Thursday, December 1 2022

Rocket companiesthe parent of rocket mortgagelost money in the third quarter and also appears to have lost its title as the largest mortgage originator in the United States.

Rocket originated $25.6 billion in mortgage volume in the third quarter, down 71% from the $88 billion volume it generated in the same period last year, when refinancing were still plentiful.

This is a dramatic drop in production for a company that generated total volume of $351 billion last year – accumulating more than double the refi volume of any lender.

But that was then, and this is now. Inflation and a sharp rise in mortgage rates quickly dampened demand for the lender’s key mortgage products, and several of its main rivals performed better in original buying activity due to their closer ties to real estate agents.

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

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

The reason was simple: spending cuts did not offset revenue. Rocket’s revenue fell 58% to $1.295 billion from a year ago, while its expenses fell 30% to $1.188 billion in the same period, according to its earnings report of the third trimester.

Leaders on the earnings call acknowledged the challenge.

At a time when “housing affordability is at a 30-year low and weakening consumer confidence is causing the home buying market to deteriorate rapidly,” Jay Farner, CEO of Rocket Companies, said said further consolidation was expected in the sector.

Farner and Brian Brown, Rocket’s incoming CFO, on the call didn’t say much about the quarterly decline. Instead, they’ve focused on the long term – making significant capital investments in its 24 million user Rocket platform.

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

“In a market like today, you’re going to have to engage with customers who are six months, 12 months, 18 months away from finding their home,” Farner said. “Rocket Money, Rocket Rewards will take us to origination, but also to the service component of that.”

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

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

For now, spending is a top priority for management.

In the third quarter, the company cut spending by more than $100 million to $1.188 billion from the prior quarter, cutting costs by more than $2 billion over the past 12 months, largely due voluntary buyouts and attrition. The company expects a further reduction of around $50 million and $100 million from the third quarter of the last three months of 2022.

With interest rates still very high, managers will draw some comfort from the management portfolio, which was a good side in the third quarter. The outstanding principal balance of its services portfolio increased 2% year-over-year to $531 billion as of September 31. Rocket has 2.5 million customers in the service portfolio and generates $1.4 billion in annual revenue in recurring service fee revenue.

Mortgage origination activity, however, is expected to decline further in the fourth quarter. Rocket forecasts closed loan volume of between $17 billion and $22 billion, with a gain on selling margins of between 230 and 260 basis points (overall GOS was 269 basis points in the third quarter).

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