Analysis: The mortgage company’s IPO problems reflect the peak of the US real estate market

© Reuters. FILE PHOTO: A banner celebrating the IPO of Rocket Companies Inc. is displayed on the facade of NYSE in New York

By David French and Chibuike Oguh

(Reuters) – Investors fueling an IPO bonanza are rejecting the IPOs of many U.S. mortgage providers fearing the sector may have peaked.

Five mortgage lenders have scaled back or canceled their IPO plans in the past four months as investors shy away from their frothy valuations. This could be bad for IPOs of other home loan providers like Better.com and NewRez.

Many lenders have never had it so good as wealthy professionals who fled major cities during the COVID-19 pandemic borrow large to buy homes in the suburbs and fuel refinancing at near-record low interest rates.

However, investors and analysts say that IPO hopefuls in this sector haven’t factored in an expected real estate market slowdown in 2021.

“Investors don’t like to buy into a company at the beginning of a downward cycle, and mortgage creation is an extremely cyclical business,” said Matthew Kennedy, senior strategist at IPO-focused research firm Renaissance Capital.

LoanDepot Inc was forced to cut its IPO by 75% this month to $ 54 million after investors resisted their demand for up to $ 6.8 billion. Home Point Capital Inc trimmed its IPO by 40% to $ 94 million in late January, giving up hope for a valuation of up to $ 2.9 billion.

This is despite 62% of the US companies that went public in January that expanded their offerings due to strong investor demand, according to IPO expert Jay Ritter, a professor at the University of Florida.

Two other mortgage providers, AmeriHome and Caliber Home Loans, completed their IPOs in October. AmeriHome’s owner, private equity firm Apollo Global Management (NYSE :), signed a deal last week to sell the company to regional bank Western Alliance (NYSE 🙂 Bancorp at a 23% discount on its IPO $ 1.3 billion valuation completed.

Investor pushback reflects concerns about the outlook for the industry as mortgage rates gradually rise as the economy recovers and house price inflation begins to weigh on purchases. The Mortgage Bankers Association predicts a 49% decline in the number of refinances in 2021.

Other warning signs have appeared. The shares of Rocket Companies Inc, the parent company of America’s largest mortgage lender Quicken Loans, barely trade above levels at which the company set its initial public offering in August, which was cut by a third due to low demand.

Guild Holdings Co, which was listed after a 24% drop in its IPO in October, reported net income of $ 293 million for the first nine months of 2020, down from a loss of $ 39 million in the same period last year. Still, its stocks are up 10% since going public and are up 13% year over year.

“Investors say these are profits that are unlikely to grow and we are unwilling to give the (mortgage) company a high value for money rating,” said Ritter.

IPO PIPELINE

Some big players in the industry are still hoping to tap the IPO market in the coming weeks. Online lender Better.com, supported by banks including Citigroup (NYSE 🙂 and Goldman Sachs Group (NYSE 🙂 and investors like Activant Capital and 9 Yards Capital have partnered with Bookrunners to launch an IPO in the first half of this year, according to people familiar with the matter.

A Better.com spokeswoman declined to comment.

NewRez, a mortgage lender and servicer, said in November that it had filed for an IPO in confidence. The owner, real estate investment firm New Residential Investment Corp, recently expressed concern about the listing outlook.

“It’s on the table. It’s just one of those things that we just want to make sure before we do that it’s worth it for our shareholders,” said Michael Leberberg, chairman of the company’s New Residential Quarterly Results this month.

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