Rocket and other lenders face shrinking mortgage market

The period of struggle for mortgage companies was clear as day in the earnings report released Thursday night by Rocket Companies Inc. (NYSE: RKT).

More examples are expected to arrive next week.

Even as senior executives at the Detroit-based parent company of Rocket Mortgage and other personal finance companies sought to present a vision for the future with diversification away from the cyclical mortgage market, neither could they. refrain from expressing a feeling of extreme challenges, at least in the short term.

“Since the start of the year, we’ve seen a seismic shift towards a smaller mortgage market,” Rocket Chief Financial Officer Julie Booth told analysts Thursday, noting that the 30-year fixed mortgage rate saw its “biggest and fastest rise” in a semester. century.

“Rising rates had a significant impact on demand for rate and term refinancing,” Booth continued. “More recently, purchase demand (for new homes) has also been affected, as consumer confidence has declined at a rapid pace, levels not seen in more than a decade and the looming apprehension of the economy. raised fears of a potential recession.”

In total, the company’s closed loan origination volume for the second quarter was down nearly 60% on a year-over-year basis.

The bottom line, however, is that Rocket’s drastic revenue decline showed “no surprises,” according to Wedbush Securities analyst Henry Coffey.

Coffey said the same will likely be true for rival lenders United Wholesale Mortgage in Pontiac and Ann Arbor-based Home Point Financial when they report results next Tuesday and Thursday, respectively.

“Mortgage is very cyclical and we’re on the wrong side of the cycle,” Coffey told Crain’s on Friday morning. “Home buying, which is expected to bail out the year, is much weaker than expected. There are a lot of hurdles there. Rocket is not the only company that will report a quarter of very, very small difference.”

Detroit-based Rocket is by far the nation’s largest mortgage lender, generating $351 billion in closed loan volume in 2021, which was a banner year for the industry. The second-largest lender, PennyMac Financial, generated about $120 million less in loans, according to data from Inside Mortgage Finance, which ranked UWM and Home Point as the third- and eleventh-largest lenders, respectively.

Rocket, analysts like Coffey point out, has built a platform that could see the company through the downtime, which executives highlighted during Thursday’s earnings call.

“I think last night was probably the best call Rocket ever made,” Coffey said. “They really explained where they were, really laid out the strategy.”

There are also positive indicators for companies like Rocket and its rivals.

The 30-year fixed mortgage rate fell below 5% this week, the first time it has fallen this low since mid-April, according to mortgage buying entity Freddie Mac.

“Mortgage rates have remained volatile as inflationary pressures tussle with a sharp slowdown in economic growth,” according to the Freddie Mac website. “The high uncertainty surrounding inflation and other factors will likely cause rates to remain variable, especially as the Federal Reserve tries to navigate the current economic environment.”

Additionally, mortgage applications have increased in recent weeks, according to data from the Mortgage Bankers Association trade group. Still, applications are 16% lower than this time last year, according to the MBA’s unadjusted Buy Index.

“Lower rates have led to increased refinance and purchase requests, but relative to a year ago activity is still depressed,” said Joel Kan, MBA associate vice president for forecasts. economic and industrial, in a press release. “Lower mortgage rates, combined with signs of increased inventory in the market, could lead to a rebound in buying activity.”

But many industry watchers maintain a largely bearish outlook for mortgage lenders.

“We continue to see (an) unfavorable macroeconomic outlook for (Rocket) in the face of a declining mortgage market that could extend into 2024, in our view, in a contracting mortgage cycle,” wrote Ken Leon, director of research at CFRA Research, in a note to investors. Friday, which urged shareholders to sell their shares. “Tough times for mortgage lenders where borrowers are faced with a sharp rise in mortgage rates that suppresses refinances while (the) housing shortage reduces origins.”

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