MortgageReal Estate

Rocket Companies’ plan to transcend mortgage

With mortgage, title, appraisal, real estate and iBuying operations, the Detroit firm is ready to take on all-comers

Rocket Companies CEO Jay Farner

Rocket Companies is not content with merely being America’s largest lender. Its ambitions are far outsized, even for a firm with a reputation for taking moonshots.

In its quarterly earnings call on Thursday, CEO Jay Farner and CFO Julie Booth described a sophisticated company that has developed a product solution for every piece of the home-buying and home-selling ecosystem. Mortgage, title, appraisal, servicing, iBuying, real estate brokerage, green energy — the gamut.

In their idealized vision, a consumer would first find the perfect home through Rocket’s listings site. They’d then utilize the services of a real estate agent found through the growing Rocket Homes platform. A few hours after applying for a mortgage, the consumer would receive underwriting approval. Then comes the mortgage — which their agent would monitor through Rocket Pro Insight. When at the finish line, the client would close with the aid of Amrock, Rocket’s title and appraisal arm. A few years later, they might list the home for sale without an agent with the help of Rocket or refinance their mortgage and place solar panels on their roof.

They see it as a true differentiator to competitors that are generally not diversified, and, as a result, are more vulnerable to the cyclical cruelties of mortgage lending.

Booth offered up a scenario. Say a client is paying $300,000 for a new home, finances through Rocket’s direct-to-consumer mortgage company, and stays entirely within the Rocket constellation of home services. That would result in a 450-basis-point gain-on-sale margin and generate $13,500 in revenue, Booth told analysts on Thursday. Should the client use the Rocket Homes real estate network, Rocket would generate $3,000 in revenue, including a 1% commission. The title and escrow services would tally another $1,500 in revenue.

“When we think about the opportunities, that transaction would generate $18,000,” Booth said. “And it doesn’t stop there.”

In the earnings call, Farner and Booth repeatedly emphasized both the diversity of Rocket’s products as well as the opportunities they’ll realize when ambitious projects like iBuying and real estate brokerage — putting it on a collision course with Zillow, Opendoor, Compass, Realogy and others — are fully mobilized in 2022.

“Tech and marketing investments create a competitive advantage and a unique value proposition to the consumer that others are not able to provide,” Farner said.

The agent referral network of Rocket Homes, one of Rocket’s biggest plays, drove $2 billion in real estate transaction value, the company claimed. Though it’s not yet near the scale of iBuyer competitors, approximately 70% of Rocket Homes closings involve both an agent in the Rocket Homes real estate agent network and Rocket Mortgage. That “attach rate,” as it’s called, is in line with homebuilders.

While executives spoke at length about the exciting future ahead, comparatively little time was spent on the actual results of Q2 2021 and the projection for Q3 2021.

As executives had predicted, net income, mortgage originations volumes and gain-on-sale margins fell from the red-hot first quarter. In Q2 2021, Rocket posted $1 billion in net income, recorded closed loan volume of just under $84 billion, and saw gain-on-sale margins dip to 2.78%. That was down from a prior quarter in which Rocket made $2.77 billion in net income, originated $104 billion in closed loans and had margins of 3.74%.

Farner told analysts that Rocket’s purchase business was stronger than ever and they’re on their way to being the largest purchase retail lender in America. Their TPO business — which includes mortgage broker clients — increased to $30.1 billion in volume in Q2 (it’s worth noting that margins were a paltry 1.16%, likely in part due to its ongoing pricing war with rival United Wholesale Mortgage) and its direct-to-consumer business funded $48.9 billion in mortgages at a gain-on-sale margin of 4.66%.

For the third quarter, Rocket is forecasting between $82 billion and $87 billion in closed loan volume, with a gain-on-sale margin between 2.70% and 3.00%. That’s stronger than most competitors’ expectations, but still below the heights of earlier quarter.

At $17.47 a share, Rocket’s stock is “undervalued,” executives said on the call.

The company has been criticized by analysts and observers in the past for being heavily tilted toward refinancings. They pointed to originating more than $50 billion in purchase business in 2021, strategically getting clients earlier in the funnel. It will put them in line to be the largest retail purchase lender in America by the end of 2023, according to Farner.

“We are really the only organization that has put together every component required to streamline the purchase experience for anyone in America,” Farner said.

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