The nation’s largest retail home lender Rocket Companies (NYSE: RKT) introduced ONE+, a new 1% down home loan program. That may be a recipe for disaster for RKT, as it encourages more people to buy homes and increases the risk of these people not being able to pay their mortgages, especially since the program is aimed at low-income Americans. If enough people can not keep up with the mortgage payment and default, it may lead to RKT stock plummeting as the situation resembles that of the 2008 financial crisis which may lead to RKT going bankrupt.
RKT Fundamentals
RKT just announced its new program ONE+, which will only require home buyers to make a downpayment of 1% instead of the minimum 3%. The other 2% percent needed to reach the required threshold for conventional loans will be paid by RKT.
While the 1% down payment will give more Americans access to home ownership, it also increases the risk of more people defaulting. ONE+ will completely eliminate the monthly mortgage insurance fee for the client – which is traditionally required if the buyer places less than 20% down on their purchase.
This all seems good for the customers, but it will put a huge strain on RKT’s financials, as RKT has removed one source of its revenue in the mortgage insurance fee and added the burden of paying the remaining 2% to reach the conventional loan requirements of 3% in down payment.
RKT incentivizing low to moderate-income Americans to own homes is similar to what happened in the 2008 financial crisis when lenders tried to incentivize low-income Americans to become homeowners. Another similarity is that existing home sales have declined to levels not seen since 2008 in December 2022. What makes matters worse is that the median house price has increased more than 30% since 2020.
That, combined with the fact that Americans’ credit card balances have increased again after plummeting during the pandemic due to the stimulus checks, indicates that people will struggle to keep up with their mortgage payments, and some people will have to default at some point. If enough people defaulted, that would mean that RKT may go bankrupt.
RKT Financials
In its Q1 2023 report, RKT’s assets increased 5% QoQ from $20 billion to $21 billion, and its cash and cash equivalents increased 23% QoQ from $722 million to $893 million. RKT’s total liabilities increased by 12% QoQ from $11.6 billion to $13 billion.
Revenue also decreased 75% YoY from $2.6 billion to $0.666 billion. Operating costs decreased almost 37% from $1.6 billion to $1 billion, which contributed to the operating loss increase of 141% YoY from $1 billion in operating income to $0.415 billion in operating loss, which amounted to a net loss of $411 million – a 118% increase YoY.
Technical Analysis
RKT stock’s trend is neutral with the stock trading in a sideways channel between $8 and $8.43. Looking at the indicators, the stock is trading below the 200, 50, and 21 MAs which are bearish indications. Meanwhile, the RSI is oversold at 27 and the MACD is bearish.
As for the fundamentals, RKT stock just witnessed a catalyst in the announcement of its new ONE+ program. Since this program is extremely risky for RKT in the current economic situation, bankruptcy is a real risk for the company if the macro environment does not improve. As a result, shorting RKT could prove to be a profitable decision.
RKT Forecast
RKT is making a risky business move to incentivize people to start buying homes again, and it’ll probably backfire. The current economic climate of increasing debt and rising interest rates is a dangerous time to introduce the new 1% down payment program as risks of customers defaulting increase, which may see RKT going bankrupt. RKT is a stock to avoid as it faces too many risks.
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