MortgageOrigination

Higher mortgage rates exposed Rocket’s vulnerability — can it prove itself as a fintech?

With rival UWM now the #1 mortgage lender in America, Rocket is betting on its platform to develop 'sticky relationships' with customers

rocket mortgage

Rocket Mortgage, once the largest mortgage originator in the country, capitalized on the all-time low mortgage rates during the pandemic years, racking up record profits through an enormous amount of refinances. Last year, it originated $351 billion in total volume — with more than double the refi volume of any lender. 

But when mortgage rates started rising following downward pressures on inflation, its business took a hit and the unimaginable happened: Rocket Mortgage not only lost $166 million in the third quarter, but it fell from its throne. Worse, Rocket lost its origination crown to its chief antagonist, United Wholesale Mortgage.

At $25.6 billion, Rocket’s origination volume in the quarter was 31% lower than that of Pontiac, Michigan-based UWM, which has been gobbling up market share in the high-rate environment.

Every lender has taken a hit this year, with the $4 trillion mortgage industry in 2021 cratering to an estimated $1.7 trillion in 2022. But the high-rate environment seems to have exposed the vulnerability of lenders that are more reliant on refinancings through a call center model and don’t have strong relationships with local real estate agents.

While the current mortgage market works against its refi-focused call center business model, Rocket’s parent Rocket Companies is betting big on the strength of its platform: a single sign-on solution for the entire Rocket ecosystem consisting of real estate services, personal loans, used cars and rooftop solar systems through subsidiaries.

At stake is the title of the country’s largest mortgage originator, and proving its strategy of branding itself as a fintech, which would enable Rocket to reach a bigger audience beyond the mortgage industry.

“As we navigate and adjust to the current environment, we’re continuing our long-term strategy of investing in our platform with an eye toward the future,” Brian Brown, Rocket’s CFO, emphasized to analysts in its recent earnings call.

Still, for the moment Rocket is in a tough spot. UWM is aiming to cement its position as the country’s largest originator by undercutting competitors through cut-rate prices in the broker channel. Rocket is the second-largest player in wholesale, and though it is a reliable source of purchase business, Rocket remains far behind UWM. 

While UWM faces a risk of losing market share when it pulls back from its aggressive pricing strategy, the wholesale lender says its bountiful profit of $325.6 million in the third quarter and improved liquidity position offsets the shrinking margins from its ‘Game On’ pricing.

“Honestly, for the next couple of years UWM is positioned a little better because they don’t have expenses like Rocket from going on to other ventures,” Kevin Heal, senior analyst at Argus Research, said. “They’re staying in the lane of being a wholesale lender.”

Rocket, whose executives have frequently spoken about the long game and the cyclicality of the mortgage industry, declined to comment for this story.

Is Rocket Mortgage waiting for another refi boom?

Though Rocket Companies has evolved from a single mortgage lender to an ecosystem of businesses involved in personal finance, auto sales, home sale and solar panels, its main source of revenue continues to be mortgages. About 94% of its generated total net revenue came from its direct-to-consumer and partner network mortgage segments year-to-date.

I think in some aspects they would like to be viewed as a proptech or fintech company. But at the end of the day, the core of the business is mortgage in our opinion.

Jay McCanless, senior vp at wedbush securities

“The mortgage business was such a large part of their business in 2021 to 2022; you’re not going to be able to replace that overnight,” Jay McCanless, senior vice president at Wedbush Securities, said. “I think in some aspects they would like to be viewed as a proptech or fintech company. But at the end of the day, the core of the business is mortgage in our opinion.” 

The Michigan lender boasts partnerships that include Salesforce – which allows Rocket to offer its mortgage technology to banks and credit unions that collectively originate $1 trillion in mortgages a year through Salesforce Financial Services Cloud – and Santander Bank, that allows Rocket Mortgage to originate mortgages for Santander clients. It’s also looked to court purchase business through an ‘inflation buster’ temporary rate buydown product.

However, mortgage rates doubled from the start of the year to surpass 6% levels, and the lack of portfolio recapture has undoubtedly hurt Rocket’s mortgage business, Shampa Bhattacharya, director of the financial institutions group at Fitch Ratings, said. 

Roughly six of every seven U.S. homeowners with mortgages have a mortgage interest rate far below 6% levels, according to Redfin. Homeowners are discouraged from moving because selling their home and buying another could mean giving up their low mortgage rate and taking on a larger monthly housing bill, creating a “lock-in” effect across the country. 

Unlike UWM — which outsources its servicing, meaning that originations aren’t as dependent on the portfolio recapture aspect — Rocket owns those customer relationships and servicing portfolios, which would generate leads in a stronger refinance environment, Bhattacharya explained.

Rates are expected to go down to the 5% levels in 2023, but it’s highly unlikely that rates will decline to the 2 and 3% levels like it did in 2020 and 2021, raising questions on whether Rocket will be able to benefit from the refi boom as it did two years ago.

“Those loans would have really low customer acquisition costs, which is what makes them so attractive,” she said. “That business significantly reduced and it had a disproportionate impact on volumes and margins.” 

Not having a local presence through branches nor relationships with real estate agents – crucial for winning over referral businesses in a purchase market environment – is an Achilles heel for Rocket in the current market.

Rocket bankers work instead at centralized locations and are given leads that follow up on customer inquiries regarding ways to save money, a former Rocket banker who requested anonymity, said in an interview. 

“They had it set up where you would always get warm leads as much as you need for many hours a day,” said a former Rocket banker. “People inquired about saving money or cashing out, and a banker will follow up with them and transfer them over to a seasoned banker.” 

The former Rocket banker focused on refinancing mortgages to lower rates during his three years at the company, but after intense training sessions on mortgage products and sales techniques, which last about six to eight weeks, bankers are able to handle basically any type of calls, the former banker explained. 

In an effort to address criticism regarding the lack of relationships with real estate agents, Rocket set up a new team focused on cultivating relationships with real estate agents. However, the team was disbanded last year, according to a report by the Wall Street Journal in late October. Rocket didn’t provide comment on whether all the teams had been disbanded and whether it plans on setting them up again. 

If you can influence consumers through ongoing direct consumer marketing, that’s powerful if it works.

Andy Harris, President of vantage mortgage brokers

In a rising-rate environment, Rocket bankers have looked to persuade existing customers to get a cash-out refi — taking advantage of record home equity levels that ballooned during the pandemic, the Journal reported. 

It’s a tough sell.

Getting potential borrowers to trade a 3% mortgage for a 6% one is like “pushing rocks up hills,” Colin Wyzgoski, who quit his job as a banker in August after taking time off because of work stress, told the Journal.

There’s also heavy competition for Rocket bankers to contend with.

“With the market starting to shift, lenders are starting to show back up in the door,” Jeremy Blanton, a real estate agent at RE/MAX Southern Shores, told HousingWire. “Now that the refi market slowed down they have time and are doing the customer support for agents again.” 

For retail lenders, brand recognition is key. And this is where Rocket has a big advantage over others —arguably no one is better at marketing. It would be foolish to count out a company as well resourced and well known to consumers as Rocket is, observers said.

“If you can influence consumers through ongoing direct consumer marketing, that’s powerful if it works,” Andy Harris, president of Vantage Mortgage Brokers, said. 

Harris explained that younger generations are “more savvy because data is more readily available online” and that’s why Rocket is trying to bill itself to be a fintech company and try to attract the younger age homebuyers in a different way. 

Plenty of money on hand

For a company with a market cap of $15.5 billion and increased liquidity in the third quarter, Rocket is positioned to withstand the storm better than any other lender.  

It’s all about building the sticky relationship with the end customer and then selling them the products when any need arises for a mortgage and they already have the customer. If they come to Rocket, their customer acquisition costs are really low and their margins are high, that’s their business strategy.

Shampa Bhattacharya, director of the financial institutions group at Fitch Ratings

Having the cash and credit lines on hand to ride out the rough patches in the market — known as liquidity — could be what separates the winners from the losers in the mortgage industry.

“Rocket is willing to sacrifice some income for the next quarters to capture market share and pull guys out of business,” Heal said. “They have plenty of funding available to finance the mortgages in between the period when they are origination and when they get sold.”

Rocket’s SEC filing indicates that it ended the third quarter of 2022 with a “strong liquidity position,” which includes $800 million of cash on hand, $3.2 billion of corporate cash used to self-fund loan originations, a portion of which could be transferred to funding facilities – warehouse lines, which used to fund loan originations.

At the end of the third quarter, the value of mortgage servicing rights came in at $7.3 billion, an increase of $1.9 billion year-to-date. A rise in the fair market value of MSRs on Rocket’s balance sheet helps to bolster the lender’s asset position, which creates more collateral for borrowings or potential income from future MSR sales — all of which help pump up Rocket’s liquidity. 

For now, Rocket is “dealing with relatively low leverage and fairly efficient operations with a limited amount of cash burn,” according to analysts. 

“If the cash burn were much higher and they were selling MSRs, this would be a red flag because you’re basically selling your forward cash flow at a discounted rate,” Kevin Barker, managing director at Piper Sandler, said.

Rocket’s to-do list as a fintech

“Rocket is going into the quarter and the start of 2023 on a pretty cautious footing, it seems like they’re doing multiple things to expand the funnel,” McCanless said, adding that the company is getting creative to generate opportunities for purchase originations where they can.

The Detroit company claimed to have 24 million Rocket user accounts through Rocket Homes, Rocket Auto, Rocket Solar and Rocket Money as of the third quarter of 2022. The goal for Rocket is to bring these members into their business lines well before they are ready to buy a home — and get them to lock in mortgages when becoming homeowners. 

“It’s all about building the sticky relationship with the end customer and then selling them the products when any need arises for a mortgage and they already have the customer,” said Bhattacharya. “If they come to Rocket, their customer acquisition costs are really low and their margins are high, that’s their business strategy.”

With a larger top of the funnel and a lower client acquisition cost, higher conversion through deeper client insights and personalized offerings, and client retention with increased lifetime value, Rocket has a significant advantage over others in the space.

Jay Farner, CEO of Rocket Companies

The most recent example of that effort is the launch of Rocket Rewards, a loyalty program that distributes points toward financial transactions across the Rocket platform for potential homebuyers. In turn, homebuyers can use points to get discounts in their closing costs in the future.  

At the vanguard of Rocket’s efforts to be defined as a fintech is Rocket Money, the latest addition to the Rocket portfolio. Formerly known as Truebill — a personal finance app that helps people split bills and cancel subscriptions — Rocket acquired the business in December 2021. Rocket wants to use the app to acquire leads for the mortgage origination business at a lower customer acquisition cost.

“With a larger top of the funnel and a lower client acquisition cost, higher conversion through deeper client insights and personalized offerings, and client retention with increased lifetime value, Rocket has a significant advantage over others in the space,”Jay Farner, CEO of Rocket Companies, told analysts during its earnings call of Rocket’s long term strategy.

“As we see rates shift and adjust, if there’s an opportunity to help folks, we’re not marketing to a 2.5 million client base, we’re marketing to a 10 million client base, and that’s the vision of what we’re creating,” Farner said.

Rocket declined to make any executives available for interviews and referred to the third quarter earnings call for any details on Rocket Companies future plans. 

Despite Rocket’s ambitions, it’s likely going to take a couple of quarters before the lender returns to profitability.

“Considering how far origination demand has fallen and the significant consolidation that has occurred in the space, we believe Rocket will continue to produce slightly negative operating earnings for the next couple of quarters (absent a sharp drop in rates),” analysts at Piper Sandler wrote in a report following Rocket’s third quarter earnings.

“With the mortgage industry heading into the winter months, we might be going into a recession, one of the most profound turnarounds,” Brian Hale, founder and CEO at Mortgage Advisory Partners, said of upcoming market prospects. “Everybody (every lender) is going to have a black eye here. It’s not a lack of desire for loans, the loans don’t exist.”

As with all companies, businesses must adapt to the changing times. Rocket is really trying to redefine themselves as a fintech provider not just a mortgage company, said Heal, of Argus Research. 

“It’s yet to be seen if that strategy has yet to work out,” he said. 

That is not to say that Rocket doesn’t have advanced technology, Bhattachary added. “They have a lot of investment going on and a lot of innovation going on” in its customer acquisition channel.

“The trick,” she said, “is to stay around and be around when the market changes and the cycle turns around. Then we’ll see who is in a better position and why.”

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