What we learned from Quicken's IPO filing

Register now

If Quicken Loans' parent company Rock Holdings pulls off its proposed initial public offering, it could be the first of many mortgage lenders to follow, analysts note.

"We see this IPO as positive for the mortgage banking industry as it highlights the current strong operating environment," said a report from Keefe, Bruyette & Woods authored by Bose George, Thomas McJoynt-Griffith and Eric Hagen.

"If this IPO is successful, we could see more IPOs in the industry. Many of the top mortgage originators are private companies. These include United Wholesale [Mortgage], Freedom Mortgage, Caliber Home Loans and loanDepot," the analysts wrote.

When asked about KBW's speculation regarding UWM's potential launch of an IPO, a company spokesperson responded in a statement: “United Wholesale Mortgage is 100% focused on supporting and growing the independent mortgage broker channel because we know mortgage brokers are best for borrowers. This will continue to be where we place our focus.”

KBW declined to comment on the announcement of the IPO, as did several other nonbank lenders and industry analysts that National Mortgage News contacted.

Quicken did not return a request for further comment.

Currently, just a handful of nonbank mortgage lenders are publicly traded, including Ocwen, PennyMac, Impac, Mr. Cooper, New Residential and Redwood Trust, along with commercial mortgage banker Walker & Dunlop.

If the IPO goes through, the publicly traded company will be named Rocket Cos. with RKT as its ticker symbol.

Rock Holdings is currently the sole owner of Rocket Cos., which was established in a reorganization earlier this year. Rock Holdings will remain as the principal owner of the company following the IPO. A recently created company, RKT Holdings, will be the direct parent of Quicken Loans and other related businesses including title company Amrock.

As contemplated in the Securities and Exchange Commission filing, there will be four classes of common stock in Rocket Cos., with Quicken Loans chairman Dan Gilbert, through the various entities, holding a stake equal to 79% of the voting equity in the company.

Prior to the IPO, Rocket Cos. will become the sole managing member of RKT Holdings. Both Gilbert and Rocket Cos. will have a stake in RKT Holdings.

The filing put to rest any speculation that Quicken Loans was raising capital for liquidity purposes or to expand the company.

"We intend to use the entire aggregate amount of the net proceeds from this offering to acquire a number of [RKT] Holdings Units and corresponding shares of Class D common stock from [Rock Holdings Inc.] ... We do not intend to use any proceeds from this offering to acquire any [RKT] Holdings Units and shares of Class D common stock from Dan Gilbert," the filing said.

Another section of the filing stated, "We do not intend to use the proceeds from this offering to fund the growth of our business."

In March — as the number of coronavirus cases grew, along with expectations of large numbers of CARES Act-related forbearances — reports stated that Quicken could face liquidity issues over required advances of principal and interest payments to investors.

But the filing showed the company was not in jeopardy, although it did include a note of caution.

As of June 30, Quicken had approximately 98,000 clients on forbearance plans, or 5.1% of its servicing portfolio. In comparison, the Mortgage Bankers Association reported that for the week ended June 28, 8.39% of mortgages overall were in a forbearance plan.

"We are able to utilize funds from prepayments and mortgage pay-offs from other clients to fund these principal and interest advances prior to remitting those funds to the agencies," the filing said. "To date, we have been able to fund all required principal and interest advances with these pay-off funds and have not had to use any corporate cash or draw on any facilities in order to fulfill principal and interest advances related to forbearances.

"While these advance requirements may be significant at higher levels of forbearance, we believe we are very well-positioned in terms of our liquidity. As of May 31, we had $2.6 billion of cash and cash equivalents and $1.22 billion in undrawn lines of credit."

Quicken is in ongoing discussions with its lenders around additional advance financing.

"Although the forbearance activity noted above has not yet had a material impact on our cash flows, we expect servicing advances to grow over time and believe they could become material," the filing stated.

The filing lists net earnings of $97.7 million for Rocket Cos. in the first quarter, compared with a net loss of $299 million for the same period in 2019.

In the first quarter of 2019, Quicken recorded a $321 million decrease in the fair value of its mortgage servicing rights due to valuation assumptions, which resulted in a net loss for the period, the filing said.

The year-over-year first-quarter change was attributed to an increase of $1.1 billion in the gain on sale of loans, due to higher origination volume in 2020. There was also an increase in other income of $112.1 million due primarily to revenues generated from title insurance services, property valuation and settlement services that were also driven by the increase in origination volume. But that was offset by a $991.3 million decrease in the fair value its MSRs.

For the full year of 2019, Rocket Cos. earned $893.8 million, compared with $612.9 million in 2018 and $770.7 million in 2018.

In the first quarter, it originated $51.7 billion of which $31.8 billion was direct-to-consumer and $19.9 billion was through third-party originators. That was more than double the first quarter 2019 production of $22.3 billion.

Wells Fargo, which has been dueling with Quicken in recent times to be the nation's top originator, did $48 billion for the first quarter this year and $33 billion for the same period in 2019.

The gain-on-sale margin was 3.25% for the first quarter, up from 2.64% one year prior.

Quicken's originations in 2019 totaled $145.2 billion, compared with $83.1 billion in 2018 and $85.5 billion in 2017. Wells Fargo's 2019 volume was $204 billion.

For reprint and licensing requests for this article, click here.
Stocks Quicken Loans Keefe, Bruyette & Woods Nonbank Earnings Digital Mortgage 2020 Technology