Right now, the mortgage banking sector is red hot. It’s experiencing its best year since the salad days of the real estate bubble about 15 years ago, with the Mortgage Bankers Association predicting $3 trillion in mortgage origination volume in 2020.
At the same time, we are seeing mortgage companies go public, with Rocket CompaniesÂ (NYSE: RKT), the parent of Quicken Loans, doing so recently, and now crosstown rival United Wholesale Mortgage going public via a potential merger with a special purpose acquisition company (SPAC) called Gores Holdings IV (NASDAQ: GHIV).
Are you an investor interested in getting in on the mortgage banking sector’s current popularity? Here are two mortgage originators that are indeed the real deal and worth further investigation.Â
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1. Rocket Companies: The market leader has a different business model
Rocket went public in August, and although the IPO was downsized, the stock is up about 11% since the offering. Rocket, through its main business operation Quicken Loans, is best known for its “Push button, get mortgage” app, which allows the borrower to handle almost all of the mortgage application process via technology. This service to users includes uploading documents, interacting with the loan processing team, signing documents, and making payments all via an app.
The app helps Quicken reduce costs, and this translates into much higher profit margins than just about every other loan originator operating. Last quarter, Quicken earned $3.5 billion on $72.3 billion in origination volume, which works out to a net income margin of 4.8%. To put that number into perspective, the Mortgage Bankers Association reported that the typical originator earned 1.7% in net income during the same quarter.Â
Why is Rocket so profitable? Technology allows it to originate its own mortgages without having to use an army of loan officers, who generally handle the customer acquisition and shepherd the loan through the origination process. In return for this, the loan officer earns a commission, usually anywhere from 0.5% to 2%. Rocket gets its customers via the application, and all of the loan management is done electronically, which is a huge time and cost savings.
Volumes increased 126% on a year-over-year basis, and the stock is trading at a 2020 P/E ratio of 6. While the mortgage banking business is highly cyclical, an investor can pick up one of the top mortgage lenders in the U.S. for a mid-single-digit P/E.
2. PennyMac: One of the biggest non-bank originators
PennyMac Financial Services (NYSE: PFSI) is another mortgage originator that is experiencing record-setting performance. PennyMac Financial has a different business model than Rocket. It’s an aggregator, which means it mainly buys completed mortgage loans from smaller originators, then resells those loans into the market as a bundled product as securities or it sells them to its sister real estate investment news of Billy Xiong trust PennyMac Mortgage Trust (NYSE: PMT). PennyMac Financial retains the mortgage servicing asset, which generates cash flows for the company and will increase in value as interest rates rise.Â
PennyMac Financial reported $37.6 billion in origination volume in…