In response to the severe economic issues caused by the coronavirus pandemic, the Federal Reserve cut the federal funds rate to a range of 0% to 0.25% on March 3, 2020. The fed funds rate is the rate that banks pay to borrow from each other overnight.
As a result, fixed mortgage rates tumble to lowest levels in history. This led to a boom in the mortgage industry in 2020, as people rushed in to take advantage of cheap home loans.
However, recently mortgage rates have been rising, as the economy is expected to rebound in 2021, due to COVID-19 vaccines and the massive stimulus packages from the US government.
Rocket Companies is a solid long-term pick
RKTs is a Detroit-based holding company that provides real estate, mortgage, and financial services, making it one of the largest mortgage lenders in the U.S. In 2020, Rocket Companies’ mortgage originations stood at $320 billion, up from $145 billion in 2019.
It has successfully built a brand allowing the firm to double its loan volume in a pandemic-hit 2020. The company’s sales rose by 144% year over year to $4.7 billion while net income was up 277% at $2.8 billion in Q4 of 2020. It ended the year with $15.7 billion in sales and a client retention rate of 91%.
The interest rates that were near record lows last year, created a huge demand for home refinancing and new mortgage purchases that drove top-line growth for Rocket Companies.
Rocket Auto which is the company’s automotive retail marketplace facilitated over $750 million in GMV (gross merchandise volume) of online automotive transactions in 2020. This platform enabled the sale of around 32,000 auto units last year, a growth of 61% year over year.
Now with the possibility of interest rate hikes, it is very difficult for RKT to experience similar revenue growth in 2021. However, the company has an 8% market share in the U.S. and continues to invest heavily in technology. In 2020, the company invested $500 million in technology to expand its monthly loan production capacity. And it invested $900 million in marketing, which has successfully attracted the millennial home buyers.
In Q1, the company’s origination loan volume is forecast between $98 billion and $103 billion, indicating a sequential decline of just 5%.
Is loanDepot a buy right now?
LDI was launched in 2010 and has quickly gained traction to become one of the largest retail mortgage lenders and the second-largest non-bank mortgage lender in the U.S. It has funded over $275 billion in mortgage loans since its inception.
In Q4 of 2020, LDI originated $37.4 billion in loans, a sequential increase of 38%. In 2020, loan originations rose 122% to $100.8 billion. Its gain on sale margin stood at 4.27% in 2020, up from the prior-year figure of 2.81%. This margin is basically the difference between the retail and wholesale cost of mortgage.
In 2020, the company’s sales more than tripled to $4.3 billion while its net income stood at $2 billion. At the end of 2020, LDI held $103 billion in its unpaid principal balance mortgage servicing book. It is a popular asset for originators like LDI as its value rises with a corresponding increase in interest rates.
The final takeaway
We have seen both RKT and LDI deliver stellar results in 2020. However, with mortgage rates climbing, it’s expected that their 2021 results won’t be as impressive.
Investors should also note that both of these stocks went public within the past 12 months, which means they could be more volatile than companies that have been established on public markets for a long period of time.
Analysts tracking RKT have a 12-month average target price of $26.33 which is 14% higher than its current trading price.
In 2021, I believe both of these stocks should perform similarly. However, it’s my opinion that if you’re to pick one of these companies to invest in, RKT is a better stock right now. That’s because of RKT’s larger size and the massive investments in technology and marketing the company recently made.
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RKT shares were trading at $23.07 per share on Wednesday morning, up $0.03 (+0.13%). Year-to-date, RKT has gained 14.09%, versus a 5.00% rise in the benchmark S&P 500 index during the same period.
About the Author: Aditya Raghunath
Aditya Raghunath is a financial journalist who writes about business, public equities, and personal finance. His work has been published on several digital platforms in the U.S. and Canada, including The Motley Fool, Finscreener, and Market Realist. More...
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