If and when Quicken Loans launches an initial public offering this year, the event could upend the business pecking order in Detroit — at least in the eyes of Wall Street.
With a potential valuation in the "tens of billions," according to a report by CNBC, the downtown-based mortgage giant could potentially exceed the market value of Ford Motor Co. ($25 billion) and perhaps approach that of General Motors ($38 billion). In such a scenario, the Quicken IPO could be the moment that Detroit becomes as much the Mortgage City as it is the Motor City.
"They might be bigger than GM the day they do this IPO," said Van Conway, a metro Detroit business consultant and head of Van Conway & Partners. "Wall Street doesn’t like car companies, so it is kind of unfair to compare them, but that’s all we have in Detroit.”
Quicken Loans has yet to confirm or deny the CNBC report last week that it is secretly planning an IPO that may be unveiled as soon as July. The report, citing unnamed sources, said Quicken is working with Goldman Sachs, Morgan Stanley and others, and that its multibillion-dollar IPO could be the biggest of the year.
An IPO is when a company first sells shares of its stock on a public market to generate capital, which can be used to fund growth and other purposes.
Finance and business experts say there are various reasons why Quicken Loans, a large and established company, could be looking to go public. They also note how unlike many recent IPOs, Quicken would be launching an IPO not as a young startup eager to dethrone incumbents, but from its already top position in the mortgage industry.
"Quicken Loans is not your typical IPO company — both the kind of business that it is in and the size of the company," said Amiyatosh Purnanandam,a finance professor at the University of Michigan's Ross School of Business. "So it will be a unique IPO. And it will be an IPO that a lot of people watch carefully, because we’re talking about billions of dollars here.”
Some possible reasons for Quicken's decision to go public could include:
- Cashing out founder and Chairman Dan Gilbert, 58, who suffered a serious stroke in May 2019 and may wish to curtail his involvement and shore up his estate planning.
- To capitalize on the current strength of Quicken's mortgage business, which has been setting company records amid low interest rates and high refinancing activity.
- Growing Quicken's cash cushion to withstand any future shock or crisis. The company's mortgage servicing business recently saw an industry-wide liquidity scare prompted by fears of borrowers missing payments due to the coronavirus pandemic.
"Raising equity is in my mind a good strategy at a time like this," Purnanandam said. "One thing COVID has done is make it very clear that companies should have more equity. When you have more equity cushion, you can sustain these negative economic shocks ... so maybe that’s what's going on here."
A Quicken Loans spokesman did not respond Friday to a request for comment.
More: Quicken Loans may offer shares to the public, CNBC reports
More: Dan Gilbert defends Quicken Loans over 'junk' bond rating
More: How Dan Gilbert has made Quicken Loans thrive in mortgage industry
Even though the U.S. entered a pandemic-caused recession in March and unemployment is likely still above 15% nationwide, media reports show how some companies, especially tech companies, have been racing to go public and take advantage of the rebounding stock market.
Names like ZoomInfo, the business data software company; recording label Warner Music Group; and online used car seller Vroom all had IPOs in recent weeks that had a great deal of appeal for investors.
"The environment is good for IPOs in general,” said David Kudla, CEO of Mainstay Capital Management. “Quicken is at an advantage compared to many new businesses coming to market for an (IPO) in that they are an established brand and a company with a stable, profitable business model."
The largest IPO in Michigan took place nearly 10 years ago when GM raised $20.1 billion at $33 a share. Fresh from bankruptcy, the automaker raised far more than the $13 billion that was originally projected, thanks to increased demand from mutual funds and others.
Money raised in the GM public offering went largely to the U.S. government, which ended up owning 61% of GM after restructuring the automaker in federal bankruptcy court.
That big asterisk on GM's 2010 IPO is why Conway believes that a Quicken Loans IPO would be a bigger deal for Detroit.
"I would argue we’ve never had one this size," he said. "When GM had an IPO after the bankruptcy, that wasn’t that exciting and that was a way for the government to get paid back."
Gilbert's first IPO
Quicken Loans became one of the first online mortgage lenders in the late 1990s after years of having physical branch offices. The company was then known as Rock Financial Corp., and it did an IPO in 1998. Back then, Rock Financial was only a sliver of Quicken's current size.
"We are going public for the main reasons that most companies do, to have better access to the capital markets to raise money to fund growth for the company's future," Gilbert said at that time.
Rock Financial was sold the following year to Intuit, the maker of Quicken software products, in a deal reportedly worth $532 million. Gilbert continued to lead the rebranded company and, in 2002, with a group of private investors, he bought it back from Intuit for $64 million in a deal that included Title Source, the title insurance firm now called Amrock that is part of Quicken's family of companies.
Today, industry publications rank Quicken as the nation's No. 1 direct-to-consumer mortgage lender. Last year, it set a company record by closing $145 billion in loans, and this spring CEO Jay Farner told Bloomberg that March would be Quicken's largest closing month ever, thanks to low interest rates and a surge in refinancing activity.
Who gets rich?
Even non-executive employees at hot startups can become rich when their company has its IPO. But experts say that it doesn't usually rain money for the lower-level employees at large and more established companies such as Quicken that go public.
A key difference is that startup employees, in exchange for lower salaries, often accept stock options as part of their compensation. That arrangement can turn them into millionaires once the company does go public.
At Quicken, those most likely to see big benefits from an IPO would be Gilbert, his investment partners and key employees, according to finance experts. Still, Quicken could give its rank-and-file employees an option to buy shares at the initial offering price.
"It’s very common for companies to invite their employees to participate," said Sam Levine, a finance instructor at Wayne State University's Mike Ilitch School of Business. "That is a terrific thing if the company's shares do pop.”
Sharing control
Going public would compel Gilbert to begin sharing some control of his company with shareholders.
Experts say Quicken could opt to issue different classes of shares for Gilbert, his top managers and other insiders with higher voting rights than general shareholders, giving them more sway over the company's direction. Publicly traded companies such as Ford, Facebook and Google have used such strategies.
Also, Gilbert might initially sell only a portion of his shares and hold on to the rest.
The dual-class stock structure "is a mechanism by which you can retain control and still raise money through the public equity market," said Purnanandam, the U-M finance professor.
Less money for projects?
A public offering might bring an end to any arrangement in which Quicken profits go toward various projects in Gilbert's business empire that are unrelated to the mortgage business, such as his Bedrock real estate firm that has redeveloped numerous downtown Detroit buildings since 2010.
"When you go public, there’s a lot of things that you can’t do anymore ... because now the public owns a portion of the company," Conway said. "(Quicken's) core business is not renovating Detroit."
However, Gilbert's share of IPO proceeds could give him a boost in personal capital that could be put toward those outside projects. The IPO also could benefit Gilbert's estate planning, several financial experts said, and could provide his family with the extra liquidity for future estate taxes.
Bigger cash cushion
The new capital from an IPO could help Quicken strength its own liquidity.
Liquidity can be a concern for nonbank lenders such as Quicken, which don't take deposits and typically borrow the money to make their loans through lines of credit with banks and other financial institutions. Because nonbanks can't easily turn to the Federal Reserve for help, their short-term financing models can potentially run dry in times of crisis.
Quicken's nonbank model is the reason why credit rating agencies have deemed its debt as below investment grade, or what's commonly called "junk" in the financial world.
Mortgage servicing scare
Quicken and others faced the possibility of a cash crunch earlier this spring amid fears that large numbers of Americans could miss mortgage payments amid the economic fallout of the coronavirus pandemic.
Quicken not only sells mortgages, but is also in the business of servicing mortgages by collecting borrowers' monthly payments and forwarding them to the investors who own the loans. Quicken Loans was the nation's No. 9 mortgage servicer last year, according to industry observer Inside Mortgage Finance.
Warning lights flashed among mortgage servicing firms early in the pandemic because the companies typically must advance the monthly payments to investors, regardless of whether borrowers make the actual payments.
Even though servicers are eventually reimbursed for the advanced payments by government-backed entities such as Fannie Mae that guarantee mortgages, there is a timing mismatch, which can result in a cash crunch for servicing firms if enough borrowers miss payments.
The Mortgage Bankers Association, an industry group, warned this spring that if one-quarter of all mortgage borrowers stop making payments or enter a forbearance program for six months or more, mortgage servicing firms could be on the hook for a devastating $75 billion to $100 billion or more.
Those fears have eased in recent weeks because the total number of loans in forbearance — about 8.5% nationwide — is lower than expected, and more than 25% of those borrowers in forbearance still made May payments, according to the Mortgage Bankers Association.
In addition, servicing firms have obtained additional credit lines from the private sector and those that also sell mortgages are enjoying high profitability, an association spokesman said. It also helped that some advanced payment obligations were cut to four months instead of 1 year.
Government backed
Aside from its servicing business, Quicken appears to have only minimal exposure to the financial risks of borrowers missing mortgage payments.
In a 2018 interview, Gilbert said that about 95% of his company's mortgages are government or agency loans that have explicit government backing against default by Fannie Mae, Freddie Mac, Ginnie Mae or the Federal Housing Administration.
Once those entities buy a mortgage, it is then off the mortgage lender's books and the lender is generally not "on the hook" for money if the mortgage later sours, a Mortgage Bankers Association spokesman said.
Details to come
The scope of a Quicken IPO wouldn't be known until any deal is publicly filed.
The outlook for the mortgage business appears solid, financial experts said, as interest rates are expected to remain low for quite some time, possibly fueling more refinancing and new home sales.
Keith Gumbinger, a vice president at mortgage information website HSH.com, said he would expect to see demand from investors, given that Quicken is a well-run company at the top of its industry.
Gumbinger said he would not be surprised if the IPO has been in the works for some time.
“It may be that the plan was to do so earlier this year but was delayed by the pandemic outbreak, and the subsequent crash of stocks,” he said.
Contact JC Reindl: 313-222-6631 or jcreindl@freepress.com. Follow him on Twitter @jcreindl. Read more on business and sign up for our business newsletter.
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