Rocket Mortgage’s profit drops dramatically in Q2 2022

Lender's net income fell posted $1 billion in profits just a quarter ago

Rocket Companies, the parent of America’s top mortgage lender Rocket Mortgage, reported a $60 million profit in the second quarter, down dramatically from $1 billion just the previous quarter. Company executives attributed the sharp decline to a stronger than expected drop in purchase business.

The stunning decline in profitability suggests Rocket has much work to do in a tough market as higher mortgage rates wipe out refinancing opportunities and even depress purchase deals. To boot, its strategy to add new products and services hasn’t been enough to offset the decline in origination volume. 

Jay Farner, vice chairman and CEO of Rocket Companies, said the company introduced new lending programs, forged new mortgage partnerships, launched the solar business and expanded the brand to Canada during the quarter. “These moves provide us immediate opportunities today, and a tremendous runway for growth and expansion well into the future,” he said. 

In the short term, however, Rocket, like every one of its peers, is navigating one of the most challenging mortgage markets in memory. Rocket originated $34.5 billion in mortgages in the second quarter, at the low end of the company’s guidance, and a big drop from the $53.8 billion in volume it notched in the first quarter. The gain-on-sale margin also fell to 2.92% in the second quarter from 3.01% in the first quarter.

A year ago, when refinancings were plentiful, Rocket originated $83.7 billion in volume, numbers no rival could come close to approaching.

“The purchase market was more muted than we expected in the second quarter, impacted by affordability and inventory challenges,” Farner said in a call Thursday with investors and analysts. 

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Though Rocket generated $1.4 billion in revenue in the second quarter, that was down from $2.671 billion in the prior quarter.

By channel, Rocket reported $19.53 billion in sold loans through its direct-to-consumer channel and $13.58 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.)

Executives said volume is going to continue to plummet in the next quarter. The company forecasts closed loan volume in the third quarter between $23 billion and $28 billion, with gain-on-sale margins between 2.50% and 2.80%.

Rocket is heavily focused on managing costs, executives said. Total expenses dropped from $1.6 billion a year ago to $1.3 billion in the second quarter of 2022.

CFO Julie Booth told analysts that Rocket’s “core business will continue to face headwinds” in the third quarter, when the company expects to cut at least $50 million in costs, for example, through renegotiations with vendors and other contracts. 

The company’s strategy is to add products and services as new sources of revenue. Rocket now offers home equity and loans to clients who want to install solar panels. According to executives, the idea is to keep these loans on the balance sheet for a short period, selling them in the secondary market. 

New clients can be attracted via Rocket Money, the new name for the app Truebill acquired in December for $1.275 billion, which surpassed 2 million paying premium members. 

New clients are also coming through new partnerships. In July, Rocket Mortgage signed an agreement to originate mortgages for Santander clients, a bank that announced in February to stop originating mortgages in the U.S but still has 2.2 million customers with other products and services.

In another deal, Rocket will enable regional banks and credit unions to offer mortgages through Q2, a banking platform leader that provides digital banking applications to over 500 financial institutions.  

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