Can Rocket’s other activities help him weather the downturn in the mortgage market?

The past year has been an excellent one for mortgage lenders. The Federal Reserve lowered interest rates to historically low levels, and mortgage rates fell to historically low levels. These rates have prompted people to refinance at an all-time high, and Rocket Cos. (NYSE: RKT) was masterful in leading the way.

Rocket Mortgage was No. 1 in the country for mortgage lending last year, with $ 1.1 million, according to the Consumer Financial Protection Bureau. Of these, 87% were refinancing loans, totaling $ 274 billion in volume. These staggering numbers overtook the second-place contender UWM participations, which issued 560,000 loans.

Rocket’s strong performance continued into the first quarter, but the lender noted that the mortgage market had started to slow. Expect the economy to normalize and rates to start rising again. Rocket understands the cyclicality of the mortgage market and has made strides in expanding its other sources of income. Is it sufficient?

Image source: Getty Images.

The cyclical nature of the mortgage industry

The mortgage industry is very cyclical due to the way interest rates move in response to economic conditions. When interest rates drop to low levels from last year, refinancing is attractive to homeowners and stimulates mortgage origination activity. As the economy recovers and interest rates rise, refinancing becomes less common and lending activity cools. Because of this, mortgage lenders trade at lower multiples during good times, and that’s why Rocket’s current P / E ratio is 6.8, while competitors PennyMac Financial Services and Mr. Cooper Group are trading at ratios of 2.7 and 3.1, respectively.

According to Freddie mac, 30-year fixed rate mortgages hit a low of almost 2.65% in January and have risen to 2.95% since then. The agency expects these rates to reach 3.4% by the end of 2021 and continue to climb until next year. The agency also predicts that total creations will grow from $ 4 trillion in 2020 to $ 3.5 trillion in 2021 and $ 2.4 trillion in 2022.

Can Rocket reverse the cyclical trend?

If Rocket is to counter the cyclical trend, it will have to do so by serving markets outside of mortgages. The company sees opportunities in auto finance and other financial services, and believes it can impact the digitization of processes in these fragmented markets.

In 2020, the company generated $ 15.7 billion in revenue from its other Rocket businesses, which accounted for 13.1% of its total revenue during the year.

Other rocket companies

2020 turnover (in millions)

% of total income

Amrock

$ 1,251

7.95%

Rocket houses

$ 46

0.29%

Rocket loans

$ 394

2.50%

Rock connections

$ 90

0.57%

Rocket Auto

$ 24

0.15%

Basic digital media

$ 253

1.60%

Total other income

$ 2,057

13.10%

Total revenue

$ 15,735

Data source: Rocket Companies 10-K repository.

Rocket’s largest producer of revenue from other Rocket companies is Amrock, a provider of title insurance, property valuation, and settlement services, all of which are integrated with the Rocket platform. Amrock accounts for 8% of the combined company’s revenue, but it still relies on mortgages, which subjects it to the cyclical nature of the industry.

Rocket’s ultimate goal is to get customers in with its mortgage platform and then build lifelong loyalty through its personal loan or auto loan solutions. Rocket Loans accounts for 2.5% of total revenue and is the company’s digital personal lending business, which enables customers to apply for a loan and receive same-day financing.

The company also has its Rocket Auto business – one of its smallest income producers last year, with 0.15% of its revenue, but this is an area the company wants to expand into. more. In an effort to grow its Rocket Auto business, the company has partnered with AutoFi, a leading software provider for the automotive retail industry. AutoFi is working with 2,000 partner dealers across the country and will help Rocket Auto connect with those dealerships, increasing their access to inventory. The company likes the way AutoFi integrates with its Rocket Auto platform, providing it with a complete automotive point-of-sale solution that includes financing and insurance.

There are opportunities for growth, but progress needs to be made

In the first quarter, these other Rocket companies generated gross revenue of $ 554 million, or 12.1% of the company’s total revenue during the period. Although this other income as a percentage of total income did not change significantly, gross income increased 83% from the previous year.

These services do not provide a significant source of revenue for Rocket at this time, but they could potentially do so in the future. Creating these other sources of income is the key to Rocket’s success and could help the lender break the trend of others in their industry. However, the business still relies heavily on mortgages for its income and must continue to contend with the cyclical nature of the industry, which expects growth to slow down in the years to come.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a premium Motley Fool consulting service. We are motley! Challenging an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.


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