Rising interest rates have cooled its red hot refinancing business, but Rocket Mortgage says it’s on track to become the nation’s number one retail purchase loan originator by 2023 as it concentrates on winning more business with homebuyers.
The decline in Rocket’s more profitable refinancing business dented third quarter revenue and profits, but the company surpassed a record for purchase loan originations that it set just a quarter ago, during the spring homebuying season.
Rocket Cos. — the holding company for Rocket Mortgage, Rocket Homes, Amrock and Rocket Auto — posted third quarter net income of $1.39 billion, down 53 percent from a year ago. At $3.11 billion, revenue was also down 32 percent year over year.
At $88.05 billion, Rocket Mortgage’s closed loan origination volume was essentially unchanged from a year ago, when it closed $88.98 billion in loans. But with less profitable purchase loans making up a bigger part of the mix, gain on sale margin slipped from 4.52 percent to 3.05 percent.
Shares in Rocket were down by as much as 6.2 percent from Thursday’s closing price of $17.86, before making up some of that loss in afternoon trading to close at $17.20. Over the last year, shares in Rocket have traded for as much as $43, and as little as $14.94, as investors digest how rising interest rates will impact mortgage lenders.
On a call with investment analysts, Rocket CEO Jay Farner put a positive spin on the company’s third quarter results.
Jay Farner
“Not only did we set a record for purchase volume in the third quarter with both our direct-to-consumer and partner channels achieving all-time highs, but by the end of September, we had already originated more purchase volume than any full year prior,” Farner said. “This rapid growth in the purchase segment puts us well on our way to reaching our goal of becoming the number one retail purchase lender by 2023.”
Although Rocket Mortgage is the nation’s biggest mortgage lender overall, it ranked as the fourth-largest provider of purchase loans last year, behind Wells Fargo, United Wholesale Mortgage, and Fairway Independent Mortgage Corp. according to data submitted by lenders submit to federal regulators.
To win more business from homebuyers, Rocket isn’t putting putting all of its eggs in one basket. It’s wooing not only real estate agents — who often hold considerable sway over which lender homebuyers turn to for financing — but independent mortgage brokers with deep roots in their local markets.
Rocket is also offering its mortgage origination technology to banks and credit unions, and targeting homebuyers more aggressively in marketing campaigns designed to bring consumers directly to its website.
RocketHomes.com averaging 2.4 million monthly users
Rocket’s real estate brokerage subsidiary, Rocket Homes, is licensed as a real estate broker in all 50 states, allowing it to provide property search site and refer business to members of its agent referral network.
Farner said traffic to RocketHomes.com has grown by close to a factor of five in the last year, averaging 2.4 million users a month, helping Rocket’s real estate brokerage facilitate more than 9,000 transaction valued at $2.3 billion during the quarter.
In August, Rocket Homes announced that it was hiring on-staff real estate agents and launching an iBuyer program, which would allow it to provide a “comprehensive suite of services” including closing and settlement services through its Amrock subsidiary.
“Through our integrated platform, clients can find their next house on Rocket Homes’ 50-state home listing search platform, secure an agent from the company’s agent network, get financing through Rocket Mortgage, have Amrock conduct the title work and appraisal for them and then after closing, have their mortgage serviced by Rocket Mortgage, all from one centralized platform,” Farner said.
‘Massive’ opportunity to partner with banks, credit unions
Rocket’s partner channel includes mortgage brokers, community banks and credit unions. Farner said Rocket sees a “massive” opportunity to originate more loans through banks and credit unions through a partnership with Salesforce announced last week.
The partnership allows Rocket to offer its mortgage technology to 10,000 banks and credit unions that originate $1 trillion in mortgages a year — nearly one-third of the total U.S. market — through Salesforce Financial Services Cloud.
“This new ‘mortgage-as-a-service’ model is a game changer for the industry and for Rocket,” Farner said. “More than simply leveraging our technologies, these banks and credit unions will have Rocket integrated into their centralized workflow, making the process seamless and simple.”
Mortgage-as-a-service, Farner said, “represents a new model for financial institutions to partner with Rocket, paving the way for an even larger opportunity to provide consumer lending as a service, including mortgages, auto loans and personal loans.”
Courting mortgage brokers
On the mortgage broker front, Rocket is in a battle with rival UWM, which has sought to limit Rocket’s growth by refusing to do business with mortgage brokers who work with Rocket or Fairway Independent Mortgage.
UWM CEO Mat Ishbia has accused “whole-tail” lenders who operate both retail and wholesale channels of attempting to cut mortgage brokers out when their clients seek out their next loan.
Ishbia ratcheted those accusations up in a March ultimatum broadcast on Facebook Live. Rocket Mortgage, he said, was not only attempting to disintermediate mortgage brokers from their existing clients, but trying to sever their ties to the real estate agents who they depend on for future business.
Last month, Rocket Pro TPO — the division of Rocket Mortgage that works with mortgage brokers — launched several initiatives aimed at strengthening Rocket’s value proposition to brokers.
In addition to offering new tech tools to mortgage brokers, Rocket provided assurances that it wants to help them build relationships with real estate agents, not disrupt them.
If a mortgage broker working with Rocket Mortgage closes a loan with a real estate agent, Rocket will refrain from soliciting business from that agent, the company said. Rocket Pro TPO has built a proprietary tracking engine that will be accessible through its broker portal detailing which agents each broker is working with, the company said.
“We know our broker partners work hard to establish connections with local real estate professionals and we want to protect those relationships,” said Austin Niemiec, Rocket Pro TPO executive vice president, in a statement. “We will honor these connections, while also leveraging our Rocket platform to help brokers create new partnerships.”
In the last 12 months, Rocket estimates that 170,000 real estate agents have closed a loan with one of Rocket Pro TPO’s broker partners, and it wants to introduce its mortgage broker partners to a larger share 2 million U.S. real estate agents.
Since many homebuyers who visit the Rocket Homes property search site are not working with a mortgage company, Rocket Pro TPO plans to introduce “select buyers” to top performing mortgage brokers participating in its Pinnacle Partners program.
Rocket Pro TPO is also planning to hold “Pro Mixers,” networking events connecting brokers with real estate agents in cities around the country, with the first event scheduled for this month in San Francisco.
Farner said Rocket’s broker portal, Rocket Connect, is another perk for mortgage brokers. Launched last year, Rocket Connect provides “a streamlined way for them to communicate directly with our operations folks,” with guaranteed 2-hour response times, he said.
Rocket’s efforts to serve mortgage brokers are paying off, with Rocket getting “north of 50 percent” of loans that its broker partners originate. That’s up from 36 percent 4 or 5 months ago, he said.
Direct-to-consumer channel more profitable
In the first nine months of the year, Rocket originated $108.5 billion in loans through its partner channel, up 58 percent from a year ago. That compares with 24 percent growth in the direct-to-consumer channel, with $163.5 billion in loans originated year-to-date.
The gain on sale margin is much thinner in the partner channel, however, slipping to 0.78 percent during the third quarter, down from 2.70 percent a year ago.
Since it doesn’t have to split profits with partners, loans that Rocket originates through its direct-to-consumer channel — consumers who come to the company’s website — are its most profitable. Gain on sale margin in the direct-to-consumer channel was 4.47 percent during the third quarter, down from 5.78 percent a year ago, when more profitable refinancings were a bigger percentage of loans.
The higher profit margins in the direct-to-consumer channel means it has a bigger impact on Rocket’s bottom line. After subtracting directly attributable expenses, the direct to consumer channel generated about $1.62 billion in profit during the third quarter, compared to $280 million for the partner channel.
Farner said Rocket spends more than $1 billion a year on digital and performance marketing to bring consumers to its website. During the third quarter, “we saw strong growth in our direct-to-consumer channel, where our purchase initiatives continue to gain traction.”
A recent Halloween-themed ad poked fun at the intense competition for homes in many markets, evoking the classic horror movie “Night of the Living Dead,” by depicting an army of zombie homebuyers who are bested by a homebuyer making an offer financed by Rocket Mortgage.
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