Despite some recent relief from mortgage rates, top executives at the parent of Rocket Mortgage continue to expect a challenging landscape for the industry in the coming months, mainly due to regulatory changes, low affordability levels and consolidation.
What will be their playbook? Leaders at the Detroit-based Rocket Companies say they will continue to invest in artificial intelligence (AI) to gain operational efficiency and grow their servicing portfolio, creating opportunities for refinances and home equity loans down the road. They will also keep chasing purchase market share.
“We’re navigating through challenging times, and unpredictability is the new normal,” Varun Krishna, CEO and director of Rocket Companies, told analysts Thursday on a second-quarter earnings call. “Despite some signs of a gradual recovery in home listings, sales affordability remains at historic lows due to persistently high mortgage rates and rising home prices.”
In this context, the company delivered a GAAP net income of $178 million from April to June, lower than its $291 million profit in the first quarter of 2024 but higher than the $139 million profit in Q2 2023, per filings with the Securities and Exchange Commission (SEC). Adjusted earnings, which excludes non-cash expenses and one-time charges, reached $255 million in Q2 2024, the company’s highest profit in two years.
This resulted from Rocket’s adjusted revenues reaching $1.3 billion in the second quarter, compared to $1.38 billion in Q1 2024 and $1.23 billion in the same period last year. Meanwhile, the company’s expenses in Q2 2024 increased to $1.1 billion, up from the previous quarter’s $1.08 billion and $1.09 billion in the same quarter last year.
Krishna said that the industry experienced weak homebuying activity during the spring, with purchase applications dropping to their lowest level in over three decades due to macroeconomic uncertainty and affordability issues that kept potential buyers on the sidelines. Smaller mortgage players are being acquired or exiting the market, and employment has decreased by 36% from its peak.
“Whether it’s the capacity coming out of the industry, the increased regulation of things like Basel III, just a dynamic of fragmentation and consolidation, or AI paradigm shift that we’re all going through, these are important dynamics that will determine winners and losers in the space.“ Krishna said. “And we feel confident that they will benefit us disproportionately.”
Rocket originated $24.6 billion in mortgages in Q2 2024, up from $20.2 billion in the previous quarter and $22.3 billion in Q2 2023. Gain-on-sale margins for Q2 2024 were 299 basis points, down from the prior quarter’s 311 bps. But this was better than the 267 bps figure in Q2 2023 — and according to Rocket executives, this improvement can be attributed to its capital markets team and capacity exiting the industry.
By channel, Rocket reported $13 billion in closed loans from April through June via its direct-to-consumer channel and $11.3 billion through its third-party originator (TPO) channel, its conduit to mortgage brokers that has historically been a stronger source of purchase business.
The company doesn’t break out purchase business versus refinances in its earnings reports. But Krishna said Rocket grew its “purchase market share year over year by making continuous improvements across our processes, teams, marketing and technology.”
Growth in servicing assets
The company’s servicing portfolio, including subserviced loans, had an unpaid principal balance (UPB) of $534.6 billion at the end of the second quarter. Rocket serviced 2.6 million loans, generating about $1.4 billion in annual fee income.
Like its peers, Rocket has been actively acquiring servicing assets at higher coupon rates to create refinance and home equity opportunities when rates decline. In the second quarter, it added $20.8 billion in UPB to its portfolio for a total consideration of $315 million.
“We’re retaining clients for the next transaction at rates three times higher than the industry average, positioning ourselves as their lender for life and generating recurring cash flow without additional acquisition costs,” Krishna said. “We’re going to keep growing our servicing portfolio.”
The company appointed Shawn Malhotra as its first chief technology officer during the quarter. In June, it launched MSR audit automation, a workflow system that streamlines the loan onboarding process, allowing capital markets teams to complete audits of mortgage servicing rights in half the time.
Looking forward, executives said the company expects the mortgage market in Q3 2024 to mirror the conditions of Q2. Rocket provided guidance for adjusted revenue of $1.15 billion to $1.3 billion in the third quarter. Operational expenses are expected to remain flat.
Rocket’s total liquidity was $8.6 billion as of June 30, including $1.3 billion of cash on the balance sheet.