Rocket Companies, the parent company of Detroit-based mortgage-lending giant Rocket Morgate, saw earnings slump in the second quarter amid rising interest rates, decades of high inflation eroding consumer confidence, and fears of a possible recession.
On Thursday, the company reported a net profit of $60 million and revenue of $1.4 billion in the second quarter. This represents a decrease of 94% and 48%, respectively, from the second quarter of 2021.
Rocket Mortgage closed its $34.5 billion loan creation volume in the second quarter — down nearly 60% from the same period last year. The company’s profit from selling margin was 2.92%, up from 2.78%.
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The mortgage industry has undergone a rapid transformation, and it is facing tough times. “Fluctuating interest rates and declining consumer confidence have contributed to general uncertainty about the economy,” Jay Varner, CEO of Rocket Cos, said on the company’s earnings call.
The Federal Reserve has been raising its benchmark interest rate in an effort to curb inflation, which is at a 40-year high – putting pressure on consumers’ wallets. Last week, the central bank announced a 0.75% rate hike, the second consecutive monthly increase.
Mortgage rates for 30-year and 15-year fixed loans on Thursday were 4.99% and 4.26%, respectively, both down from last week, according to mortgage buyer Freddy, but up significantly from a year ago.
“In this time of significant change, we have taken proactive steps to improve our core mortgage operations by improving lead acquisition and allocation, launching new products, signing new partnerships, and aligning our resources internally,” Varner added.
“Our senior leaders, industry veterans who have passed many courses in our 26 years here at Rocket, are as close to business as they have ever been. We adapt our mortgage operations to the current market environment, and we remain focused on running the business with discipline. “.
Despite executives reassuring investors that Rocket is in a good long-term position, “the quarter was miserable,” said Eric Gordon, a professor at the University of Michigan’s Ross School of Business.
“The bottom line,” he said, “net income fell by about 95%, and bottom line revenues were halved.” “If the volume of loans does not change, the company will have to cut costs much more than it did in the quarter, and that could mean layoffs in Detroit at one of the most important companies in the city.”
Rocket stock, which is down nearly 30% year-to-date, traded lower in after-hours after the close at $10.29 per share Thursday.
Varner said the company still saw opportunities around cash-out refinancing, but acknowledged that the buying market slowed in the second quarter due to affordability, inventory and consumer confidence issues.
Emphasizing the importance of the company’s engagement platform to keep consumers coming back to Rocket for different products and services, he said that Rocket Mortgage has recently rolled out new products in response to what’s happening in the housing market — for example, a program that covers a large portion of closing costs for refinancing if prices drop. Interest and the customer refinances within three years of purchasing a home.
Varner also noted opportunities around forging new partnerships with companies looking to exit the mortgage business. For example, in July, Rocket Mortgage signed an agreement to create mortgages for Santander Bank. It has also partnered with banking platform Q2.
Meanwhile, Truebill, the personal finance app purchased from Rocket in December, will rebrand it to Rocket Money this month. Edison Financial, the company’s Canadian digital mortgage broker, will become Rocket Mortgage in Canada.
Rocket Money reports that Rocket Money saw paid members topped 2 million users in July, more than doubling year-over-year. The brand launched a beta version of its first credit card during the second quarter.
Rocket Homes, the company’s digital real estate platform, saw real estate transactions grow 25% year-over-year in the second quarter. It also had two record months for closed units.
However, executives acknowledged the challenging market conditions.
“YTD we have seen a seismic shift towards a smaller mortgage market,” said Julie Booth, chief financial officer and treasurer at Rocket.
“The 30-year average weekly mortgage jumped from 3.2% at the start of the year to nearly 6% at the end of June — the largest and fastest rise in more than 50 years. Rising rates had a huge impact on the rate and demand for refinancing.”
“Recently, buying demand has also been affected as consumer sentiment has fallen at a rapid pace, to levels not seen in over a decade. Looming concern about the economy has led to fears of a possible recession. As a result, consumer behavior has changed significantly. And, in particular, potential homebuyers are sitting on the sidelines.”
Rocket cut costs by $300 million in the second quarter, down $100 million more than executives had expected. Booth said the cuts came from marketing, production and vendor-related expenses, among other areas.
The company is looking forward to further cost reductions in the third quarter of between $50 million and $150 million, from production and marketing expenses, as well as savings from staffing cuts implemented earlier this year.
“We expect our core mortgage business to continue to face headwinds,” Booth said in the third quarter. The company’s guidance assumes that recession fears and weak consumer confidence will persist.
Rocket expects closed loan volumes of between $23 million and $28 billion and a selling margin of between 2.5% and 2.8% in the third quarter.
At the end of the second quarter, the company reported that it had a total liquidity of $7.3 billion and a cash position of $4 billion.
Pontiac-based United Wholesale Mortgage Holdings Corp will report second-quarter earnings on Tuesday.