Kevin Peranio on meeting the challenges of lending in this market

Inside Rocket’s strategy to win when the market turns

In an interview with HousingWire, Bob Walters and Tim Birkmeier talk M&A opportunities, the state of the market and the lender's "bank-like" strategy to gain new business

Rocket Mortgage‘s top executives believe the mortgage market is near the bottom, which means a recovery may be on the horizon soon. 

“If we’re at historic refinance lows and if we’re at secular purchase lows, you largely can paint a picture over the coming years that we’ll see both of those expand. So yes, we’re toward the bottom in that,” Bob Walters, CEO at Rocket Mortgage and president and COO at Rocket Companies, said. 

How does it change the company strategy? 

With regard to the mortgage business, Walters said the company will be competitive in pricing and opportunistic on M&A deals since some competitors are struggling and excess capacity is exiting the industry. Meanwhile, Rocket is as committed as ever to becoming a fintech company and reducing its customer acquisition cost by adding more consumer-focused products, such as the app Rocket Money.

“In some ways, the strategy is similar to a bank, but it’s quite different in other ways. Because the end game for us is to provide the mortgage and we want to provide it well. For most banks, it may be an afterthought. They’re pursuing deposits. We’re all-in on mortgages,” Tim Birkmeier, president at Rocket Mortgage, said. 

In an interview with HousingWire at the company’s Detroit offices last week, Walters and Birkmeier offered new details into the company’s strategy. 

This interview has been condensed and lightly edited for clarity.

Flávia Furlan Nunes: Where is Rocket in its journey of becoming a fintech and reducing the cost to acquire a client?

Bob Walters: We’ve repositioned and added many more products that our clients can take advantage of. We’re becoming a holistic solution as it pertains to financial services. Because one of the challenges for our business ­– mortgages – is it’s an infrequent purchase. You may get a mortgage once every 10 years. As such, there are two challenges: you’re not revisiting those clients as often as you would like and it’s expensive to acquire new clients.

So, for us, there’s this mutually beneficial reality that takes place when we have products like Rocket Money. Many people, especially if they have multiple accounts, don’t always have a real day-to-day understanding of what’s happening from a cash-flow perspective. That’s always relevant day in and day out to 2 million Rocket Money clients. A credit card is always relevant. And if you can have a credit card with benefits, cash back and, even more, the option to offset closing costs, that’s valuable. Then you add 2.5 million service clients that make almost half a trillion dollars of mortgage balances and you see a picture of a fintech powerhouse emerging.

Rocket Money has been acquired and doubled in size in the last 18 months. There are different client acquisition costs based on different products. If we pay for a lead, it costs X dollars. If a client is in the Rocket Money ecosystem, the acquisition cost is zero. If you’re a baseball fan, there are nine innings in baseball. I’d say we’re in the seventh inning. 

Nunes: Rocket paid $1.275 billion for Truebill, now Rocket Money. Has it already paid off?

Tim Birkmeier: Whether or not we believe that Rocket Money has paid off, Rocket Money will pay off. The majority of the people who visit there are relatively young. Many are not yet homebuyers, which is fine. We primarily purchase Rocket Money to introduce us to clients further up the funnel. And that’s really what this has done. 

We have access to a lot of data. We want to help clients get ready to buy a house and there’s nothing better to do that than this budgeting tool. Also, visualize a world where many of these folks have now decided to buy a home with us. We monitor their mortgage rate because we know exactly what it is and where the market is at any given time. Now we have a unique way to communicate with them at a relatively low cost. Every day, we could let them know how much money they could save by refinancing their house. This is not just an opportunity for a one-time client. This is an opportunity to do multiple transactions. 

In some ways, the strategy is similar to a bank, but it’s quite different in other ways. Because the end game for us is to provide the mortgage and we want to provide it well. For most banks, it may be an afterthought. They’re pursuing deposits. We’re all-in on mortgages.

Nunes: How relevant will all these other businesses be to the company? Do you consider adding more services and products organically or by mergers and acquisitions? 

Walters: Mortgage is still the flagship and a huge component. We won’t get into the cotton candy business. But we’ll continue to invest in areas where it makes sense for clients. 

Both are the answers [Rocket will add solutions organically and via M&As]. We have a couple thousand technologists. Many of them are software engineers building things. But with Rocket Money, we see the value of buying things. You’re not only buying the product. You’re also buying smart, talented people who built that product and learning from those folks. 

And that’s also where our balance sheet comes into play [Rocket had $900 million in cash at the end of March]. We’re very fortunate when you look at our balance sheet, cash position, and ability to use stock as currency. We’re in a position to take advantage, especially in the mortgage space. It’s been a challenging year or two. That’s the sad part of it. The good part is that if you have this balance sheet, you can take advantage and be opportunistic when things may become cheap.

Nunes: Where are we in the mortgage market cycle? And relatedly, what’s Rocket’s priority now: profitability or market share?

Walters: If we’re not at or near a bottom, we’re getting close. Refinancing activities are at 20-year lows. No matter how high the interest rates go, there is a systemic need for cash-out refinances and other things independent of interest rates. And then with purchases, this is a down year for a couple of reasons: interest rates have risen, home values have risen, and supply is low. I don’t see them getting worse. They will gradually get better. So, if we’re at historic refinance lows and if we’re at secular purchase lows, you largely can paint a picture over the coming years that we’ll see both of those expand. So yes, we’re toward the bottom in that. 

The other thing is that capacity in our industry grew tremendously during the pandemic. That is coming out. It’s painful. And we’re even seeing an acceleration of companies that are either going under, consolidating, people exiting the industry. Things will continue to get better going into the future. So, it is still difficult. 

I always think about long-term enterprise value, meaning volume – for volume’s sake – that has no value. But we’re also not like: “Oh, it’s just how much money we’ll make tomorrow.” In business, money and numbers follow delighted clients. 

Birkmeier: If you believe the MBA [Mortgage Bankers Association] projections, and they’re prone to change, we will probably have a $1.8 trillion market this year, with activity probably picking up in the fourth quarter to next year at a $2.2-$2.3 trillion market. But also exciting is you go from maybe $300 billion in refinance volume to $600 billion or $650 billion. So if we’re not at the bottom, we got to be pretty close.

There are folks out there cutting to the bone. They’re going to pay a price for that at some point. We talked about all the things representing a massive investment: technologists, product strategists, and people working to bring forth Rocket Money. These are world-class technologies, world-class capabilities that don’t come cheap. But if you think about the long-term value of a company, then you think differently about the exact headcount relative to the way other places may think about it.

Nunes: What can we expect from Rocket in terms of price?

Walters: Certainly, in any industry, when things get challenging, people often lean towards price. And we saw that now, it got difficult. That’s where I go back to our balance sheet. We’re going to be competitive. Margin pressure is still high. It’s abated some. But it still takes a while. That’s where I talked about capacity in the industry that continues to come out. We’re starting to see it now. A lot of people were hesitant to capitulate. But you’ve seen companies sell. You saw Homepoint, for example, sold their operations to The Loan Store. Other people are downsizing substantially. Many companies have 10% of the employees they had two years ago. It’s only a matter of time before many of those exit the industry. That’s a natural cleansing that takes place. 

Nunes: Is the banking crisis over?

Walters: The financial crisis was about bad loans – loans that were improperly made that ended up defaulting. The problem that some banks have today is about mismatches: their deposits are at a higher rate than their investments because the Federal Reserve raised rates so quickly in one year. Plus, some of these banks have highly concentrated deposits. From our perspective, the backbone is Fannie Mae, Freddie Mac, and Ginnie Mae. Those are rock-solid data that there’s no concern. 

Regarding our financing sources, we’ve worked tirelessly over the last 13-14 years to diversify those funding sources. So quite frankly, if things were to get worse – and I don’t want that to happen by any means – the effect actually would be positive because there’s a high likelihood that you’ll see long-term interest rates fall in response, which would be beneficial to us and to people getting mortgages.  

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