Hello, LOs!
Even before many lenders have released Q2 earnings, compared to 2020's banner performance, gain on sale margins are looking pretty underwhelming.
Some shareholders are not pleased. One filed a class-action-seeking lawsuit this week against Rocket, arguing that the mortgage behemoth knew that gain on sale margins were shrinking before it disclosed that publicly.
Owen Arent, who until May was a software quality assurance engineer at the Detroit-based lender, argued that public statements company officials made in May reveal they knew more than they were letting on in the first quarter.
A Rocket spokesperson called the lawsuit a "work of fantasy."
The lawsuit claims Rocket Chief Financial Officer Julie Booth "admitted" that the decline of gain on sale margins began "at the end of Q1," the lawsuit says. That coincided with former CEO and founder Dan Gilbert's sell-off of $500 million in shares, which the lawsuit argues is evidence Rocket knew the refinance boom was coming to an end.
Rocket Mortgage, which last year this time was riding the crest of the refinance wave, said in May it expected gain on sale margins of 2.65% to 2.95% in the second quarter. That's a nearly 100 basis point sequential drop and a dramatic 254 basis point decrease year-over-year.
It's the second lawsuit in as many weeks to target Rocket for allegedly making misleading public disclosures. It also mirrors a June shareholder lawsuit that made similar claims about Home Point Capital. The plaintiff in the latest Rocket lawsuit even hired the same law firm as the Home Point lawsuit's plaintiff did.
One mortgage finance expert I spoke to, who was not authorized to speak about the lawsuit publicly, said that a new crop of investors — empowered by online platforms like Reddit — are shunning traditional analyses. He said these shareholders may feel they are entitled to bring such lawsuits, even though forward-looking statements from executives are typically protected by a safe harbor meant to encourage companies to speculate, in order to provide useful information to investors.
The person also argued that the disclosures Rocket made were appropriate, and said the company's performance wasn't surprising, given the adverse market conditions.
"The reported level of gain on sale is inside of [Rocket's] guidance, he said. "If you look at their disclosure on this subject it's pretty damn clear."
Still, he said that every once in a while, one of these lawsuits will "get lucky." We'll keep you in the loop.
Do you think we'll continue to see more of these lawsuits, especially as a new cohort of investors enters the fray?
Write a note anonymously to gkromrei@housingwire.com.
Georgia Kromrei
Senior Mortgage Reporter, HousingWire
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