Can Rocket’s Other Businesses Help It Overcome a Slowing Mortgage Market? – Motley Fool

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Can Rocket’s Other Businesses Help It Overcome a Slowing Mortgage Market? – Motley Fool

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The mortgage lender looks to diversify its revenue streams with its other Rocket companies.

Courtney Carlsen

The past year was a great one for mortgage lenders. The Federal Reserve cut interest rates to historically low levels, and mortgage rates dropped to record lows as a result. Those rates prompted people to refinance at a record pace, and Rocket Cos. (NYSE:RKT) was masterful in leading the way.

According to the Consumer Financial Protection Bureau, Rocket Mortgage was No. 1 in the country in mortgage originations last year, with 1.1 million. Of those, 87% were refinance loans, totaling $274 billion in volume. These staggering numbers outpaced second-place competitor UWM Holdings, which issued 560,000 loans.  

Rocket’s solid performance continued in the first quarter, but the lender has noted that the mortgage market has begun to slow down. This is to be expected as the economy normalizes and rates begin to rise once again. Rocket understands the cyclicality of the mortgage market, and it has made strides to expand its other sources of revenue. Is it enough?

People shaking hands over table with paperwork.

Image source: Getty Images.

The cyclical nature of the mortgage industry

The mortgage lending industry is highly cyclical due to how interest rates change in response to economic conditions. When interest rates are cut to low levels, as they were last year, refinancing is attractive for homeowners and drives mortgage origination activity. As the economy recovers, and interest rates rise, refinancing becomes less common and loan origination activity cools off. Because of this, mortgage lenders trade at lower multiples during good times, and it’s why Rocket’s current P/E ratio is 6.8, while competitors PennyMac Financial Services and Mr. Cooper Group are trading at ratios of 2.7 and 3.1, respectively.

According to Freddie Mac, 30-year fixed-rate mortgages bottomed out near 2.65% in January and have risen to 2.95% since then. The agency expects these rates to rise to 3.4% by the end of 2021 and continue climbing through next year. The agency also projects total originations to drop from $4 trillion in 2020 down to $3.5 trillion in 2021 and $2.4 trillion in 2022.  

Can Rocket buck the cyclical trend?

If Rocket is going to buck the trend of cyclicality, it’s going to have to do it by serving markets outside of mortgages. The company sees opportunities in automotive financing and other financial services, and it believes it can make an impact digitizing the processes in these fragmented markets.

In 2020, the company generated $15.7 billion in revenue from its other Rocket businesses, which accounted for 13.1% of its total revenue during the year.  

Other Rocket Companies

2020 Revenue (in millions)

% of Total Revenue

Amrock

$1,251

7.95%

Rocket Homes

$46

0.29%

Rocket Loans

$394

2.50%

Rock Connections

$90

0.57%

Rocket Auto

$24

0.15%

Core Digital Media

$253

1.60%

Total other revenue

$2,057

13.10%

Total revenue

$15,735

Data source: Rocket Companies’ 10-K filing.

Rocket’s biggest revenue producer from other Rocket companies is Amrock, a provider of title insurance, property valuation, and settlement services, which is all built into the Rocket platform. Amrock makes up 8% of the combined company’s revenue, but it still relies on mortgage lending, making it subject to the cyclical nature of the industry.

Rocket’s ultimate goal is to get customers in the door with its mortgage lending platform and then keep those customers for life through its personal lending or automotive lending solutions. Rocket Loans makes up 2.5% of total revenue and is the company’s digital personal loans business, which allows clients to apply for a loan and receive funding the same day.

The company also has its Rocket Auto business — one of its smallest revenue producers last year, at 0.15% of revenue, but this is an area where the company wants to expand further. In an effort to grow its Rocket Auto business, the company partnered with AutoFi, a leading software provider for the automotive retail industry. AutoFi works with 2,000 dealer partners across the country and will help Rocket Auto connect with those dealers, increasing its access to inventory. The company likes how AutoFi integrates with its Rocket Auto platform, providing it with a full automotive point-of-sale solution that includes financing and insurance.  

Opportunity for growth is there, but progress must be made

In the first quarter, these other Rocket companies provided gross revenue of $554 million, accounting for 12.1% of the company’s total revenue in the period. While this other revenue as a percentage of total revenue hasn’t changed significantly, gross revenue did increase by 83% from the year before.  

These services don’t provide a significant source of revenue for Rocket right now, but they potentially could down the road. Building up these other revenue sources is key to Rocket’s success and could help the lender break the trend of others in its industry. However, the company is still heavily reliant on mortgage lending for its revenue, and it must continue to deal with the cyclical nature of the industry, which expects slowing growth in the coming years.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

Courtney Carlsen has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.“>

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