rapid rise in house prices in most of the country, caused by insufficient supply of housing, is putting pressure on the buying market and leading to an increase in the average loan amount.”

Given that property prices are at an all-time high in almost all markets in the country, it is difficult to imagine a significant increase in mortgage loans in the future. And when interest rates eventually rise, refinancing could drop to almost zero.

Ratio of rates and default

Banks charge interest rates on loans to account for risk, in other words, default.

In theory, mortgage lenders charge a rate that will provide them with a decent amount of income and protect against defaults. They can “borrow” from check and savings depositors at near zero and the Federal Reserve at 0.25%, and provide 30-year mortgages at 3%, and all is well in the world.

Recovery from defaults is, of course, included in these credit calculations. But something always happens. In September 2009, US mortgages that were overdue or past due rose to an astounding 14.4% of all mortgages.

But wait, don’t they sell all their loans to third party buyers like Fannie Mae and Freddie Mac? Yes, they do, but RKT usually retains service rights, i.e. processing payments and loan fees. But if a customer stops paying, RKT often on hook:

“During any period when one of our clients does not make payments on a loan we are servicing, including in certain circumstances where a client prepay a loan early, we are required under most of our service agreements to advance our own funds to meet the principal contracts and claims for the transfer of interest, payment of property taxes and insurance premiums, legal costs and other protective advances “

Yes, currently the average credit rating is 755 and LTV is 67%. The delinquency rate is low – 0.72%. But, as many forecasters learned the hard way in 2007 and 2008. real estate never fallsbut everything changes. They always do that.

Valuation of RKT shares

The highly cyclical and highly competitive nature of mortgage banking makes it nearly impossible to deliver consistently high economic returns and sustainable growth. Like banks, most analysts use book value as an indicator. RKT shares were sold more than 3 times at book value.

Low P / E does not make sense for these companies due to the strong earnings volatility driven by the factors mentioned above. Look at distributing Yahoo Finance for income estimate… The range is $ 1.79 to $ 2.65 this year, and $ 1.15 to $ 2.10 for 2022. However, 2022 could easily become zero or less if rates rise and competition becomes irrational.

However, Rocket has a good track record of profitability and growth, and an excellent management team. Whether these factors can outweigh macroeconomic forces is still open to question.

At this stage in the economic cycle, Rocket is a risky stock.

Investors and traders often look for the next entry point when the market falls. But the negative side to the RKT stock outweighs the positive, so the next entry point for the RKT must be below book value to create a headroom.

At the time of publication, Tom Kerr did not hold any positions in the securities mentioned in the article. The opinions expressed in this article are those of the author and are published on Publishing rules

Tom Kerr has over 25 years of experience in the financial services industry. He is currently Senior Portfolio Manager at Rocky Peak Capital Management. Prior to that, he was Chief Investment Officer and Director of Research at SGL Investment Advisors and held a number of positions in other investment-related organizations. Mr. Kerr has also written articles for, and… He is a CFA holder and holds a BA in Finance from Texas Tech University.

Message Rocket mortgage is in a dangerous phase of the cycle first appeared on InvestorPlace

The views and opinions expressed herein are those of the author and do not necessarily reflect the views of Nasdaq, Inc.


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