Rocket reports financial loss as production slumps in Q3

Rocket is likely to lose title as America's largest mortgage lender

Rocket Companies, the parent of Rocket Mortgage, lost money in the third quarter and also appears to have lost its title as America’s largest mortgage originator.

Rocket originated $25.6 billion in mortgage volume in the third quarter, which was 71% lower than the $88 billion in volume it produced in the same period last year, when refinancing business was still plentiful.

It’s a dramatic production decline for a company that last year originated $351 billion in total volume — racking up more than double the refi volume of any lender.

But that was then, and this is now. Inflation and a sharp spike in mortgage rates has rapidly cooled down demand for the lender’s bread-and-butter mortgage products, and several of its chief rivals have performed better in originating purchase business due to their stronger ties to real estate agents.

Chief among them is United Wholesale Mortgage, which is expected on Friday to report origination volume north of $30 million in the third quarter. If that happens, Rocket will be America’s second-largest lender for the first time since the third quarter of 2017.

The Detroit-headquartered lender reported an adjusted net loss of $166 million in the third quarter, posting its first unprofitable quarter since going public.

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The reason was simple – expense cuts didn’t offset revenue. Rocket’s revenue dropped 58% to $1.295 billion from a year ago, while its expenses declined 30% to $1.188 billion during the same period, its Q3 earnings report shows.

Executives on the earnings call acknowledged the challenge.

At a time when “housing affordability is at a 30-year low and weakening consumer sentiment is leading to a rapidly deteriorating home purchase market,” Jay Farner, CEO of Rocket Companies, said further consolidation is expected in the industry.

Farner and Brian Brown, Rocket’s incoming CFO, on the call didn’t speak much to the quarterly decline. Instead, they emphasized the long game – making major capital investments into its Rocket platform of 24 million users. 

In September, Rocket launched its “Inflation Busters” rate buydown product, which reduces homebuyers’ monthly payments by one percentage point for the first year of their loan.

“In a market like today’s, you’re going to have to engage with clients who are six months, 12 months, 18 months away from finding their home,” Farner said. “Rocket Money, Rocket Rewards will lead us into origination but then also the servicing component of this.”

Rocket, which has fashioned itself as a fintech since its march toward the August 2020 IPO, acquired the personal finance app Truebill in December 2021. Rocket Rewards is the company’s newly launched loyalty program that distributes points toward financial transactions across the Rocket Platform for potential homebuyers who can, in turn, use points to get discounts in their closing costs in the future. 

Within the first 72 hours of its launch on Nov. 1, more than 70 million points were awarded to both new and existing Rocket clients for completing over 17,000 activities, Farner said.

For the time being, expenses are a top priority for management.

In the third quarter, the firm reduced expenses to more than $100 million to  $1.188 billion from the previous quarter – cutting its costs by more than $2 billion over the past 12 months, largely through voluntary staff buyouts and attrition. The company expects a further cut of around $50 million and $100 million from the third quarter in the last three months of 2022.

With interest rates still highly elevated, executives will take some solace from the servicing portfolio, which was a bright side in the third quarter. The unpaid principal balance in its servicing book rose 2% year-over-year to $531 billion as of September 31. Rocket has 2.5 million clients in the servicing portfolio and generates an annual $1.4 billion in recurring servicing fee income. 

The mortgage origination business, however, is expected to decline even further in the fourth quarter. Rocket is projecting closed loan volume in the range of $17 billion to $22 billion, with gain on sale margins between 230 and 260 basis points (the overall GOS came in at 269 bps in Q3).

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