Rocket Mortgage prepares for a slowdown

Lender expects originations to fall below $90B in Q2 and profit margins below 300 bps

Rocket Mortgage originated more than $100 billion in mortgages for yet another quarter, but profit margins are trending down. And the country’s largest mortgage lender expects a good-sized slowdown in the second quarter of 2021.

All told, the Detroit lending powerhouse originated $103.6 billion in closed loans in the first quarter of 2020, more than double its originations in Q1 2020. Rocket also reported net income of $2.77 billion, a dramatic increase from the $99 million in profit the first quarter of 2020. And revenue was $4 billion, well above the $2.1 billion in the first quarter of 2020.

“The combination of our technology platform and Rocket Cloud Force of highly trained professionals, continues to deliver scalability and a client experience that is unmatched,” CEO Jay Farner said in a statement Thursday. “In fact, this was the sixth consecutive quarter where our team was able to double the company’s home loan volume year-over-year.”

But like virtually all mortgage lenders of late, the uptick in interest rates and the weight of a larger workforce has dragged down profits. Rocket’s gain-on-sale margin in the first quarter checked in at 3.74%, a 67-basis point decline from the 4.41% margin recorded in the fourth quarter and a 78 bps decline from the third quarter of 2020. Expenses rose to $1.74 billion, up from about $1.26 billion in the first quarter a year ago.

In the second quarter, Rocket is forecasting closed loan volume of between $82.5 billion and $87.5 billion and net rate lock volume of between $81.5 billion and $88.5 billion. Gain on sale margins are projected to slip to between 2.65% and 2.95%.

According to its earnings statement, Rocket Morgage’s direct-to-consumer segment continued to represent the bulk of the company’s business in the first quarter. The DTC segment captured $65 billion in originations in Q1, up from $31.7 billion a year prior. Its gain-on-sale margin in DTC was 5.36%, up from 4.69%.

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Observers, however, were probably more interested in how its other mortgage segment did in the first quarter, given its battle with arch-rival United Wholesale Mortgage, which in early March forced mortgage brokers to choose whether it would work with Rocket or UWM.

Rocket Mortgage’s partner network, which includes mortgage brokers and referral deals with corporate partners, doubled its funded loan volume from a year prior. Rocket originated $40.7 billion through its TPO channel, and its gain-on-sale margin was 1.93%, up from 0.79% in Q1 2020. Net revenue was $722 million, with a contribution margin at $543 million. How the segment – which is a major driver of purchase revenue and is less sensitive to interest rate increases – does in the second quarter will be of great interest to analysts and investors.

One other interesting development is the growth in its Rocket Pro Insight program, which gives real estate agents insight into their clients’ mortgage process. Over 45,000 real estate agents have signed up, the company said in its earnings statement, a 220% increase from Dec. 31, 2020.

At the close of the New York Stock Exchange on Wednesday, Rocket’s stock was trading at $22.80, up 1.38% from the prior day.

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