Mortgage lenders clearly think that now is the time to go public. They’ve broken volume records and profitability targets, they’ve scaled up capacity and gobbled market share - the next growth move is to generate a capital injection the way only a public offering can.
But with a public offering comes a fundamental shift in the business. Shareholder interest is paramount and the overall health of the company, or at least its valuation, is subjected to the vicissitudes of the market and the whims of investors. From an investor’s perspective, how attractive are these mortgage companies as long-term prospects?
“It seems to be an incredibly intelligent move to go public,” said Larry Swedroe (pictured), investment guru and chief research officer at Buckingham Wealth Partners. “Companies are generally very good about timing purchases and sales of their stock. Going public means they think the valuations are high and it’s a good time to go raise capital, because it’s cheap. Of course, the flip side of that should be that it’s probably not a great time for you to be an investor.”
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Swedroe explained that bullish investor sentiment on pretty much anything that’s not a “value” stock will drive up share prices for Rocket, UWM, and their ilk in the short-term. He believes markets view these companies more as fintech firms than purely financial companies, and markets are especially bullish about any investment with the word “tech” attached.
What Swedroe is worried about, however, is what happens when the cyclical nature of the mortgage industry crashes into the fickle nature of investor sentiment. Much of the current profitability and valuation of these publicly listed mortgage lenders has been on the back of the refinance boom. That boom will end and, if these businesses’ profitability is seriously impacted by that end, they could be in some trouble.
Swedroe likened the industry to an airline, spending decades and fortunes building enormous capacity. At some point in the economic cycle, however, that capacity is no longer needed. When that comes, airlines sell jumbo jets for scrap and mortgage lenders fire staff. Swedroe believes that those lenders building up war chests and growing capacity at sustainable rates during these boom periods ought to outlast any busts, keeping investors happy all the while. Without those fail-safes, Swedroe is worried about what market volatility could do to a lender’s valuation.
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For investors looking to assess mortgage lenders, Swedroe believes leverage is a key indicator of a company’s long-term health. High operating leverage in a boom-bust cycle, in Swedroe’s opinion, could create a bankruptcy issue for a lender that’s “not a matter of if, but when.”
Finally, Swedroe emphasized that whether publicly listed or privately held, mortgage lenders will still be driven by the deeply competitive nature of the industry. In the months and years to come, we’ll see that competition playing out more on the NYSE.
“If you’re a lender, you’re a commodity, you’re not adding any value in any way,” Swedroe said. “It’s all about who can give me the money at the cheapest cost. Because I’m going to go with the cheapest lender, so that lender has got to be the lowest cost.”