Some of the biggest names in the mortgage business opted to go public over the past year. United Wholesale Mortgage, Rocket Mortgage and Home Point Capital, among others, sold stock to the public for the first time.
There are advantages and disadvantages to going public, said Kathleen Weiss Hanley, a Lehigh University finance professor and former deputy chief economist for the Securities and Exchange Commission (SEC). She also taught a course on the Rocket Mortgage stock offering, which occurred in summer 2020. An initial public offering (IPO) can generate interest in a company and raise money needed to both originate loans and invest in technology. But it also can invite extra scrutiny by regulators.
“Rocket raised $1.8 billion and it valued the company at $36 billion,” Hanley said. “That’s a huge amount of money, but then, Rocket is the 800-pound gorilla in the room, obviously.”
Hanley spoke to Scotsman Guide about why this IPO boom is happening now, what she’s seeing and what it could mean for mortgage borrowers.
Are you surprised at the number of mortgage lenders that are going public?
No, there’s a huge demand for mortgages right now, and since COVID-19 came on, the mortgage market has been quite robust. Rates are very, very low. If you look at the [S&P CoreLogic Case-Shiller Index], it’s the highest it has ever been. [These nonbank lenders] have to get capital, which is difficult to get and they don’t take deposits. Having access to public-market investors can be helpful [in] filling that gap between when they can originate and sell a loan.
Rocket Mortgage performed well after they went public and they’re still above their IPO price. They priced below what they expected to get and they withdrew some shares, and that’s usually not a great sign. That means that there’s not enough demand for this particular offering. Guild Mortgage did the very same thing. They priced below their (projected) price range and downsized the offering. It is a bit of a mixed bag with these mortgage companies.
Why is this happening now?
The real estate market is hot and there’s a lot of demand for these mortgages. There is a funding gap because the number of mortgages that are being originated is probably pretty high and needs to be filled. People are thinking about mortgages and housing. It’s a good time to go public when there’s a lot of investor attention on the industry.
What are the advantages and disadvantages?
If you’re trying to move ahead of some of your competitors, moving into the public markets gets some recognition and can bring more people to your products. That’s one benefit. It’s capital, second. These entrepreneurs who’ve started these companies do not have a mechanism to sell out from their stocks. … It does give the ability for the owners to cash out, as well as employees, if they’ve been given stock options.
Mortgage lenders are under scrutiny already. You’re going to be under more of a microscope because now you have the SEC making sure you’re compliant. You have to make disclosures about your business model. … You’re going to have to tell investors and your competitors all sorts of things about your business model.
If you’re trying to move ahead of some of your competitors, moving into the public markets gets some recognition.
What could it mean for mortgage lenders that remain privately held, and what is the long-term significance for borrowers?
It depends on [the lender’s] access to capital. If the reason why these companies are going public is because of lack of funding and you need access to the capital markets, then it means that private companies are going to have a harder time getting capital to make loans.
It’s probably pretty good for borrowers because if [a lender] can raise capital elsewhere, you can afford to make mortgages at a slightly lower rate because you don’t need the money quite as much. The Rockets of the world are looking to invest in machine learning to better understand the credit characteristics of their borrowers in ways that perhaps traditional, nonpublic, smaller mortgage lenders can’t. ●