I read yesterday that Rocket (parent company of Quicken) did not disclose its percentage of purchases (relative to refis) in its earnings release for Q3.
I found that fascinating b/c it was probably intentional and it speaks to what I have been alluding to all year – with so many mortgage companies going public or planning on going public.
Who in their right mind would invest in a company that relies very heavily on continually falling rates and refinance revenues to make money?
Don’t get me wrong though, as Rocket is an amazing company – with stellar management, state-of-the-art technology, a brilliant sales and marketing machine, the best brand-awareness in the industry, and more market share than any other lender – by far.
Rocket’s founder, Dan Gilbert, also almost single-handedly revived the city of Detroit, Michigan, by bringing so many jobs and so much development back to the city center.
Interest rates dropped very quickly this year and hit new all-time record lows repeatedly over the last 8 months, and many lenders are having their best years ever.
But many lenders also garner over 75% of their revenues from refinancing activity, particularly the major online lenders with large call-centers.
There is nothing wrong with this of course, and I give full credit to the lenders that are best able to take advantage of the opportunity.
My only point is that investors should be wary of a company that relies so heavily on revenues that can shut off at any minute.
WHY INVESTORS LIKE ROCKET MORTGAGE
Investors like Rocket nonetheless b/c it has so many competitive advantages and revenue sources.
It can compete with banks without the capital and regulatory constraints that banks face (its online model also does not need branches, so its costs are much lower for that reason alone).
Rocket also does not rely solely on mortgages for revenues, as it garners massive title insurance fees, marketing fees, and real estate services fees.
Investors also believe that Rocket will be able to turn its skills into other aspects of lending at the consumer level, such as auto and unsecured consumer loans.
And finally – investors believe that Rocket will be able to turn its mighty focus to purchase loans when refis dry up.
And they will, but I seriously doubt they will be able to come close to replacing their refi revenues.
ONLINE LENDERS AND PURCHASES
I have blogged about this many times in the past and am going to hit it briefly again.
Purchases are often too complex for online lenders to handle.
JVM closes about 100 purchases per month, and about 70 of them are simple and straight-forward.
But, 20% to 30% of them always have complexities that are beyond the scope of hastily-trained call-center loan officers.
These issues include properly calculating self-employment income, paper-trailing funds, finding qualified appraisers, dealing with property condition issues, and screening contracts for deal-killing language.
Online lenders are also unable to close as quickly as we can, and their jumbo pricing is usually, for want of a better term … awful.
So, unless online lenders completely revamp their training systems and their entire models, I don’t see consumers and – more importantly, real estate agents – learning to trust them with their purchases en masse.
So – why did Rocket not disclose its percentage of purchases relative to refis?
Probably b/c they don’t want to scare the bejeebers out of investors.
Founder/Broker | JVM Lending
(855) 855-4491 | DRE# 1197176, NMLS# 310167