Rocket stock closed down 5.3% on Monday.
Gabby Jones/Bloomberg
A price war has been brewing in the wholesale mortgage industry, and the dynamics could continue to cut into margins at companies such as Rocket Companies through next year, according to analysts at Jefferies.
On Monday, Jefferies analysts Ryan Carr and John Hecht downgraded Rocket Companies (ticker: RKT) from Buy to Hold and lowered their price target on shares from $26 to $18. The pair said that margin-shrinking competition among wholesale lenders appears to be here to stay through 2022 and beyond, and Rocket was among the lenders that would be impacted.
“We had initially foreseen a shorter time horizon for the wholesale price war,” the analysts wrote. “At this point, it is clear that the war will likely continue for the foreseeable future.”
Rocket stock closed down 5.3% on Monday to $18.03 after the research note was published.
To gauge the outlook for lenders, Jefferies surveyed mortgage brokers about industry competition and found the majority of brokers said that competition has increased among their wholesale partners. Asked for the three most important factors when choosing a wholesale lender, the most popular answer among those surveyed was pricing.
Competition among lenders in the wholesale channel—or those that lend through a third party, like a mortgage broker—has been high since the first quarter, the analysts wrote. “The ongoing price war in the wholesale channel has caused margins to contract much faster than they have historically in cycles, and quite frankly, much faster than we’d initially anticipated,” the analysts wrote.
High competition will also weigh on retail lenders, or those who lend directly to the consumer, the analysts wrote, adding that they don’t believe retail margins, which held up throughout the first quarter, are sustainable.
Competition in both channels will impact Rocket, even if mortgage volume remains high, the analysts wrote. “Gain-on-sale revenue is the most significant contributor to EPS and this material contraction is likely to impact the business for a prolonged period,” they wrote.
The analysts added that the majority of Rocket’s mortgage volume is in its direct-to-consumer channel. “While these are much higher than wholesale margins, we anticipate these falling as well.“
Rocket operates in both wholesale and retail channels, offering loans through partners and directly to individuals. The company reported margins of 3.74% in its first-quarter earnings this May, which missed analyst estimates, and guided for lower-than-anticipated margins in its second quarter. The company did not immediately respond to a request for comment about the Jefferies downgrade.
Jefferies is optimistic about the long-term prospects of tech-driven mortgage companies. “We continue to believe that leading technology-enabled mortgage originators will consolidate market share and drive scale/efficiency improvements over the long run, especially as they capture a larger share of first-time homebuyers,” the analysts wrote.
Rocket is not the only company that Jefferies said could be impacted by the dynamics. The analysts lowered their price targets on two other companies with exposure to the wholesale channel: United Wholesale Mortgage (UWMC), from $9.50 to $8; and LoanDepot (LDI), from $30 to $18. The analysts maintained a Hold rating on United Wholesale Mortgage and a Buy rating on LoanDepot.
Write to Shaina Mishkin at [email protected]
