BofA Expects Selling Pressure on Rocket Companies (RKT) Today After CEO of United Wholesale Mortgage (UWMC) Issued an Ultimatum to Mortgage Brokers

The Chief Executive of United Wholesale Mortgage (NYSE: UWMC) told mortgage brokers yesterday that they must choose between his company and Quicken Loans, which is the largest component of Dan Gilbert's Rocket Companies (NYSE: RKT).

"So I’m starting today and saying at UWM, we’re not helping those that help them. If you work with them, you can’t work with UWM any more,” CEO Mat Ishbia said.

Quicken Loans is the nation’s largest mortgage lender, but it lags behind UWM in the key metric - underwriting loans for independent mortgage brokers. UWM is ranked as the nation’s 4th largest lender.

Ishbia set a deadline (March 15) for other brokers to sign an agreement pledging to stop working with RKT or Fairway Independent Mortgage Corp. He accused RKT of paying real estate agents to go without competing brokers and instead refer clients to Rocket’s team.

“He said to his customers (mortgage brokers) that if you use them, you can’t use me. I don’t think the SEC is going to come breathing down his throat saying, ‘you can't tell your customers not to use you. But it certainly makes for strange theater,” Matthew Roling, executive director of the Office of Business Innovation at Wayne State University's Mike Ilitch School of Business, said.

As a result, BofA Securiteis analyst Mihir Bhatia warned clients of downward pressure in RKT shares today. According to the analyst, the data shows the broker channel accounted for about 30% of RKT’s total 2020 production.

“While it is not clear how brokers will respond to UWM’s ultimatum or even how RKT will respond, we view the development as a negative. UWM is the largest originator in the wholesale channel with ~2x the market share of RKT (which is the second largest originator in the channel). It seems likely that RKT’s volume and overall wholesale channel margins could face some pressure,” Bhatia writes in today’s note sent to clients.

“Of note, RKT has been focused on growing in the Broker channel in 2021, including the launch of a national mortgage broker directory and a Super Bowl commercial focused on the channel. These efforts are likely to be complicated by UWM’s actions. Intense competition between RKT and UWM is not new and resulted in lower margins in the broker channel in 2018-19 for all originators.”

Still, the analyst has reiterated a “Buy” rating on RKT, mostly due to the company’s best-in-class consumer channel, as well as the growing partner network and ability to generate its own demand. The price target stays at $27.00 per share.

Moreover, he sees the Buy-rated Homepoint Financial (NASDAQ: HMPT) as a potential beneficiary of this conflict.

“Brokers who are forced to choose sides between the two largest wholesale originators may look to diversify their originator relationships to others. HMPT as the third largest originator has shown an ability to scale in response to demand growth (228% growth in 2020). Currently trading at ~3.5x 2021E, valuation is not too demanding. Channel margins being pressured by UWM-RKT actions are a risk,” the analyst concludes.

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