| Author | Source |
|---|---|
| u/zipitrealgood |
Disclaimer: This is not financial advice, I am not a financial advisor, please take everything I say with a grain of salt and do your own due diligence research.
[Edit 1] - Woah this blew up. Just woke up on the west coast, will try to answer questions/respond to comments. However, I do want to point out that I plan to iterate this DD as holes / counter points are brought up. Some have mentioned the recent government proposal for 40-year mortgages and link MeetKevin. I plan to address this, as I believe this is the government acting early in an attempt to prevent a mortgage collapse. Furthermore, there have been points made that I fixate on QL/RKT too much and should delve more into the full market, noted and I will. Also, some mention my Synthetic CDO links only highlight corporate debt and the market isnât that large. I will address these as well. Ultimately, thank you for reading, and I look forward to other counter arguments so I can update the DD and validate it.
[Edit 2] - Minor grammar fixes. Additional Background Information on FHA Default rates, Avg. Median US Income (after inflation), Housing Prices, and Localized issues with FHA defaults.
[Edit 3] - Additional Background Information surrounding the rise in â2nd homeâ purchases
[Edit 4] Adding detail to the 8-minute claim, itâs to APPROVAL, not actual mortgage loan (thanks apes for the callout). The underlying problem though is that mortgage requestors are still relying on the mortgage lender to decide how much they can afford. Thatâs the dangerous element.
[Edit 5] Fixing Links
[Edit 6] Added âOPEN QUESTIONS and Counter Arguments - Iâm an ape, not a pro, and am doing this in my free time. Iâm going to make mistakes, get tunnel vision, and potentially convey my point poorly at times. Thank you for everyone who is âsniff testingâ this DD, and providing constructive criticism. I want to make this iterative and ensure I am coming to the right conclusions.
[Edit 7] Based on the feedback, it seems like my points are getting lost. So Iâve added additional background points, and will be adding tie inâs with future updates.
[Edit 8] Tightening up the RKT section, how they fit into it, and clarifying my points.
OPEN QUESTIONS / Counter Arguments needing addressed:
Iâve iterated the DD based on feedback, I believe I have covered the concerns.
(If you think I still missed your callout / want something addressed, please recomment or add a comment so I can add it / address it)
Everything Short Shoutout:
First off, hats off to u/atobitt for creating âThe Everything Shortâ DD. It is a good read (if you havenât checked it out). Although, like everything, donât assume it is correct. Dive in and do your own âsniff testâ. There was a follow up post ââThe everything short continued updated again nowâ which delves into SPACs. After reading these posts, I wanted to contribute an investigation into the nefarious mortgage market, specifically, looking at one of the shiny objects we were supposed to invest inâŚRocket Mortgages ($RKT). My initial post gained traction and I was requested to do a separate DD by a few fellow Apes. Even though this relates to the mortgage markets, this does relate to $GME.
My Background:
Currently, I work for a FAANG company as a Data Engineer (my title is a bit more specific, but if I listed it, you would immediately know which company I work for). I am was an Econ major, with a minor in Philosophy (with a focus in Logic). I spend spent my undergrad life learning the inâs and outâs of the â07-â08 Housing Market crash as part of my Economics degree. Iâm more than happy to verify my work with the Mods of r/Superstonk should they request it.
My Positions:
Read my other DD on Posting Positions. However, from my previous comments, you can ascertain that I have a significant holding in $GME (without being able to specifically understand my avg. cost, total number of shares, or even calculate a rough estimate of a ceiling or floor).
On to the DD
Summary:
Background - The Everything Short DD / Other Background
Part I - Pre-Pandemic
Part II - Pandemic
Part III - Bringing it all together
TL/DR:
The fucks got greedy again, thereâs a massive housing bubble on top of all of this mess, and we are going to see â08 squared.
Background:
Letâs start with a pie chart that was posted in âThe Everything Shortâ DD, which gives a good representation of how important MBS (Mortgage Backed Securities) are to the Repo market (and overall liquidity).
As youâll see, MBS represents 19.1% of the entire Repo market, so itâs important for us to understand at a Macro-level, the health of our Mortgage lenders. As you may well know, their behavior caused the most recent market crash.
What you need to understand are that Treasury Yields are up. When Treasury Yields go up, that means higher interest rates for mortgages. When there are higher interest rates on mortgages, that means less homes sold. Less homes sold, means that mortgage lenders have less liquidity.
Everything Short PIE Chart - Repo Market
Other Background:
Mortgage Process (Simplified)
So first, some commentary suggested I didnât know how the basic concepts of mortgages work, hereâs a diagram of the SIMPLIFIED process. The Home Sales by Financing type breakout can be found in a chart below.
Important Note - Housing Prices vs Avg. Median US Income
A huge issue with rising real-estate prices, is the fact that housing prices have sky-rocketed, whereas the Avg. Median US Income (after factoring in inflation), has remained stagnant. This means, that the underlying âassetâ the median US home-buyers is purchasing, is not an asset at all, but rather a liability. Since they will require a larger mortgage, to purchase the home.
Median Household Income (Adj. For Inflation is Blue Line)
At a high level, when the number of borrowers increase (COVID flooded the market with prospective buyers), those who facilitate the loan (Originator / Underwriter), will take on more risk temporarily until they can sell these to the secondary market.
Foreshadowing, the real issue is the FHA / VA mortgages, not your typical âConventionalâ mortgage. In the chart below, youâll see that these two loan types are higher than their Housing Market crash levels.
Mortgage Delinquencies by Type
Why this is important, is because how large of the mortgage market these two loan types are (see graph below). As you can see, theseâs two types represent at any given time roughly ~24% of the total market.
Market Share by Financing Type
However, the overall picture doesnât look too bad. Even with higher delinquency rates in FHA / VA, this still wouldnât cause a problem, seeing as the delinquency rates are low for the lion-share of the market (aka conventional).
The Issue:
The FHA loans alone are going delinquent in concentrated metro areas (see chart below). Once the government forbearance protection expires (Right now, this will happen around July, but they can extending and continue to do so), youâll see a flood of foreclosures coming from the FHAâs.
Metros FHA Delinquency Rates
The Problem:
As you can see, the âSeriously delinquentâ rates alone are higher than the national averages for FHA delinquencies. When you are in this stage of delinquency, thereâs a high likelihood of defaulting. So, even though there is historic demand, the supply of FHA foreclosures will have a significant impact to prices in these regions. When this occurs, housing prices will fall, when housing prices fall, refinancing / cash-out refinancing (which are at housing crisis levels), will not be available in these areas. This âregionalâ problem will trickle a domino effect and spread to the broader market, causing more concerns (âThereâs a 0 percent chance youâll contain your losses at 5%â).
TO BE CLEAR - I AM SAYING THAT INCREASED FHA FORECLOSURES IS JUST GOING TO INCREASE SUPPLY OF HOMES AVAILABLE. SUPPLY GOES UP, PRICE GOES DOWN. THAT IS ALL.
Compounding the Problem: Current Historic Demand isnât solely 1st Home Buyers, 2nd home properties are on the rise
As you can see in the chart below, over 14% of the 2020 Mortgage demand is due to âSecond Home / Investor Mortgage applicationsâ. With the rise of investment / 2nd home purchases, we will struggle to meet demand, because for every 20 homes on the market 3 of them are going to an individual who already has a home. Therefore, we are most likely in an artificial shortage, due to speculative home buying.
Factoring in FHA delinquencies, should housing prices decline as aforementioned, these âinvestorsâ will be looking to offload their newly acquired 2nd homes, as they will start to lose money on their investments, and will add fuel to the flame when it spirals.
2nd Home / Investor Mortgage Applications as a Share of All Applications
Therefore, when overall housing prices go down, those who are overextended by buying investment properties or 2nd homes, will also sell to cut their losses. Expediting the home value decreases in the area. As the value of the homes continue to decrease, the default risks rise (even on what would be considered âsafeâ). As risk levels rise, investors who buy the MBS tranches will slow (Itâs important to callout that the government has been buying up MBSâs, but they arenât the whole pie).
When you see a lack of investors, the middle man will have difficulty selling the mortgages they wrote. Therefore, thereâs a âkinkâ in the process. If the middle man canât get the risk off their books, they canât issue new mortgages, and if they begin to see their âassetâ values (aka mortgages to sell) fall below their liabilities, then they are in significant risk for bankruptcy.
Also, remember, if mortgage rates rise (due to high treasury yields), demand will decrease. If demand decreases, and at the same time supply increases, value will sharply decline.
PART I: Pre-Pandemic
Who are the biggest Mortgage lenders in the US? - The Data I will provide will be from 2019 to use as a proxy, as I do not have the 2020 figures available to me (if an Ape has them, Iâll gladly update this DD)
Well, thatâs a tough question, because itâs important how you slice the dataâŚ
First, letâs look at by purchase originations (aka the # of new loans)
Quicken Loans (541,000)
United Short Financial (339,000)
Wells Fargo (232,00)
Chase (168,000)
Okay, letâs understand by $ amount (this will include, purchase, refinance, cash-out refinance, home improvement, other)
Wells Fargo ($306B)
Chase ($177B)
Quicken Loans ($146B)
Note - I know you apes want to divide $146B/541K to see how big each loan is, but you canât. The $ amount provided includes refinance, home improvement, etc⌠so donât, just be patient.
So, you might see a theme here. There are three big names. Wells Fargo, Chase, and Quicken Loans. Two of the three are LARGE banks. One, is technically defined as a ânon-bankâ. If you havenât put together the pieces, Quicken Loans is that ânonbankâ. Also, Quicken LoansâŚisnât Quicken Loans. Itâs parent company is, you guessed it, Rocket Mortgages ($RKT).
Even though Wells Fargo is a smarmy institution (Google search âWells Fargo 2018â) and JP Morgan is no saint either, I want to spend my time looking into Rocket Mortgages and paint you an ugly ass picture (Bob Ross would change his mind on what a âhappy accidentâ is).
Something you need to understand is that Quicken Loans (aka Rocket Mortgages), have eyed becoming the largest Mortgage supplier to the US, which they have achieved. They represent over 9% of the total US mortgage market. Their dramatic rise is attributed to their labeling of being a âtechâ focused mortgage lender whoâs digital process has tapped into the millennial market. Boasting as low as 8-minutes from consumer logging on to mortgage mortgage approval.
Pause - Did you fucking just say 8 minutes. Yes. I did. If you are a âBig Shortâ fan, this is the scene where they are bragging about how fast they can write mortgages. If you know anything about the financial crisis, this highlights the consumer flaw. Which was, the person requesting a mortgage, relied upon the lender to tell them what they can and cannot afford. This is a grave mistake (queue ominous foreshadowing music).
Any who, back to the numbers. With the metrics above, Iâm illuminating the point that Quicken Loans is a âvolumeâ player (feel free to look at other years, youâll see they are just as high) not a âQualityâ player. Seeing as they have a massive delta between the second mortgage supplier, and even though you canât utilize the $ amount provided directly, they are Billions less than Chase and Wells Fargo. To prove it, hereâs some fun facts about their LMI (or low to moderate income borrowers - defined as earning less than 80% of the estimated current area median family income).
In 2019, they ranked #2 with 37,252 or roughly 7% of their mortgages. Also, 70% of Quicken Loans originations were refinances (aka 70% of 541,000 is 378,000). Remember, the downside of refinancing is that it costs the mortgage owner money. Essentially, you are taking out a new mortgage to pay off the old one. A lender wants you to refinance, so they can have extra liquidity and also prevent you from moving to a different mortgage lender.
Whatâs the standard to get a mortgage on Quicken Loans? 580 Credit score with only 3.5% downpayment (with an option for a manual underwriting process, where a person can ask for mortgage without a credit score, as long as you have rent payments, phone bill, etc. and 2 other âverifiableâ sources of credit history).
Alarm bells should be ringing in your head, because the â07 - â08 crisis was driven by low interest rates and relaxed lending standards (incl. low down payment requirements), which allowed more people to purchase homes (or more home they could afford). This then drives home prices up, especially as people try to flip houses and extend themselves since they think âhousing only goes upâ (which unfortunately is amplified by companies like Zillow, who have âZestimatesâ which complete a self-fulfilling prophecy that an asset worth X one year is somehow worth X * (1.5 to 2.0) in a few years without any improvement).
But letâs say $RKT is not a predatory lender, whoâs giving out mortgages to anyone. Just a player that moves a massive amount of volume.
Oh, did I also forget this Rocket Loans gem from their personal loans business? (Personal Loans are not Mortgages, just another arm of their business)
âOur personal loans are not secured, guaranteed or insured and involve a high degree of financial risk.
Personal loans made through our Rocket Loans platform are not secured by any collateral, not guaranteed or insured by any third party and not backed by any governmental authority in any way. We are therefore limited in our ability to collect on these loans if a client is unwilling or unable to repay them.â
If you continue to read, they show there is a significant risk to these personal loansâŚ
âSometimes, borrowers use the proceeds of a long-term mortgage loan or the sale of a property to repay a short-term loan. We may therefore depend on a clientâs ability to obtain permanent financing or sell a property to repay our short-term loans, which could depend on market conditions and other factors. In a period of rising interest rates, it may be more difficult for our clients to obtain long-term financing, which increases the risk of non-payment of our short-term loans. Short-term loans are also subject to risks of defaults, bankruptcies, fraud, losses and special hazard losses that are not covered by standard hazard insurance.â
[Chuckles] Iâm in danger.
This is not a problem with $RKT aka the fire itself, but rather gasoline that would amplify issues should they arise.
TL/DR Part I: Prior to the pandemic, Quicken Loans was riding the bull market and was dolling out mortgages, roughly having 7% of mortgages going out to LMI (or low income) lenders. Also in their quest to become the largest mortgage lender in the US, they primarily deal in refinancing, which is a mortgage to pay off your original mortgage. They also write personal loans, which are backed up with an IOU, which they use as âcollateralâ. If interest rates rise, buying dries up, then the whole house of cards can fall, since they will run out of liquidity. This means, theyâll need to rely on selling the loans to the secondary MBS market, to stay afloat.
PART II - The Pandemic
Housing demand spikes because people want more space and guess who picked up the tab, seeing as they are a âVolumeâ player.
Hereâs their 10-K filing in Marchâs Condensed Balance SheetâŚ
From 2019 to 2020, $RKTâs Balance Sheet goes from $13.2B to $22.8B in Mortgage loans at âfair valueâ. However, what should jump out to you is that cash, only increases by $580M. To put it simply, I showed this balance sheet to a CPA friend of mine (works for the big 4) without disclosing the company the balance sheet belonged to, and his quote directly was, âthis is a crazy leveraged companyâ. Another point he brought up, âheld for sale also implies they are not readily available for sale and their maturity date could be long down the roadâ.
Also, remember, the majority of their âVolumeâ in 2019 were refinances (think strip club in the âBig Shortâ). Yes there was an increased demand in 2020, but you have to imagine that over 50% of their increase were also due to refinancing opportunities.
Now, hereâs one of the most important quotes in their 10-K
âAs of December 31, 2020, we had approximately 80,000 clients on forbearance plans, which represents approximately 3.9% of our total client serviced loans portfolio. Our delinquent loans (defined as 60-plus days past-due) were 3.91% of our total portfolio. Excluding clients in forbearance plans, our delinquent loans (defined as 60-plus days past-due) were 0.84% as of December 31, 2020. We monitor the MSR portfolio on a regular basis seeking to optimize our portfolio by evaluating the risk and return profile of the portfolio. As part of these efforts we sold the servicing on approximately 240,000 loans with $90.8 billion in UPB during the year ended December 31, 2020. These sales were more than offset by new loans that were added to the MSR portfolio organically during the period.â
APE LANGUAGE - 4% of our clients are about to be foreclosed, but not to worry, these 4% make up anyone who is 60-days past due. We sold the rights to $91B to another mortgage lender but not to worry, we offset this by just creating new loans.
THAT IS SCARY. Wrote and sold the rights to $91BâŚaka we move a lot of loans, and if we canât sell them to get them off our books we are in trouble. To continue to keep the lights on, we need to write new loans, so we can have liquidity.
Okay, but you might say, 4% forbearance ainât bad right? Whatâs the industry standard? Well, we can look to Guild Holdings ($GHLD) 10-K filing to learn more. Below, Iâve included Guild vs Industry Forbearance Rates (with stimulus injections), and unemployment graphs for your viewing pleasure.
From $GHLD 10-K
Youâll see the industry, is not doing well. From April 2020 through February 2021, the Forbearance Rate is above 5%. Also, unemployment correlates to industry Forbearance Rates. Also, what you can see, is that a round of stimulus checks hit American wallets BEFORE Dec 31st, 2021 2020 (I know by drawing is s$%# but common, the date was December 29th). Which skews $RKTâs claim that by Dec 31st, only an additional 1% of their loans were delinquent.
Why do I mention this?
Well, whatâs important to note is that Forbearance is still 2.5% higher than pre-pandemic. This is also with the Forbearance and Foreclosure Protections for Homeowners still in effect. Which extends the foreclosure moratorium, extends mortgage payment forbearance enrollment, and provide up to six months of additional mortgage payment forbearance (if you entered forbearance on or before June 30th, 2020). Also, if you delve further into the links, youâll see that Rent payments are behind (9%-28% by state or 1 in 6 adult renters) and 10.6M adults are in households that arenât caught up on mortgage payments.
So, even if there are % people abusing the Forbearance protections, the rate has still risen during the pandemic from 2.7% in March.
TL/DR Part II: Rocket Mortgages is a crazy leveraged company right now to meet demand, who is participating in an industry that is staring down the barrel of foreclosures (especially in select markets who have high rates of âsevere delinquenciesâ from the background info), only to be held off by stimulus bills and executive orders. This is not just a Rocket Mortgage issue, but an industry wide issue. If they canât sell the volume of mortgages to the secondary market (MBS), they could face liquidity issues.
PART III - Putting it all together
Rocket Mortgages is a highly leveraged company, whoâs own 10-K filing suggests that they are a ticking time bomb to destruction, if there are issues getting loans off their books, and is being pushed by MSM as a âBUYâ by CRYMER. Which should give you complete confidence that any âantiâ Cramer play around that time (cough $GME), is the right call.
But you might say, I donât believe this can be a whole industry thing⌠I still donât believe you. Even if Rocket Mortgages goes under, we have to be fine. Right? Well, if the secondary market investors take on losses in different areas of their business (cough banks cough cough), then there will be less buying. Less buying, means the longer the âmiddle manâ ($RKT) will have to hold the mortgages on their books. Longer they have to hold, the less liquid they are. If the underlying asset they are holding loses value, then liabilities start to outweigh assets, causing mortgage lenders to head towards bankruptcy. On top of that, as mortgage rates rise, demand shrinks and they wonât be able to write new loans to beef up their liquidity (or might not be able to take the loan on in the first place).
Well, remember CDOâs? [Sarcastic response, âyeah but they donât exist anymoreâ]
Why is this bad? Letâs ensure we focus on the true problem of the last housing crisis. Low rates, predatory loan practices (aka giving people loans who shouldnât have them, over extending the average individual, and/or both), and government policies that were in place at the time. THIS was the FIRE.
CDOâs and CDOâs Squared were the GASOLINE. Even without CDOâs, this still would have resulted in the lower tiers of MBS tranches to be filled with terrible loans regardless. CDOâs \and CDOâs squared were the gasoline of the housing crisis, but not the fire itself. The housing bubble wouldâve popped back then, drastically impacting the market regardless of CDO / CDO squared. Just wouldnât have risked the collapse of the entire system (Something people often forget is how DRASTIC the action taken by the government was. Without CDOâs / CDO squared, bubble does still pop due to ARM loans kicking in, but the impact would not have been as bad. Who knows what the response from the government would have been, but the market wouldâve definitely been impacted).
Remember when Selina Gomez described a âSynthetic CDOâ and Mark Baum realized the system was imploding? They canât exist can they?
Even though the article dictates that the synthetic CDOâs are surrounding corporate debt, why does this relate to the housing bubble? Again, if the investors that are in the secondary market are taking financial hits in other areas of their business, they canât buy the MBSâs. Therefore, causing a âkinkâ in the Selling process, sticking the middle-man with the bag. This is a primary reason why mortgage lenders began to fail first in the housing crisis and the banks second. So, if the investors of the secondary market are impacted at all negatively by an instrument that is proven to be gasoline to a fire, this will cause a kink in the mortgage process.
Well, that market canât be big right? Everyone with a brain knows synthetic CDOâs are a risky investment, regardless of industry. Can anyone be that greedy?
So, this risk is growing for banks, the game has just changed.
Letâs bring it back to Mortgages. Well, what was the foreclosure rates in 2007 before the crash, 5.2% in 2021 ainât bad right? Letâs use sub-prime as a benchmark since they are the worst.
So, letâs just say the 2.7% from March is now mid to high 3%. This is for all mortgages remember, not just subprime. This is a serious problem. Especially, considering that the forbearance / foreclosure risk, in specific markets are looming. Even though the loans at risk are FHA / VA, the problem isnât a financial one initially. Itâs a supply / demand problem. The market is hitting a cross road where supply can drastically increase and demand can drastically decrease, lowering home prices / value. The secondary market (MBSâs) investors current investments become riskier and if they are over-extended in other areas of their business, will stop taking on additional risk. The middle-men in the mortgage process, will not be able to move âassetsâ off their books. These âassetsâ will lose value, and liabilities will start to outweigh the assets. Liquidity will run dry for them to create new loans, which provide liquidity to the company in the first place, and will compound the problem.
In conclusion, with the largest mortgage lender leveraged to the max, reports showing that the industry is experiencing the same hardship (and if you look at GHLDâs 10-K) and are over-leveraged with the recent spikes in housing demand due to COVID. The 19.1% represented in âThe Everything Short DDâ Repo market of MBS is built on a house of cards. CDOâs are back, synthetic CDOâs are back, and they are getting greedier and greedier by the minute. The rise in Treasury Yields will cause the mortgage interest rates to rise, the mortgage interest rates rising will slow down sales / refinancing opportunities, drying up liquidity for mortgage lenders (like Rocket who DEPEND on sales & refinancing to stay afloat), and the underlying assets will eventually be devalued not only by a saturation of the market naturally, but because of the influx of foreclosures that are bound to hit the market. Should home values decrease, the existing bonds in the secondary market get riskier, and will slow down the selling / buying as investors canât take on more risk. Yes, the government is buying up MBSâs, but they arenât the entire market. The other investors are at risk to be exposed to losses in their other business segments, preventing them from buying and in the process leaving the âmiddle menâ holding the bag.
I completely agree with âThe Everything Short DDâ that $GME remains as one of the sole hedges against the implosion of the market.
TL/DR: To top it all off, we have a housing bubble, with mortgage lenders who are over extended due to the increased demand of the COVID crisis. Rocket Mortgage = New Century, they are tip of the over-leveraged iceberg. With the rise of the Treasury Yields, weâll also see a collapse of MBSâs, which is going to cripple the liquidity of the Repo market. I agree with âThe Everything Short DDâ that $GME is one of the only hedges against the implosion of the market.
Thank you for reading, please let me know if I have errors, mistakes, or edits I need to make. Iâve been staring at databases for far too long today and Iâm a few margaritaâs in.
Obligatory: GME TO THE MOON đ đ đ đ đ đ đ đ đ đ đ đ HODL
Other Points I wanted to incorporate:
Removed the point about $RKT owner selling, sites / 4Kâs confused me. I believe only 20M not 60M were sold, and the proceeds werenât for a âgoldenâ parachute as I initially described.
GHLDâs balance sheet
GHLD Balance Sheet
3. If you look at the âother assetsâ of the condensed RKT balance sheet, they are primarily (5.7B) in âloans subject to repurchase right from Ginnie Mae (These are also written as Liabilities, seeing as they donât want to be a Lehman Brothers⌠i know its not the same thing, but you catch my drift. It can be either an asset or a liability, they donât know yet⌠but spoiler⌠itâs a liability)