Just two weeks after announcing the sudden retirement of longtime executive Jay Farner, Rocket Companies reported a fat financial loss in the fourth quarter of 2022, its largest ever. And things aren’t getting any easier in a depressed originations environment.
The Detroit-headquartered lender suffered a $197 million adjusted net income loss in the fourth quarter, on the back of a $166 million loss in the third quarter, when the company also relinquished the title as America’s largest mortgage originator. The company’s GAAP net loss in Q4 was $493 million.
In all, Rocket originated $19 billion in mortgages in the fourth quarter, a 26% drop from the $25.6 billion originated in Q3. The fourth quarter production also represents a 75% decline compared to the same period in 2021. Its production has been eclipsed by arch-rival United Wholesale Mortgage over the last two quarters.
Like virtually all of its competitors, Rocket’s performance last year dramatically declined compared to 2021, when refinancing business was still plentiful.
The last year marked Rocket’s first – maybe only – year in which it wasn’t profitable. Adjusted net income in 2022 was negative $137 million, a stark contrast from the $4.5 billion profit in 2021. Origination volume explains much of the drop – it fell to $133 billion in 2022, down from $351 billion in 2021.
Here’s a breakdown of what went wrong, how the first quarter is shaping up, and why Farner is leaving Rocket.
Right-sizing as a painful year comes to a close
The theme of the earnings call on Tuesday after market close was right-sizing.
“Last year marked a period of transformation for Rocket. We right-sized our business to respond to a challenging market; we also made key investments to serve our clients better on every step of their home ownership journey,” Farner, who departs in June, said in prepared remarks. “With foundational pieces of our client engagement program in place, we are focused on expanding our top of funnel, lifting conversion and lowering our client acquisition cost, with the ultimate goal of growing our purchase market share and extending client lifetime value.”
To date, Rocket’s cost-cutting moves haven’t been enough to keep the company out of the red. The company has offered voluntary buyouts and made several rounds of layoffs to reduce its expenses, which in the fourth quarter tallied $986 million, down from $1.18 billion a quarter ago, roughly a $200 million cut in expenses.
Brian Brown, Rocket’s chief financial officer, told analysts that the company reduced its expenses by $3 billion, or 40%, annually in 2022.
“We committed to a further reduction in total expenses from the third quarter to the fourth quarter of $50 million to $100 million. And we far exceeded that estimate, reducing expenses by $202 million during the quarter,” he said, noting the company is still investing to grow its share of the purchase market.
According to Warren Kornfeld, an analyst at Moody’s Investors Services, Rocket’s fourth quarter loss was largely driven by still elevated operating expenses and low gain-on-sale margins, which came in at just 217 basis points. (Company executives attributed this to higher-than-anticipated demand for its “Inflation Buster” rate buydown program.)
Shampa Bhattacharya, an analyst at Fitch Ratings, said Rocket accelerated its cost-cutting actions in the fourth quarter, setting them up to be better positioned for the remainder of 2023. However, “We anticipate Rocket to take incremental actions if the right-sizing effort undertaken so far proves to be insufficient, with the goal of being profitable in 2023,” she added.
Kornfeld noted that Rocket, which has $8.1 billion in liquidity, including $3.3 billion in cash, “continues to be conservative with respect to capital management during this very severe operating environment for non-bank residential mortgage companies.”
Meanwhile, on the other side of the ledger, revenues plunged in the fourth quarter. According to Rocket’s earnings report, the lender generated a total of $481 million in revenue in the final quarter of the year, down from $1.295 billion in the third quarter. Revenue in the fourth quarter of 2021 was $2.95 billion.
On the bright side, Rocket’s servicing portfolio is increasing. The unpaid principal balance in its servicing book rose to $535 billion as of Dec. 31, compared to $531 billion as of the end of September. Rocket has 2.5 million clients in the servicing portfolio. It generates an annual $1.5 billion in recurring servicing fee income.
Better days ahead for Rocket?
Looking at the trends for the first quarter, Rocket expects operating expenses to be “relatively consistent with the fourth quarter, with a slight increase on an absolute basis due to seasonal items, such as payroll taxes, Brown said.
Brown said the adjusted revenue is expected to come in between $700 million and $850 million in the first quarter of 2023, driven by an increase in production and improved margins compared to the fourth quarter.
Since the beginning of 2023, margins have improved by more than 20 basis points compared to fourth-quarter levels, primarily due to a shift in promotional products, executives said on the call.
Regarding profitability, Brown said it’s a company priority, but Rocket will not sacrifice long-term results. “We’ve been a private company long before we were a public company, and we’re not interested in sacrificing to hit a short-term number.”
To reach profitability, Rocket has as a competitive advantage its low cost to acquire new clients: the company’s executives estimate it’s less than $100 through Rocket Money, according to Farner. He added that the company also has an opportunity to gain market share as competitors reduce their mortgage business footprint. In addition, Farner said that Rocket is “always looking” for mergers and acquisitions.
Hello, Bill. Welcome back!
With the announcement that he’s leaving his post on June 1, Farner will be passing the torch to a familiar figure, Bill Emerson, his predecessor.
Little was said about the reason Farner, just 49 years old, is leaving the company he’s spent his entire career with. He said on the earnings call that he’s retiring to spend more time with his family.
Emerson, another Rocket lifer, replaced Farner on the board earlier this month. The board of directors approved a base salary of $600,000 for Emerson, effective June 1. He will also be eligible for a target bonus of 100% of his base salary for 2023 and receive a grant of restricted stock units equal to $6 million.
Rocket is looking both internally and externally for a permanent CEO. Analysts say Farner’s replacement will be tasked with putting the company on a profitable path while it transitions from a refi-reliant mortgage lender into a multi-disciplined fintech. Several analysts estimate Rocket won’t return to profitability until the third quarter of 2023.