With a new CEO at the helm, Rocket Companies reported net income of $115 million in the third quarter, which was down from the $139 million in the second quarter, but still a strong showing, according to Varun Krishna.
Rocket Mortgage was able to make a narrow profit too, despite the constraints of today’s market and facing back-to-back losses in the fourth quarter of 2022 and the first quarter of 2023.
Rocket Mortgage’s gain on sale margin was 2.76%, marking the third consecutive quarter of gain on sale margin increase. Margins improved both in the wholesale and direct-to-consumer channels.
In total, Rocket Mortgage generated $22.2 billion in mortgage origination closed loan volume, down slightly from $22.3 billion in the previous quarter and a 13% drop from $25.6 billion the same quarter last year. The slight improvement in production may have been assisted by the gains made in purchase market share, both year-over-year and quarter-over-quarter; however, the company did not state how much it gained, nor does it break down its purchase business versus its refinance business in its earning reports.
“We grew purchase market share and reported strong results for the quarter with adjusted revenue north of $1 billion, which is above the top end of our guidance range, reflective of continued momentum over the past four quarters,” Krishna said.
Although the Detroit-based lender’s net income may be lagging from last quarter’s $139 million, it’s still an improvement from the $96 million it made in the third quarter of 2022. Rocket posted a $7 million adjusted net income in the third quarter following a $33 million loss in the previous quarter.
“In the third quarter, we turned a corner and achieved positive adjusted net income, and for the second quarter, we achieved positive adjusted EBITDA and GAAP net income,” Krishna told analysts in the earnings call.
Rocket Pro TPO, its wholesale channel, produced $10.3 billion in loan volume for the third quarter, up from $9.5 billion from last quarter. Gain on sale margin came in at 122 points, up 93 points from the prior quarter.
In the direct-to consumer channel, Rocket Mortgage produced nearly $12 billion in loan volume, falling slightly from $12.4 billion in the previous quarter. Gain on sale margin was 299 points, up 46 points from the last quarter.
The company said it had net income of 4 cents per share. Earnings, adjusted for one-time gains and costs, came to less than 1 cent on a per-share basis.
The average estimate of six analysts surveyed by Zacks Investment Research was for a loss of 2 cents per share.
Headwind For You, Tailwind For Us
While mortgage applications have fallen to the lowest level since 1995, according to the Mortgage Bankers Association (MBA), due to sky-high rates and low inventory, Rocket executives said how that may put the company into a better position compared to its smaller and less capitalized competitors.
“There's sort of a cyclical nature to the business,” Krishna said. “What is a headwind for the industry, we believe, is a tailwind for Rocket in particular. It is a dynamic where it may be tougher for small players to compete, but we are incredibly well-capitalized. We have liquidity.”
Total liquidity was approximately $8.7 billion, as of September 30, 2023, which includes $1 billion of cash on-hand, $2.8 billion of corporate cash used to self-fund loan originations, $3.3 billion of undrawn lines of credit, and $1.7 billion of undrawn MSR lines.
Currently, Rocket’s servicing portfolio includes 2.4 million loans serviced, generating about $1.4 billion of recurring servicing fee income on an annual basis. The company strategically acquired mortgage servicing rights (MSR) on certain agency loans for a total consideration of $103 million, which adds $6.2 billion of unpaid principal balance for loans with a weighted average coupon well above that of their current portfolio in hopes to provide a compelling refinance opportunity when rates eventually decline.
Rocket's Chief Financial Officer Brian Brown also said the firm has made significant cuts to expenses and has committed to cost savings equal to $200 million per year starting in the fourth quarter.
“This achievement is a result of a concerted effort that has spanned the winding down of underperforming businesses to a rigorous reprioritization of company initiatives to the implementation of a career transition program,” Brown said.
In Q4 2023, Rocket expects adjusted revenue of between $650 million to $800 million.
New CEO Sees Huge Fintech Potential
Other than financials, analysts and others listening in on the call were provided more insight on what the newly hired Krishna has in store for the company. The former executive at Silicon Valley business software company Intuit, said he was “drawn to the huge market potential,” and sees a major opportunity to technologically revolutionize the industry, first by simplifying and digitizing the loan origination process.
“I believe we are now approaching a critical inflection point in the world when artificial intelligence, knowledge engineering, machine learning, automation, and personalization will change every aspect of our industry and our lives,” Krishna said. “I believe AI will be at the center of how clients buy, sell, and finance homes.”
Krishna used Rocket Logic as an example of the headway the company is making, which is a proprietary AI-powered next-generation loan origination system that generates tasks to complete the mortgage origination process from application to underwriting the loan.
The CEO also boasted that Rocket was able to deliver 20% faster purchase turn times, and reduce manual touches by more than 20% compared to the same time last year.
Krishna said that with the “wealth of assets at our fingertips,” that Rocket will be able to leverage generative AI and revolutionize the home buying and financing process.
“We have a strong foundation in place and a wealth of assets at our fingertips to leverage generative AI,” Krishna said. “We have data in sales that most fintech companies would be envious of, and we believe no one in the mortgage industry even comes close.”
