Shaina Mishkin

Two pending acquisitions by Rocket Cos. could transform the mortgage lender into a conglomerate for real estate services of startling size and scope.

On March 31, Detroit-based Rocket agreed to buy mortgage servicer Mr. Cooper Group in an all-stock transaction for $9.4 billion, just three weeks after it said it would buy digital brokerage Redfin in a similar deal for $1.75 billion. Rocket shares dropped after both deals were announced but rallied 15% in the past two days, according to Dow Jones Market Data.

If approved, Rocket would rank No. 1 in mortgage servicing -- the business of processing monthly payments -- and No. 2 in mortgage origination, according to Inside Mortgage Finance. It would also have a sizable presence in home listings with Redfin. The deal will put one in six U.S. mortgages under Rocket's roof, according to an investor presentation. The three companies combined had $8.4 billion in revenue in 2024.

The scope of the deal has startled the housing and mortgage industries. "We haven't had anything like this for a couple of decades," says Bose George, an analyst covering mortgage finance at KBW. He was referring to Bank of America's financial crisis-era purchase of Countrywide Financial, then the largest U.S. mortgage lender. Ultimately, Countrywide's risky subprime lending practices contributed to the 2008 housing crisis.

Rocket's new heft could well become an important competitive advantage. "Acquisitions like this are useful and valuable in the sense that they add scale -- and I can't stress enough how much we think scale matters," says Eric Hagen, an analyst at BTIG covering mortgage finance companies.

Big mortgage servicers often enjoy substantial economies of scale. Servicers earn steady fees by funneling monthly payments from mortgage borrowers to banks and others holding the loans. They also perform a variety of administrative tasks related to the loans. With Mr. Cooper, Rocket would service some $2.1 trillion of mortgages.

On the origination side, Rocket said last year at its investor day that it wants to grow its share of originations for home purchases to 8% in 2027 from 4%, and its share of the refinance market to 20% from 12%. That would be more attainable after the deal is completed, says KBW's George. The combination would give Rocket 7.1% of total mortgage originations, based on 2024 Inside Mortgage Finance data, just behind United Wholesale Mortgage. When it's time to refinance, the idea is that Mr. Cooper's borrowers will use Rocket's origination platform.

Varun Krishna will remain CEO of the parent company while Mr. Cooper CEO Jay Bray takes the reins at Rocket Mortgage, and Redfin CEO Glenn Kelman stays in his post -- an arrangement that could foster stability.

Krishna tells Barron's that he sees clear advantages to the size. Redfin draws buyers through its real estate portal; Rocket Mortgage originates loans; and Mr. Cooper adds servicing. "We can connect these experiences and actually create a better homeownership platform," Krishna says.

The deal requires regulatory approval, and its size could draw some antitrust scrutiny, says Prasad Krishnamurthy, a professor at UC Berkeley Law. But the fact that the combination unites companies from different parts of the real estate business could work in Rocket's favor. That kind of deal typically doesn't attract as much attention from regulators as those that involve direct competitors, says Krishnamurthy.

UBS analyst Doug Harter likes what the Mr. Cooper acquisition would bring: larger scale in servicing, more earnings stability when mortgage origination is tough, and an integrated platform that touches all parts of the homebuying process. One sticking point is Rocket's valuation. It trades at 2.4 times its book value, a premium to competitors like PennyMac Financial Services and Rithm Capital, which fetch 1.2 times and 0.8 times, respectively.

"From a strategic rationale and financial accretion perspective, the transaction makes sense to us," writes Harter, who has a Neutral rating and a $14 price target. "Valuation has been the hold up for us as we assess the level of premium to peers that RKT warrants given its platform."

Write to Shaina Mishkin at shaina.mishkin@dowjones.com

This content was created by Barron's, which is operated by Dow Jones & Co. Barron's is published independently from Dow Jones Newswires and The Wall Street Journal.

(END) Dow Jones Newswires

April 03, 2025 03:30 ET (07:30 GMT)

Copyright (c) 2025 Dow Jones & Company, Inc.