What happened
For the week, shares of the mortgage originator Rocket Companies (RKT -0.63%) had fallen more than 18% in the final hour of trading Thursday, according to data provided by S&P Global Market Intelligence, as soaring interest rates continued to spook investors.
So what
Rocket is the largest mortgage originator in the country and performed extremely well in the ultra low interest rate environment seen in 2020 and 2021 because homeowners wanted to refinance. But as the Fed has aggressively raised its benchmark lending rate, the federal funds rate, mortgage rates have shot up, recently surpassing 6%. Nobody is going to want to refinance right now.
This has significantly cut into mortgage volume and Rocket's gain-on-sale margins, which make up the bulk of Rocket's revenue.
There's also reason to believe that the pain may not be done yet because the Fed just raised interest rates by 75 basis points (0.75%), and Fed Chairman Jerome Powell said to expect a 50 or 75 basis point bump at the Fed's next meeting in July.
The Mortgage Banker's Association recently said that overall mortgage application volume as of last week was down close to 53% compared to the same week in 2021.
Now what
After generating $54 billion of closed loan volume in the first quarter, Rocket only guided for between $35 billion and $40 billion in the current quarter. The company is also expecting gain-on-sale margins to keep coming down.
For Rocket to win in this kind of cyclical industry, it will need to take a dominant market share position. While the company has grown market share in recent years, I would want to see more proof that it can take a more dominant piece of the pie before buying in.
