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After racking up nearly $1 billion in losses over two consecutive quarters, Rocket Companies returned to profitability during the spring homebuying season by slashing costs and boosting its share of the purchase loan market in the face of severe inventory shortages.

While second-quarter mortgage originations fell 35 percent from a year ago to $22.3 billion, the Detroit-based mortgage giant managed to cut expenses by 16 percent over the same period, to $1.1 billion. That allowed Rocket to report $139 million in Q2 net income Thursday as adjusted revenue came in above previous guidance at $1 billion.

Bill Emerson

“We remain encouraged by the fact that consumer demand for homes continues to be robust, and we’re seeing a healthy purchase pipeline,” interim CEO Bill Emerson said on a call with investment analysts. “People just want to buy homes. That said, at the macro level, the inventory and affordability challenges consumers experienced in the first quarter persists.”

Shares in Rocket, which have traded for as little as $5.97 over the last year, briefly touched a new 52-week high of $11.54 Friday before closing at $11.18, up 10 percent from Thursday’s close.

Rocket executives said they expect Q3 adjusted revenue to come in between $850 million to $1.0 billion, with home sales facing continued headwinds.

“According to the National Association of Realtors, May 2023 home inventory was roughly one quarter that of May of 2007,” Emerson said. “Let that sink in for a second. While there are no quick fixes to low inventory and affordability issues in the industry, we see these market challenges as an opportunity to offer innovative solutions to help our clients during this time.”

In April, Rocket announced it would offer homebuyers a closing credit of up to $10,000 if they work with a real estate agent that’s partnered with sister company Rocket Homes. Emerson said the BUY+ program “has resonated strongly with first-time homebuyers, home sellers and real estate agents.”

A collaboration between Rocket Mortgage and Rocket Homes, Rocket’s home search platform and real estate agent referral network, the BUY+ program “has far surpassed our initial expectations on lead generation,” he said.

In May, Rocket rolled out ONE+, a new 1% down mortgage targeted at low- to moderate-income homebuyers that also picks up the tab for private mortgage insurance.

Emerson said ONE+ builds on a client engagement program Rocket launched last year that revolves around the company’s personal finance app, Rocket Money, and programs like Rocket Rewards and a Rocket Visa Signature Card that promise to help consumers become homeowners.

Rocket acquired the personal finance app Truebill in 2021 for $1.27 billion and rebranded it as Rocket Money last year, as part of a plan to cross-market financial services and realize the full “lifetime value” of the customer.

Emerson said that at the end of June, Rocket was managing 29.3 million consumer accounts, an increase of nearly 2 million from March 30, “with Rocket Money continuing to lead the way.”

Rocket’s client engagement program “can meaningfully change our business model, broadening Rocket’s acquisition channels, lowering client acquisition costs and lifting conversion through the data insights we get,” Emerson said.

Rocket’s client engagement programs

Source: Rocket Companies investor presentation

In addition to the $13,500 in revenue Rocket expects to earn by originating and servicing a $300,000 mortgage, the company may also earn $3,000 in real estate agent commissions through brokerage subsidiary Rocket Homes and $1,500 in title and closing revenue through its Amrock subsidiary.

Brian Brown

“With Buy Plus, purchase clients can save thousands of dollars in upfront costs if they work with the Rocket Homes partner real estate agent and obtain financing with Rocket Mortgage,” Chief Financial Officer and Treasurer Brian Brown said. “This is something that only Rocket can offer at scale through our integrated real estate and mortgage experience.

“In addition, because of our ability to capture the economics from both the real estate side and the mortgage side of the transaction, Rocket is uniquely positioned to provide consumers with meaningful savings on their closing costs.”

As part of its pivot to a financial technology company, Rocket this week announced that veteran fintech executive Varun Krishna will succeed Emerson as CEO on Sept. 5.

In addition to earning an annual base salary of $1.25 million and a target bonus equal to 150 percent of that, Krishna will be eligible to receive a one-time signing bonus of $2 million and up to $16.87 million in performance-based stock bonuses over three years, the company disclosed in a Thursday regulatory filing.

Emerson said Krishna was chosen with the help of a national search firm and “clearly rose to the top” as someone with “a great strategic vision for the organization” aligned with Rocket’s fintech goals “and the things that we’re looking to do as it relates to expanding our business and our platform and our ecosystem.”

Having racked up nearly $1 billion in losses during the last three months of 2022 and the first three months of 2023, Rocket continued to cut costs during Q2, trimming $150 million to $200 million in annual expenses through voluntary employee buyouts and by winding down unprofitable businesses.

Most of those savings will kick in later this year, with Rocket disclosing to investors that it will make cash payments of $50 to $60 million dollars to employees who have accepted buyouts through a “voluntary career transition program” launched in July, primarily in the third quarter of 2023.

On a call with investment analysts, Brown said Rocket Companies recently wound down operations at Rocket Auto, and that Rocket Solar has pivoted from investing in a sales platform for solar to only offering solar financing through the Rocket Loans platform. Rocket Auto now refers potential auto loan clients to Drivly and Rocket Solar sends traffic to Palmetto Solar LLC.

“Last year, we took out $3 billion of cost, over 40 percent of the cost structure came out,” Brown said. “This round was really about focusing on efficiency and focusing on prioritization.”

Rocket mortgage originations and market share

Source: Rocket Companies investor presentation

Rocket estimates that its market share peaked at nearly 8 percent during the refinancing boom of 2020 and 2021, falling to 5.9 percent last year as rising mortgage rates curbed refinancing. But Rocket claims it grew its market share in both the purchase and refinance markets last year.

While the company would not disclose specific numbers, Brown said Rocket’s claim to have built its share of the purchase loan market during the spring homebuying season was based on mortgage securitization data that covers 70 percent of the market and other sources, such as Optimal Blue and CoreLogic data.

Rocket Mortgage’s direct to consumer channel, which includes consumers who take out loans from Rocket online, reported $12.45 billion in Q2 sold loan volume, down 36 percent from a year ago. Gain on sale market dropped to 3.67 percent, down from 4.17 percent a year ago, but contribution margin (adjusted revenue minus expenses) increased 10 percent to $253 million.

For the year to date, direct to consumer sold loan volume was down 62 percent, to $21.3 billion. The segment generated $458 million in contribution margins, down 46 percent from $856 million in the first half of 2022.

Rocket’s partner network — which includes mortgage brokers and lenders who refer clients to Rocket Mortgage — saw Q2 sold loan volume drop by 29 percent from a year ago to $9.57 billion. With gain on sale margin falling from 1.29 percent to 0.93 percent, the partner network generated $63 million in contribution margin (adjusted revenue minus expenses), down 23 percent from Q2 2022.

For the year to date, partner network sold loan volume was down 59 percent to $16.1 billion, and the segment generated $89 million in profits, down 65 percent from $253 million in the first half of 2022.

“As we think about Q3, I can tell you we’re one-third of the way through the quarter as we sit here and talk to you today and the trends are very consistent, particularly on the purchase side with what we saw in Q2,” Brown said. “So that’s the good news. The challenge comes back to the inventory levels.”

Brown said Rocket’s guidance that Q3 adjusted revenue is unlikely to exceed Q2 reflects that company executives are “very confident in our execution and our internal performance, but the inventory levels do give us pause as we look into the third quarter.”

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Email Matt Carter

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