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Rocket says it’s preparing for further declines in mortgage profits

The nation’s biggest mortgage lender, Rocket Companies Inc., says rising interest rates took a deep bite out of first-quarter profits as its profitable refinancing business largely dried up, with further declines expected this quarter.

Although the Detroit-based lender managed to eke out a $1.037 billion first-quarter profit, that’s down 63 percent from a year ago, when the refi boom helped Rocket generate $2.78 billion in net income. First-quarter revenue declined 41 percent over the same period, to $2.67 billion, the company said.

In reporting first-quarter earnings Tuesday, Rocket outlined steps it’s taking to weather mortgage industry headwinds — including shedding thousands of employees through voluntary buyouts and growing its mortgage servicing portfolio.

With rising mortgage rates taking a toll on the company’s highly profitable refinancing business, Rocket closed $54 billion in loans during the first quarter, a 49 percent drop from a year ago.

Purchase loan volume was up 43 percent from a year ago, helping shore up the bottom line. But purchase loans aren’t as profitable as refis, and first quarter gain-on-sale margins dropped to 3.01 percent, down from 3.74 percent a year ago.

Rocket expects loan production to slip further during the second quarter, to between $35 billion and $40 billion in closed loan volume, with gain-on-sale margins of 2.60 percent to 2.90 percent.

Rocket CEO Jay Farner said that as it navigates the slowdown in the mortgage business, the company is intent on “protecting our margin and profitability while continuing to invest in strategic areas such as technology, partnerships and performance marketing to grow share and expand our business for the long term.”

Last month Rocket made buyout offers to approximately 2,000 workers at subsidiaries Rocket Mortgage and Amrock that included several months of compensation, six months of health coverage, payment for banked time off and early vesting of stock incentives.

On a call with investment analysts, Rocket CFO Julie Booth said the “voluntary career transition program” is expected to save the company approximately $180 million a year. She said Rocket expects second-quarter expenses to total about $1.4 billion, a $200 million reduction from the first quarter, which includes $100 million in reduced production expenses.

In addition to buyouts, Farner said Rocket has been renegotiating large vendor contracts, and “shifting our marketing spend. We continue to review every aspect of our cost structure and are committed to running an efficient and effective business.”

Further bolstering the company’s bottom line, Rocket has grown its mortgage servicing portfolio by 17 percent from a year ago, to $546 billion. The company is now earning $1.4 billion in annual servicing fees for collecting payments from 2.6 million borrowers. Rising interest rates make it less likely borrowers will refinance, increasing the value of that portfolio, Booth said.

An eye to the future

As mortgage profits have declined, Rocket executives have been emphasizing the value of the company’s other lines of business, and the potential to take market share away from competitors. Since announcing the $1.27 billion acquisition of personal finance app Truebill in December, Rocket has been positioning itself as a fintech platform with a stable of personal finance and consumer technology brands that includes Rocket Mortgage, Rocket Homes, Rocket Loans, Rocket Auto and Amrock.

Farner said Rocket employees who work on strategy, technology and marketing are “working on things that will grow out our technology platform to serve consumers far beyond mortgage,” which the company will continue to invest in.

“The more clients that we engage with and bring into our ecosystem at higher interest rates, the more people we will be able to help when interest rates fall. And I don’t need to explain that to you — just go back and look at ’20 and ’21 to see what our company is capable of when we see a reduction in interest rates. Now magnify that by continuing to have other services — Truebill, Rocket Homes, Rocket Auto — we’re engaging with clients, and we’re setting ourselves up to have relationships with those clients, and data about those clients, so we can assist them in the future.”

Rocket reported that as of March 31, Truebill’s member base has grown to 3.4 million, up 142 percent in the last year, with premium members more than doubling, to 1.7 million.

Real estate agents affiliated or partnered with Rocket’s real estate agent network, Rocket Homes, were involved in a record 8,200 real estate transactions valued at $2 billion during the first three months of 2022, the company said, a more than twofold increase from a year ago. Monthly active users also more than doubled, to 2.8 million.

In addition, about 85,000 real estate agents have signed up for Rocket Pro Insight (RPI), a digital platform Rocket created to help real estate agents participate in the mortgage process from application to closing.

“While we expect challenging times ahead, there are bright spots in industry,” Farner said. “Home values have risen to new highs, creating $26 trillion of available equity. Home buying demand remains strong, particularly from first time homebuyers and millennials, currently the largest generation by population.”

Farner said 75 percent of Rocket clients who use the company’s online platform or app are first-time homebuyers or millennials, and that the company was “the nation’s largest leder to first-time homebuyers in 2021.”

Beyond purchase loans, “this client pool represents a tremendous future opportunity when the market is once again ripe for rate and term refinances,” Farner said.

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Email Matt Carter