The agreed-to merger between Rocket and Mr. Cooper is the first large domino to fall in what is shaping up to be another year of consolidation.
Mortgage lenders are still dealing with overcapacity, and in the fourth quarter, swung back to losses on production.
On a pro forma basis, Monday’s deal would create an originator almost, but not quite as large as United Wholesale Mortgage. UWM did $38.7 billion in origination volume in the fourth quarter. The Rocket/Mr. Cooper/Bay Equity (a Redfin subsidiary) combo did about $38.1 billion.
“We have an entirely different Securities and Exchange Commission than before, so we should expect a lot more M&A,” said Paul Hindman, an industry consultant, in response to a LinkedIn posting. “Big fish will only get bigger under this administration!”
To Micah Jindal, managing director and senior partner at Boston Consulting Group, the combination is a really good transaction, connecting Rocket with its strength in originations and customer service, with Mr. Cooper’s forte in servicing and back office operations.
Rocket’s track record in servicing customer recapture is another benefit for adding the Mr. Cooper mortgage servicing rights.
At the same time, adding in the Redfin business, Rocket is the “one company that I think can pull this off, given they’re so focused on experience and have a track record with growth,” Jindal said.
BCG recently said overcapacity remains in the mortgage business, and the deal will take some of that out, but not in a significant way, Jindal said.
Mr. Cooper recently added the Flagstar mortgage servicing portfolio, although it has flipped the third party origination operation to A&D Mortgage.
The transaction will generate a lot of attention, and that is rightfully so, declared John Cady, CEO and president of Citywide Home Mortgage.
“Any time you’re consolidating three major organizations it’s a complex process that will take time to integrate — so we don’t expect to see much immediate impact in the field,” Cady said. “From our perspective, the fundamentals don’t change. Our competitive edge continues to be adaptability, a strong internal culture, and deep-rooted local relationships.”
The mortgage industry has room for two very strong leaders between UWM and Rocket, Jindal said.
It will also shake up the servicing landscape as Sagent, the mortgage servicing platform which Mr. Cooper has invested in, will take on the Rocket portfolio as a result of the deal.
“Sagent is thrilled at the opportunity to work alongside Rocket, the gold standard of lending technology, to leverage real-time data and automation to transform America’s $14 trillion mortgage servicing ecosystem,” said its CEO Geno Paluso.
Mr. Cooper has a $1.56 trillion servicing operation with 6.7 million customers. “When combined with Rocket’s 2.8 million servicing customers and industry-best 83% customer retention rate, Mr. Cooper, Rocket, and their chosen mortgage servicing systems will power 9.5 million customer relationships,” Paluso said.
National Mortgage News reached out to ICE Mortgage Technology for a comment.
Rocket and Mr. Cooper tend to be at opposite sides of the J.D. Power mortgage industry satisfaction studies. But Bruce Gehrke, senior director, lending intelligence at J.D. Power, noted Mr. Cooper is probably the entity which acquires the largest amount of servicing rights and its studies have shown that transfers negatively impact customer satisfaction.
J.D. Power has worked with both companies and “they have similar cultures when it comes to focusing on the customer,” Gehrke said. So he doesn’t believe the two will have any trouble integrating operations.
Mr. Cooper handles over $820 billion in subservicing, but not all of that might be a part of the deal, as “a chunk of” UWM’s $240 billion portfolio is handled by the company once known as Nationstar, Eric Hagen, a BTIG analyst, noted in his report on the deal. (NMN also reached out to UWM for a comment.)
“We think the deal helps validate the growing value we see for mortgage servicers achieving operational and financial scale,” Hagen, who follows Mr. Cooper but not Rocket, said. “Historically a valuation for servicers near 2 times book value may have stood out more meaningfully; however, we see a new paradigm which ascribes more value to the ‘utility-like’ returns from non-bank originator/servicers, which includes a less rate-sensitive earnings profile.”
But the combination could also be “a modest headwind” for mortgage-backed securities investors, as he expects consumers to see lower refinancing costs from Rocket’s scale, meaning prepayment speeds could increase.
Hagen feels Rocket will get the synergies from Mr. Cooper sooner, while those associated with the Redfin transaction are more long-term, given they are tied to the theme of the lifecycle of homeownership.
Gehrke pointed out that the Redfin transaction, along with this deal, gives Rocket an end-to-end real estate platform, much along the lines of Zillow.
While this deal plays to the strengths Rocket has had with refinance customers, Redfin “positions them further up in the purchase sales funnel,” said Gehrke. It gives them the entry to the customer as they are making the initial decision to start looking for a house.
“What you’re going to see is some other folks trying to position themselves as being part of that decision,” he continued. What J.D. Power has seen consistently in its data is that the company who has the first crack at the consumer increases its chances of not only converting the lead, but also obtaining higher levels of customer advocacy.
“Starting with Redfin’s home search and brokerage through Rocket’s home financing and into Mr. Cooper’s servicing, we’re creating an integrated homeownership experience with scale and revenue captured at every step,” Rocket Cos. CEO Varun Krishna said on the deal’s conference call. “This fully connected model gives us the flexibility to create more value for our clients.”
Another reason Rocket might be entering into these transactions, especially with the shuffling of leadership after the deal, might be estate planning for Dan Gilbert.
A 2024 Detroit Free Press article said only 7% of Rocket’s ownership is public, with the remaining shares held by Rock Holdings, which Gilbert is the 76% owner of.
At the time Rocket went public in 2020, speculation on one of the motivations was Gilbert’s health (he had recently suffered a stroke) and that the offering was in part for estate planning purposes.
As it now stands, Mr. Cooper’s ownership ends up with 25% of Rocket Cos.
Fitch may downgrade Rocket after the deal is completed, after it put the company on Ratings Watch Negative status. Mr. Cooper was put on Ratings Watch positive.
“The downgrade would be primarily driven by higher corporate leverage of the parent, pro forma the Mr. Cooper and Redfin acquisitions, which may remain above the prior downgrade trigger of 1 times beyond the 12-24 months outlook horizon,” the report said.
Both companies’ ratings are “constrained by the highly cyclical nature of the mortgage origination business, an expected increase in corporate leverage resulting from the transaction, elevated MSR valuation risk exposure, execution risks from integrating multiple acquired companies, a reliance on secured, wholesale funding facilities, and potential servicing advance needs and regulatory scrutiny related to Ginnie Mae loans,” Fitch added.
The deal will lead to further consolidation, Jindal said. “I think this creates greater impetus for others to exit, and just say it’s not worth it” to stay in a business where they are originating loans at a loss.
He gave Guild as an example of a company which has purchased a number of smaller originators in recent years. Other nonbanks have shut and even some banks for which mortgage is not a focus have exited the business because of the current dynamics.
“We expect that to accelerate more through the rest of 2025 because of this deal,” Jindal said.
Citywide’s Cady said his firm is looking to thrive during this turmoil.
“While others scale through acquisition, we’re focused on scaling through execution — investing in technology, talent, and trust,” Cady said. That’s what drives sustainable growth, regardless of what’s happening at the top of the market.”
