Looking at the relatively newly IPO’d Rocket Mortgage (Rocket Companies) because of its massive cash flow. I think there’s massive disruption opportunity in the real estate market which is why I’ve been so pro-Redfin… but maybe the greater opportunity doesn’t lie with the brokerage but instead with the financial mortgage transaction… thoughts? Oddly, looks like its highly shorted at almost 40%.
Market Cap - $43B
“Rocket Cos., Inc. engages in the provision of a suite of services related to homeownership and other personal financial transactions.”
Other Parts of the Company:
Rocket has some key competitive advantages that have made it a top dog in the space. The primary edge is its digital business model, which enables consumers to refinance, apply for a loan, or do whatever they need to do through the Rocket Mortgage app. This includes transmitting documents, getting approvals, and e-signatures.
The other major advantage of the Rocket model is its low cost, as it greatly reduces the need for loan officers. That leads to higher gain-on-sale margins, a metric that measures the difference between the retail and wholesale cost of a mortgage. As a result, Rocket has lots of cash on hand – about $3.5 billion, up from $1.4 billion at the start of 2020.
The other advantage is that Rocket doesn’t have to pay an army of loan officers (who can earn well over a 1.5% commission per loan). This is a huge cost advantage for the company. When refinance activity dries up and the business gets more competitive, Rocket will be able to outcompete many smaller lenders.
That day may not come for a year or two, but it will come eventually. Rocket is much more profitable than the average mortgage bank; in the third quarter of 2020, it earned 3.4% profit on its origination, which was over two times the average independent retail mortgage originator’s profit.
Rocket’s app will certainly be imitated, and at some point, most lenders will have a fully online offering. But Rocket does have the first-mover advantage here, and it concentrates on the lowest-hanging fruit of the mortgage market: salaried borrowers purchasing or refinancing a primary residence. This lowers the cost to do a loan.
Rocket does have mortgage servicing rights on its book as an asset, and mortgage servicing can be a volatile and difficult-to-value asset. A mortgage servicing right is the compensation the servicer receives for handling the administrative duties of a loan. These include processing payments, ensuring property taxes are paid and that insurance is valid, and loss mitigation when the borrower goes delinquent. For compensation, the servicer gets paid 0.25% of the loan balance. Since it generally doesn’t cost 0.25% to service a loan, that asset is worth money.