In an IPO that could be worth tens of billions of dollars, the 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 as Rocket Companies (NYSE: RKT).
Now the largest mortgage lender in the U.S., Rocket Companies has provided more than $1 trillion in home mortgage loans since it launched, and has a current market share of 9.2% in the $2 trillion annual market. As part of the S-1, Rocket Companies unveiled lots of information that was previously not public. Because of the lender's massive presence, it provides lots of insight about the current state of the mortgage market. Here are five things we learned:
Image source: Quicken Loans.
1. Forbearance levels
The company disclosed that roughly 98,000 clients were on forbearance plans as of June 30, representing 5.1% of the company's serviced loans. Under those plans, Rocket Companies must advance principal and interest payments on the loans for up to four months on mortgages backed by government-sponsored entities (GSEs) like Fannie Mae and Freddie Mac, and for longer on other government-backed mortgages. The company also noted some people could extend forbearance for up to a year.
While this is certainly a substantial amount, it is not as big of a number as I might have expected, considering total forbearance plans, according to Black Knight, reached 8.8% of all active mortgages as of June 23. Rocket Companies said forbearances had not yet had a material impact on its cash flows, but that it expected forbearances to grow over time and that they could eventually have a material impact on the company's liquidity.
2. How liquidity could dry up for mortgage servicers
Early into the coronavirus pandemic in March, there was talk of a potential liquidity crunch among non-bank mortgage servicers like Rocket Companies because these companies do not have the same access to the Federal Reserve as traditional banks. While the industry appears to be OK right now, Rocket Companies laid out how a liquidity crunch could still occur.
Essentially, companies like Rocket Companies sell most of the mortgages they originate to the GSEs mostly, but then continue to service those mortgages for the GSEs, who package them into mortgage-backed securities they sell to investors. The way investors get paid is through the cash flows from mortgage payments. So, even as people have been going into forbearance, mortgage servicers have still been on the hook to continue making these payments to the investors who have purchased mortgage-backed securities.
Rocket Companies said it has been using prepayments and mortgage payoffs from other people not in forbearance to fund principal and interest payments for people in forbearance. As a result, the company has not been forced to dip into its cash or debt borrowings to fund the forbearance payments. However, if this cycle continues for long enough, it may have to dip into these sources, which would chip away at its liquidity and could impact its standing with its own lenders.
3. Strong mortgage activity
There may be a lot of forbearances, but mortgage activity appears strong if you look at Rocket Companies' first quarter results. The company reported $1.36 billion in total revenue, bolstered by strong gains on the sale of loans, which includes revenue from loan origination fees and from the sale of loans into the secondary market. If the company can keep up this pace for the rest of the year, it would top total revenue in each of the last five years. The company originated $51.7 billion in residential mortgage loans in the first quarter, a 131.7% increase from the first quarter of 2019, and Rocket Companies CEO Jay Farner previously told CNBC the company planned to do $75 billion in originations in the second quarter.
The big blemish in the quarter was that because the Fed dropped interest rates so rapidly, which sent the 10-year treasury down quickly as well, Rocket Companies ended up reporting a $991 million decline in the fair value of mortgage servicing rights. This is a massive drop compared to the company's previous markdowns. Lower rates increase refinancing activity, resulting in lots of mortgages being paid off early. That means that Rocket Companies loses the future income it would have made from servicing those mortgages, resulting in the change in fair value. But even still, Rocket Companies reported a $97 million profit in the first quarter, up from a nearly $300 million loss in the first quarter of 2019.
4. The mortgage market is highly fragmented
While there is a lot of talk about breaking up the big banks, one trend that has materialized over the last decade is the fragmentation of the retail mortgage market. Rocket Companies said the five largest retail mortgage lenders only issued 17.3% of all retail mortgages in 2019, a massive shift from 2009, when the top five retail mortgage originators issued 62.4% of all retail mortgages. Compared to other industries, this is nothing if you look at the market share of the top two largest companies. It also shows there is significant room for Rocket Companies or other players to grow:
Image source: Rocket Companies S-1.
5. Strong origination activity
Citing data from the Mortgage Bankers Association, Rocket Companies points out that strong mortgage origination levels are expected to continue, with $2.7 trillion in volume projected this year, a seven-year high. That number is then expected to be $2.1 trillion in 2021 and $1.9 trillion in 2022, still solid compared to yearly levels over the past decade.
Image source: Rocket Companies S-1.
