Rocket The Rates Down Call Option

Capacity, human inertia, two acquisitions, gain on sale and the future of RKT

You have to kick over a lot of rocks in investing. And by kicking over rocks I mean scanning news, reading Q’s, or working through research reports. The truth of it is, most of this work is “wasted” since 9.5 of 10 rocks you kick over end up being a “not worth it” or a “not at this price”, but the process is what sharpens your skills and builds your internal compass.

To this point, I spent part of last eve going through a GS report on Rocket Companies (RKT). Their scenarios are straight forward and I’m not going to post the whole thing here. But the big picture says that in 2027, Rocket earns about $1.15 if nothing much changes, closer to $1.30 if the mortgage market climbs back to roughly $2.6 trillion, and closer to $1.70 in a fully normalized $3.3 trillion market. Depending on whether you treat Rocket as a lender, a homeownership platform, or a fintech, the stock price goes anywhere from the low 20’s to the high 30’s.

Make no mistake, a “bet” on RKT though is attached at the hip to mortgage rates, refis, home purchases, and the 10 year UST. Those are the macro variables that drive upside & downside. A quick look at historical Google trends shows you that.

And now, with the stock trading around it’s 50DMA and having given up some of the rates down vibes rally, it’s as good as ever a time to educate yourself on the risk-reward of the stock.

What interested me more than the numbers in the GS report were the forces underneath the numbers, because those are what actually shape your future returns as a RKT long or short. And after long enough in this business, you learn to stop memorizing the decimal places and start paying attention to the what’s under the hood and what can’t be seen in today’s Q.

Rocket today is positioned around four forces the spreadsheet can’t fully capture: capacity, inertia, optionality, and margin behavior.

Capacity Expands In A Refi Bull Market

Capacity is the first one. When rates fall, demand returns quickly, and the industry doesn’t always have room to take it. Goldman’s “modest improvement” in the mortgage market case already pushes refinancing above $1 trillion and purchase volume above $1.5 trillion. Their “normalization” case pushes both even higher and the lenders who stay organized through the slow years generally take more share in the busy ones.

Rocket has been preparing for years, consolidating their market position against UWMC and the other bigger players.

Their AI investments have already removed more than 1 million hours of manual work from underwriting and processing, and banker productivity has risen roughly 63%. Rocket believes it can handle close to $300 billion of originations without a crisis-mode hiring sprint.

Capacity through tech means all things equal RKT does NOT have to hire as many human mortgage brokers (which hangs on expenses and drags down margins) to produce the same amount of output.

Inertia Works in Rocket’s Favor

The second force is inertia. Mortgage decisions are not equations, they’re emotional, time-consuming, and easy to postpone. Behavioral research has shown this for decades. Samuelson and Zeckhauser documented the strength of status quo bias. Madrian and Shea showed how retirement behavior changes dramatically based on the default choice. Ben Keys and colleagues found that 20%+ of homeowners fail to refinance even when the savings are straightforward. Basically, people return to familiarity when a decision feels heavy.

Rocket and COOP together service about $2.1 trillion in unpaid principal. When mortgage rates drift toward 5.5%, Goldman estimates that nearly $300 billion of that becomes economically attractive to refinance, with $200 billion coming from COOP’s book. These borrowers cost nothing to reacquire because they already sit in Rocket’s ecosystem. Many of those refinances produce incremental EBITDA margins around 70% because the customer acquisition cost rounds to zero.

Optionality Is Hard to Model, But Very Important

The third force is optionality, and Rocket has it at both ends of the housing journey. On the front end sits Redfin, with nearly 50 million monthly users. Historically only 0.13% of those users turned into transactions which is why people didn’t love the deal. Goldman modeled what happens if Rocket lifts conversion toward 5% and pushes mortgage attachment toward 50%. That alone adds $21 billion in volume and roughly $0.07 in EPS. Even a one-point improvement in conversion contributes about $0.02. Redfin gives them the front end of the funnel optionality they lacked before.

Is it the premier name? No, Zillow is way more popular, but I think RKT improves this.

COOP’s servicing book provides the equivalent leverage on the other side. Goldman estimates about 549,000 potential recapture opportunities at mid-5% mortgage rates. Given performance-marketing costs of roughly $1,000 per acquired borrower, the savings stack up to around $550 million. Reinvesting half of that can unlock another $75 billion in originations and roughly $0.33 in long-term earnings power.

These two acquisitions give RKT optionality on the front side of the funnel, and the back end of the funnel and as disccussed set up the flywheel known as human laziness, or rather “inertia”, as I called it. This is the very same inertia that banks use to pay you nothing on deposits left over and gym’s use to make money off the countless people that pay and don’t show up.

The Trickiest One, Margin Behavior

The fourth force is margin behavior, and this is the one most people misunderstand. Gain-on-sale margins are partly set by the market and partly set by the lender. The secondary market tells Rocket what buyers will pay for a mortgage, but Rocket still chooses the rate it offers the customer. The difference becomes the margin. When Rocket trims borrower rates by 10 or 20 basis points, yes, the margin falls, but volume often rises much faster because Rocket has the brand, the servicing footprint, and the operational room to handle that surge. Goldman says that even a 25bp decline in GoS can increase earnings by 10–13% because volume expands more than margins compress.

Even though RKT is working thinner, the volume pick up produces upside optionality.

It’s Still A Bet on Rates Down

Rocket has some lofty purchase and market share assumptions. They want to be 8% of purhase, up from 4% today. And they want to be 20% of refi, up from 12% today. I think these are achievable over the long run.

But make no mistake, buying RKT now is still a bet on 10 year UST rates and mortgage rates falling. If you think about rocket in a real rates down, call it 200bps as Goldman outlines it, this means a big chunk of people are now in the money and able to refi (about $1.4 trillion according to GS) and improved affordability layers on another huge swath (about $1.8 trillion according to GS). In this world RKT’s origination’s hit $320 billion and core EPS bumps to $1.70 (their words not mine).

What’s it worth in that world?

Totally up to you and the market, and to how well they manage the 4 sources of upside optionality above. But ranges could be anywhere from 12x to 18x depending on what you want to call RKT. This means you’re talking a range from $20 to $31. $20 is if RKT is “just another mortgage lender” and $31 is the RKT is a platform (like UBER).

But make no mistake, there is no rip higher should interest rates stay here. If the “run it hot” economy Trump & Bessent are shooting for comes to fruition, and if inflation stays stubbornly high, and if the yield curve steepens as the Fed lowers short rates, there is no call option higher for RKT (absent some unforseen government program). You literally need lower mortgage rates for RKT to turn into the call option.

I’ve yet to find a better “rates down call option” than RKT. If you have one, let me know.

The best is ahead,

Victaurs