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Got junk?
For the city of Detroit and its top downtown employer, the answer is not anymore.
That’s because 2024 was the year that both Detroit and Dan Gilbert’s Rocket Mortgage stopped being “junk” in the eyes of Wall Street rating agencies.
City government and the downtown-headquartered mortgage lender had for years held credit ratings below investment grade, a status given to companies or governments with finances perceived as somewhat risky. Debt issued with such ratings carries the “junk” nickname, which was popularized in the 1980s.
Companies and governments with these ratings typically pay more to borrow money than those with investment-grade ratings. And their bonds are considered too risky for some investors, such as some pension funds.
Detroit’s ratings had been in junk territory since 2009, when the city was on the path to its 2013-14 municipal bankruptcy.
And Rocket Mortgage — the biggest and most dominant company within Gilbert’s publicly traded Rocket Companies — had carried a junk rating and its negative connotations for years, even during the height of its profitability amid the pandemic-era mortgage refinancing boom, when it was earning billions in profit every quarter.
Now, they’ve finally shed the unflattering moniker.
“It’s just one metric but it’s an important metric, because the higher your credit rating, the less you have to pay when you go out into the money markets to do bonds or borrow money,” former federal Judge Gerald Rosen, who was chief mediator in Detroit’s bankruptcy case, recently said during an interview about his book on the Detroit bankruptcy.
This past spring, two rating agencies, Moody’s Ratings and S&P Global Ratings, each upgraded the city’s general obligation debt to investment grade. Detroit went to “BBB” from “BB+” on the S&P scale and to “Baa2” from “Ba1” on Moody’s.
The city celebrated with a news conference and a release, headlined “Detroit’s journey from junk bonds to investment grade complete.” Mayor Mike Duggan handed out bottles of black ink, labeled “Baa2” for the new Moody’s rating, and meant to symbolize Detroit’s exit from an earlier era of “red ink” or financial losses.
In reviewing the city’s finances, the S&P analysts wrote: “Ten years on from its bankruptcy filing, Detroit’s financial position and economic condition are the strongest they’ve been in decades. Liquidity and reserves are at record levels, the debt burden is manageable, population decline is flattening, the stock of blighted and vacant properties is down considerably thanks to extensive city-managed programs, assessed property values have increased in five consecutive years … and taxable wages continue to grow.”
Detroit Chief Financial Officer Jay Rising said the upgrade is beneficial not only at times when the city is issuing bonds, but also for more routine business matters such as leasing vehicles and equipment.
“The value of this doesn’t just go to the city, it goes to residents,” Rising said in a phone interview this week. “It lowers our budget costs for borrowing, it gets us access to not pay as you go for some things, but pay over time for some things, which gives us more ability to provide services for residents.”
Rocket jettisons ‘junk’
Headquartered in downtown, Rocket Companies as a whole had 10,735 workers in Detroit as of last year, or slightly fewer than the city’s No. 1 employer by headcount that year, automaker Stellantis, which operates factories in the city, according to figures in the city’s most recently published annual financial report.
In November, Fitch Ratings upgraded Rocket to “BBB-” from “BB+,” which officially made the mortgage lender investment-grade. The company had been in junk territory for years, since before it went public in 2020 and was still known as Quicken Loans.
Rocket Companies Chief Financial Officer Brian Brown touted the Fitch upgrade last month in Rocket’s third-quarter earnings call.
“This makes Rocket Mortgage the first non-bank mortgage company to receive investment grade status from one of the three big rating agencies in almost two decades,” Brown said. “This achievement highlights our strong balance sheet and financial profile, and paves the way to access a wider range of funding sources at a much more favorable cost of funds.”
The main reasons why Rocket held a junk rating for so long wasn’t because of any management concerns or worries the company was going broke, but rather the company’s business model as a nonbank lender, coupled with the cyclical nature of the mortgage business.
Nonbanks like Rocket do not take customer deposits and generally rely on shorter-term borrowing to get the money they use to finance mortgages.
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So unlike traditional banks, they lack the safety of having federally insured deposits if a financial crisis were to erupt and also lack access to the Federal Reserve’s “discount window” for emergency borrowing.
Rating agencies might also be erring on the side of caution when it comes to the mortgage industry, as the agencies took criticism in the wake of the 2008 financial crisis for having given high ratings to some lenders as well as mortgage-backed securities that ultimately went bust.
Eric Orenstein, a senior director at Fitch Ratings, said in a phone interview that the cyclicality of the home lending business, where volumes can go way up when interest rates drop, then plummet when rates rise, is an added risk for nonbank mortgage lenders like Rocket.
He noted how traditional banks like Wells Fargo have more diversified business models, whereas Rocket Mortgage’s business is just mortgages.
“Banks also have more robust regulatory frameworks from the regulators,” Orenstein said, “where they have capital requirements and stress testing they need to submit to and things like that, which I think tend to lead to higher ratings for banks overall than for nonbanks.”
Nevertheless, Rocket Mortgage is the highest-rated mortgage company of the eight that Fitch reviews — and the sole one with an investment-grade rating.
The Fitch upgrade came even after a down quarter for Rocket Mortgage’s parent, Rocket Companies, which reported a $481 million loss on $647 million in total revenue during the third quarter. Like other mortgage lenders, Rocket has seen a drop in business since early 2022 when mortgage rates began rising from historic lows, leading to fewer home purchases and less refinancing activity.
Some reasons for Rocket’s higher rating compared to industry peers, Orenstein said, are its market share, good liquidity, and strong brand with consumers. Another plus, he said, is that Rocket does both direct-to-consumer mortgages, known as retail lending, and mortgages through independent brokers, known as wholesale lending.
Rocket’s leading rival, Pontiac-based United Wholesale Mortgage, only does wholesale lending through brokers. Fitch currently has a “BB-” rating for UWM, which is in junk territory and three notches below Rocket Mortgage.
UWM declined to comment for this story.
Not all of the rating agencies are on the same page for Rocket. Moody’s still rates the mortgage company as slightly below investment grade.
Contact JC Reindl: 313-378-5460 or [email protected]. Follow him on X @jcreindl
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