Rocket-Mr. Cooper should pass regulatory scrutiny

In spite of investor qualms, Rocket Cos.' purchase of Mr. Cooper is likely to clear regulatory hurdles, analysts at Keefe, Bruyette & Woods commented.

The deal was announced before the markets opened on March 31. Mr. Cooper started trading that morning at $125.18, up from its previous close of $104.49. But during the day, it drifted as low as $118 per share before rebounding.

At 3 p.m. Eastern Time on April 2, it was up to $132.18. But it was below what KBW analyst Bose George cited as the takeout price of $143.33. This implies the market has reservations about whether the deal will be completed, George said.

Misplaced concerns

"We think concerns reflect both the size of the servicing portfolio (pro-forma share of 16-17%, which is roughly double the next largest servicer, JPMorgan Chase) and the fact that this is the largest mortgage banking transaction since the forced mergers during the Great Financial Crisis," George wrote.

"Nevertheless, we think the regulators should approve the deal from an antitrust perspective given that the servicing market will remain relatively fragmented even following this deal, and the origination market is even more fragmented."

George said he feels since Mr. Cooper's management has a close relationship with regulators, its board, along with Rocket's, wouldn't have signed off on the deal if they weren't confident it would get approval.

The report didn't even note that the Trump administration in general is expected to be more friendly to business combinations of large players. The Biden administration approved the Intercontinental Exchange's purchase of Black Knight but required divestitures of the latter's loan origination system (now Dark Matter) and product and pricing engine (Optimal Blue).

Rocket's better business model

The impact of Rocket adding Mr. Cooper will be a net positive, giving it a better business model, and that is why KBW upgraded its ratings on the Detroit-based company.

This is the opposite of Fitch Ratings, which said it is likely to downgrade Rocket Mortgage to "BB+" from "BBB-" when the deal closes, citing the added leverage from not just the Mr. Cooper acquisition, but also the pending purchase of Redfin.

Fitch would also upgrade Mr. Cooper by one or two notches, "reflecting the stronger combined business profile and lower leverage pre-acquisition."

KBW, on the other hand, brought Rocket's stock rating to market perform from underperform.

By adding Mr. Cooper, Rocket will have a more balanced business model, giving KBW confidence the lender would achieve earnings estimates, the report from George said.

"Given the steady fee stream associated with Mr. Cooper's industry-leading servicing book, Rocket's pro-forma earnings power should have a higher floor compared to previous cycles in which the company hovered around break-even when industry volumes were on the weaker side," said George. "In periods when mortgage volumes are strong and rates are presumably lower, we think Rocket should continue to benefit given its high recapture rate, although there would be a larger offset from higher (mortgage servicing rights) amortization and negative MSR marks."

A road to meeting market share goals

Rocket's stated 2027 market share goals of 8% in purchase and 20% for refinance become more realistic, George said. He cited Mr. Cooper's 2%-to-2.5% share in refi and 1% in purchase, and Rocket's current 12%-4% split respectively.

"Share gains from the Redfin acquisition will be negligible on day one, but there is upside optionality if the company can convert more portal users into mortgage customers," he wrote. "We now forecast purchase and refi market shares of 7%/18% respectively by 2027 (compared to 6%/14% respectively in our previous model)."

While Redfin's main business is real estate brokerage, it owns Bay Equity Home Loans.

The impact on competitors

The early mortgage industry investor reaction to the deal has resulted in share price weakness for publicly traded competitors, particularly UWM Holdings, the parent of rival United Wholesale Mortgage, but George doesn't think the deal is a negative for Rocket's competitors.

UWM and Pennymac should retain their No. 1 and 2 positions as market share leaders in purchase, he said, given Mr. Cooper's small share, and plus it will take time for the impact of adding Redfin to be felt.

These deals do not shut the door on Rocket's acquisition activities, especially as it looks to get to the 8% purchase market share target, George said. "There are a number of purchase-heavy retail mortgage originators in the market, including Guild, Rate, CrossCountry Mortgage and Fairway," he said, pointing out the latter three are privately held.

How Blend Labs is affected

Meanwhile, ICE Mortgage Technology is not the only vendor this transaction will affect; Rocket's servicing portfolio will be transferred to Sagent, which Mr. Cooper has an ownership stake in.

Mr. Cooper, as a result of the sale of a majority stake in Title365 at the end of the second quarter of 2021, also is currently tied to Blend Labs.

The deal could impact between 15% and 20% of Blend Lab's revenue, a separate report from KBW's Ryan Tomasello said.

Mr. Cooper made up 17% of Blend's revenue in 2024, the latter's 10-K filing said. That includes just under 47% of Title365's business.

"While Blend's exposure to Mr. Cooper is high, most of the risk is tied to Blend's title agency business, which is lower quality revenue that is not as material of a driver of Blend's valuation, in our view (we believe Title365 currently runs around breakeven)," Tomasello said. "Blend has also signaled a de-emphasis of its first-party title agency business, which we believe could entail a transition to a partnership-like model in the near term."

At the same time, Rocket has its own title business, Amrock, and it is likely to transition Mr. Cooper's operations off of Title365 after the deal closes, he continued.

Blend has a contract with Mr. Cooper to use its point of sale platform through the first half of 2028. It has a minimum volume commitment, but the amount is unknown, Tomasello said.

"Rocket's historical approach to running its origination software in-house suggests a high probability of Rocket moving Mr. Cooper off of Blend's POS software, in our view," KBW wrote. "It is unclear what flexibility Rocket might have to cancel this contract before its 1H28 expiration (or if there could be associated termination fees)."

The risk for Blend would be Rocket only paying to cover that minimum commitment, Tomasello said.

Blend's response

The fact that Blend's relationship with Mr. Cooper was extended until the middle of 2028 is "a testament to the trust and synergy we've built over the years," said Amir Jafari, head of finance and administration, in a statement. "And as one of our first Blend Builder customers on our Rapid Refi product, Mr. Cooper exemplifies the power of our extensible, modular, API-driven platform, designed to meet the evolving needs of large-scale institutions seeking an embedded, tailored experience."

Jafari said the transaction has sparked the market, and Blend has engaged in "dozens" of phone calls with lenders and other industry participants.

"As we support Mr. Cooper and Rocket through this transition, Blend remains dedicated to accelerating digital transformation in lending," Jafari said. "We view this development as a catalyst that not only enhances our strategic relationships but also sets a new standard for industry collaboration. We are enthusiastic about the opportunities ahead."

Mr. Cooper's deal with A&D completed

Meanwhile, on April 1, Mr. Cooper completed the sale of Flagstar's wholesale and non-delegated correspondent production operations to A&D Mortgage.

Mr. Cooper has retained the MSRs from Flagstar.

A&D is primarily known as a non-qualified mortgage lender and this deal expands its presence in conforming and government products.

The combination, on a pro forma basis, did over $10 billion of volume last year.

"Bringing our teams together has opened new horizons," said Lana Izgarsheva, chief operating officer of A&D, in a press release. "Our shared values, commitment to innovation, and customer-first mindset make this a natural fit." 

The deal included the related staffers making the move to A&D. This differs from the servicing transaction, where some 400 Flagstar employees who were expected to make the move, ended up not being onboarded by Mr. Cooper, it was previously reported.