Elevated mortgage rates hurt Rocket Companies, the parent of Rocket Mortgage, again in the first quarter of 2023. Rocket has been cutting expenses and targeting purchase business, but the firm was unable to achieve profitability in Q1 in a shrinking mortgage market.
The Detroit-headquartered lender sustained a $111 million adjusted net income loss in the first quarter, following a $197 million loss in the fourth quarter. The company’s GAAP net loss in Q1 was $411 million, a decline from 2022 Q4’s $493 million.
“Rocket delivered solid results in the first quarter in the backdrop of an uncertain macro environment. Adjusted revenue exceeded the top end of our guidance, driven by healthy client demand and strong execution,” Jay Farner, CEO of Rocket Companies, said in a statement.
Farner, who is retiring at the end of the quarter, said that Rocket’s purchase pipeline has grown in the second quarter. He also acknowledged that low inventory and poor housing affordability still present challenges.
Rocket originated $17 billion in mortgages in the first three months of 2023, a 10.5% decline from $19 billion in Q4 2022. The first quarter production also represents a whopping 67% drop compared to the same period in 2022.
By channel, Rocket reported $8.8 billion in sold loans through its direct-to-consumer channel and $6.6 billion through its TPO channel, its conduit to mortgage brokers and historically a stronger source of purchase business. (The company doesn’t break out purchase business versus refinancings in its earnings reports.)
Capturing potential homebuyers
Executives emphasized the company is well positioned to target the purchase market through its client engagement programs – which includes Rocket Money, Rocket Rewards, Rocket Signature Card and the home buying plan.
“We now have multiple ways to acquire and engage our clients,” Brian Brown, CFO of Rocket Companies, told analysts.
“We believe this engagement will help grow our market share in purchase, as well as lower our client acquisition cost, meaningfully lift conversion from lead to close, increase retention and extend client lifetime value,” Brown added.
Most recently, Rocket launched a ‘Buy+ and Sell+ purchase initiative,’ a collaboration between Rocket Homes and Rocket Mortgage – its proprietary home search platform and real estate agent referral network business.
Through Rocket’s “Buy+ program, clients who obtain purchase financing from Rocket Mortgage and find a home with a Rocket Homes partner real estate agent, will receive a credit equal to 1.5% of their loan amount to put toward closing costs, helping defray upfront costs, the company said in April.
With SELL+, sellers listing their home for sale with a Rocket Homes Verified Partner Agent will receive a rebate check for 1% of the sale price from Rocket Homes after closing.
Rocket’s effort to attract buyers and homeowners in the first quarter includes the launch of its first credit card.
Those looking to buy a home can earn 5% back by using the Rocket Visa Signature Card for up to $8,000 that can be used toward closing costs and down payments. Homeowners who are making monthly mortgage payments to Rocket Mortgage can use their card points to receive 2% of their card spending toward their unpaid principal balance.
Heading towards profitability
Rocket reported net revenue of $666 million in the first quarter, an improvement from a total of $481 million in the final quarter of 2022. Revenue in the first quarter of 2022 was $2.7 billion. The company’s expenses climbed to $1.1 billion from the previous quarter’s $986 million.
After reducing expenses by 40% in 2022 – that involved offering voluntary buyouts and several rounds of layoffs – Brown said the company is heading toward the right direction of profitability.
“Looking at Q4 to Q1, we cut the operating loss in half. margins have improved from Q4 to Q1 fairly substantially to gain-on-sale margins that is and then we’ve guided up revenue from Q1 levels to Q2 levels,” Brown said.
Gain-on-sale margins posted in the first quarter were 239 basis points, up from 217 basis points in the previous quarter.
Rocket reported $8.1 billion in liquidity — including $900 million in cash — unchanged from the previous quarter.
The unpaid principal balance in its servicing book declined to $524.8 billion as of March 31, compared to $535 billion as of the fourth quarter of 2022. Rocket has 2.5 million clients and generates an annual $1.5 billion in recurring servicing fee income.
Regarding potential acquisitions, Rocket hinted at buying MSR portfolios. Wells Fargo recently put an MSR portfolio worth roughly $50 billion up for auction, but Rocket was outbid by Mr. Cooper, sources told HousingWire.
“When you’re thinking about purchasing an MSR, you have got to think about your cost to originate it (…) We became experts at producing a refinance transaction (…) So if you think about where you might put your dollars as you keep cracking that code, and you start seeing wins, much like I think we saw with refinance over the year,” Bob Walters, CEO of Rocket Mortgage, said on the Thursday earnings call.
“A strong place we will look is leveraging those wins that we find and being able to generate our own growing MSRs through the origination of purchase transactions,” Walters told analysts.
Looking ahead, Rocket expects to post an adjusted revenue between $850 million to $1 billion in the second quarter.
On an absolute dollar basis, Rocket expects Q2 expenses to be modestly higher than the first quarter, partly due to higher production, but also marketing spend for the launch of its signature credit card and nationwide Buy+ campaign.
“We need a little cooperation from the housing inventory in the backdrop of the market, but I think we’re doing everything right and we’re absolutely within striking distance,” Brown said.