Rocket Companies Inc. (NYSE: RKT) saw its stock price increase by 2.8% to $14.37 during Wednesday's trading session, bucking the broader trend of declining mortgage demand. The advance occurred despite a 6.4% drop in mortgage applications, which hit a one-year low, and a rise in the average 30-year fixed mortgage rate to 6.76%.
The divergence between Rocket's share performance and the mortgage market highlights the growing significance of its servicing franchise. As of March 31, Rocket held $19.38 billion in mortgage servicing rights (MSRs), an asset that now represents approximately 47% of its current market capitalization of $40.83 billion. The company's servicing portfolio carries $2.11 trillion in unpaid principal balance, which is 47 times its first-quarter closed origination volume of $44.7 billion.
However, caution is warranted when making this comparison. Rocket also reported $26.31 billion in secured and unsecured financing, which adds complexity to its balance sheet. The company's servicing asset is highly sensitive to interest rate changes; a hypothetical 10% adverse change in prepayment speeds would reduce its fair value by $504 million.
The broader mortgage industry continues to struggle under the weight of elevated rates. The Mortgage Bankers Association's weekly application index fell 6.4%, with refinancing applications dropping 9.9% and purchase demand also weakening. Joel Kan, an economist at the MBA, noted that rates 'continue to significantly impact refinance borrowers.'
Rocket's serviced loans carry a weighted-average rate of 4.55% from the first quarter, which is 221 basis points below the current market average. This gap likely extends the life of servicing assets, as refinancing remains unattractive, but it also delays Rocket's opportunity to refinance existing customers into new loans.
In the first quarter, Rocket booked a $279 million valuation gain on servicing rights from assumption changes, partially offset by hedge losses and servicing-rights realization. The Federal Reserve held its target range at 3.50%-3.75% on Wednesday, with three policymakers favoring a quarter-point increase, signaling continued uncertainty in the rate outlook.
Rocket is scheduled to report second-quarter results on August 6, with company guidance calling for adjusted revenue between $2.7 billion and $2.9 billion. Management expects to achieve $400 million in expense synergies by year-end, one year ahead of schedule. Investors will be closely watching for evidence of improved servicing margins and lower operating costs.
Despite the recent uptick, Rocket shares remain about 41% below their 52-week high of $24.36, indicating that the market has not fully discounted the risks associated with the rate cycle. The August earnings report will be a key test of whether Rocket's servicing scale can sustain earnings through weak demand, which is now the central question for investors.
Peer stocks also saw gains, with UWM Holdings Corp. (NYSE: UWMC) rising 8.3% to $2.02 and loanDepot Inc. (NYSE: LDI) advancing 1.5% to $1.05, though the rally was uneven.
