Mortgage Bank Stocks Crashed!
COVID caused rates to plummet – which in turn ushered in the mother of all refi booms.
Several large mortgage banks** had initial public offerings at the height of the refi boom – with valuations that were based largely on revenues from refis.
**“Mortgage banks” only originate and fund mortgages and do not do any “commercial bank” activities, such as holding deposits, issuing checking accounts, or making commercial loans.
I expressed amazement when the companies went public, wondering why anyone would buy a stock that was based on revenues that would dry up instantly as soon as rates went up.
And sure enough, rates went up and revenues dried up instantly – and the stocks crashed!
Rocket peaked above $23 per share and is now close to $10; Finance of America peaked around $11 and is now under $2; and Guild Mortgage was close to $18 before falling to $10.50.
But – the poster child of mortgage bank stock crashes is loanDepot – as it peaked at $31.50 and is now under $2.
Note: I know a lot of very sharp loan officers, wholesale reps, managers and/or executives at all of the companies I list above (including and especially loanDepot), so this blog is no slight on any of them.
What’s To Learn?
- Why did some mortgage banks fair better than others? I am just repeating what some banking consultants have told me, but Rocket seems to have performed better because it has multiple revenue streams (title insurance, software, credit monitoring, car loans, etc.) over and above just mortgages and it is extremely well run – with an amazingly efficient “refi capturing” machine. Guild Mortgage is also extremely well managed, and it has a very strong retail presence and network of loan officers in its branch system.LoanDepot seems to be facing a variety of issues, and Brian Stevens set out some of them in this recent NREP video. I am not sure what is and isn’t true and, once again, loanDepot has a lot of very talented people, but the fact remains that its stock has dropped over 90% over a short period.
- Malinvestment. So why did investors pour so much money into companies with fleeting revenue streams? One answer is “malinvestment” – or what happens every time there is too much money or credit (from too low of rates) in an economy. So, whether it is tulip bulbs, Florida land, dotcom stocks, or housing prior to 2008, investors are always desperately chasing returns anywhere they can find them (and riding false euphoria waves) when money is too plentiful or cheap, and it results in enormous losses (and huge amounts of lost capital – which is horrible for an economy). So this is one more reason why super low rates are not always a good thing, and often a very bad thing.
- Don’t invest in fleeting revenue streams. Duh. But, if a company’s revenue stream can’t be maintained outside of very specific economic conditions, e.g. very low rates, don’t walk – run.
Biggest Irony Ever?
And – here is the biggest irony ever: I think the above stocks may be a great buy now because I think one more massive refi boom is very likely, given the likelihood of a recession and sharply falling rates (although, I am not an investment advisor, so nothing in this blog should be perceived as investment advice).
And sadly, if there is a refi boom and those stocks do come back, nobody will learn anything. 😊
Jay Voorhees
Founder | JVM Lending
(855) 855-4491 | DRE# 1197176, NMLS# 310167
