Rocket’s earnings plummet, but its liquidity remains solid

The lender's cash on hand and lines of credit now total $8.3 billion

During this period of rising rates and general rate volatility, having the cash and credit lines on hand to ride out the rough patches in the market — known as liquidity — can be what separates the winners from the losers in the mortgage industry. 

Rocket Companies, the parent company of Rocket Mortgage, despite a less-than-impressive second-quarter earnings performance, appears to recognize that reality.

The nonbank lender boosted its liquidity significantly shortly after the end of the second quarter by adding a $1 billion credit facility secured by agency mortgage-servicing rights (MSRs), a recent filing with the U.S. Security and Exchange Commission (SEC) shows. The new lending pact supplements an existing $1 billion line of credit agreement with Citibank — resulting in a total $2 billion credit facility extended to Rocket by the bank.

Rocket indicates in the SEC filing that it plans to use the new $1 billion MSR-secured credit facility to fund servicer advances or future purchases of MSRs. 

The lender turned in a relatively anemic $60 million net profit for its recently ended second quarter on revenue of $1.39 billion — down from net income of $1 billion on total revenue of $2.7 billion for the same quarter in 2021. A good part of the reason the lender was able to stay in the black at all during the recently completed second quarter is that it shaved some $300 million off expenses, compared with the prior quarter.

A significant jump in the fair market value of MSRs on Rocket’s balance sheet, however, also helps to bolster the lender’s asset position, which creates more collateral for borrowings or potential income from future MSR sales — all of which can help to pump up Rocket’s liquidity. The fair market value of MSRs it controls increased by about $1.3 billion between the end of the fourth quarter of 2021 and the end of the second quarter of this year — going from $5.4 billion to $6.7 billion, SEC filings show

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The increased value is a reflection of the hot MSR market — given MSRs tend to rise in value as interest rates increase. That’s because mortgage refinancing activity plummets as rates rise, which extends the life of MSRs tied to existing loans.

“During this time of change in the industry, we are focused on operating our business with discipline. We reduced expenses by approximately $300 million during the second quarter and will continue to execute a prudent approach to cost management,” said Julie Booth, chief financial officer and treasurer for Rocket Companies, in comments included with Rocket’s recent earnings report filed with the SEC. “We are also investing our capital into the Rocket engagement and services platforms to expand our client base, drive higher conversion, and lower our client acquisition cost, setting the foundation for our next stage of growth.”

Having a strong liquidity position — via cash on hand and lines of credit — to navigate the ups and downs of a volatile rate environment is one necessary component for ensuring the lender has the cash flow to invest in growth. That can include using lines of credit to fund strategic acquisitions of additional MSRs, which produce income and are assets with value in the current market. In addition, MSRs also represent an important database of potential customers that can be mined to expand the lender’s product and borrower reach.

Rocket’s SEC filing indicates that it ended the second quarter of 2022 with a “strong liquidity position” at $7.3 billion, including $3.1 billion in corporate cash that can be used to self-fund loan originations, “a portion of which could be transferred to funding facilities” — specifically warehouse lines used to fund loan originations, Rocket’s earnings statement filed with the SEC states. In addition, the lender reports that it had $900 million in cash on-hand and a total of $3.3 billion of undrawn lines of credit — $200 million of which was in undrawn MSR lines.

“Subsequent [after] to June 30, 2022, [the end of the second quarter] our total liquidity has increased with the addition of our new $1 billion MSR facility,” Rocket’s SEC filing added. “On a pro forma basis, including this new MSR facility, total liquidity at June 30, 2022, would have been $8.3 billion, including cash on hand, corporate cash used to self-fund loan originations and undrawn lines of credit and undrawn MSR lines.”

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