Rocket's second-quarter profits plunge amid market slowdown

Rocket Companies, the Detroit-based parent company of mortgage lending giant Rocket Mortgage, saw profits plunge in the second quarter amid rising interest rates, decades-high inflation that is dampening consumer confidence, and concerns over a possible recession. 

The company on Thursday reported net income of $60 million on revenue of $1.4 billion in the second quarter. That's down 94% and 48%, respectively, from the second quarter of 2021.

Rocket Mortgage had closed loan origination volume of $34.5 billion in the second quarter — down nearly 60% from the same period last year. The company's gain on sale margin was 2.92%, up from 2.78%. 

More: Long-term mortgage rates under 5% for 1st time in 4 months

“The mortgage industry has shifted rapidly, and it’s facing challenging times. Volatility in interest rates and declining consumer sentiment has contributed to overall uncertainty about the economy," Rocket Cos. CEO Jay Farner said on the company's earnings call. 

The Federal Reserve has been hiking its benchmark interest rate in a bid to curb inflation, which is at a 40-year high — pinching consumers' wallets. The central bank last week announced a rate hike of 0.75%, its second consecutive monthly increase.

Mortgage rates for 30-year and 15-year fixed loans on Thursday stood at 4.99% and 4.26%, respectively, both down from a week ago, according to mortgage buyer Freddie, but up substantially from a year ago.

"In this time of flux, we have taken proactive steps to optimize our core mortgage operations by improving lead capture and allocation, launching new products, signing new partnerships and aligning our resources internally," Farner added. 

"Our senior-most leaders, seasoned industry veterans who have navigated numerous cycles through 26 years here at Rocket, are as close to the business as they’ve ever been. We are adapting our mortgage operations to the current market environment, and we remain focused on managing the business with discipline.”

Despite executives assuring investors that Rocket is well-positioned for the long run, "the quarter was miserable," said Erik Gordon, a professor at the University of Michigan's Ross School of Business.

"Bottom line, net income dropped about 95% and top line revenue was cut in half," he said. "If loan volume doesn't turn around, the company will have to cut costs far more than they did in the quarter, and that could mean layoffs in Detroit at one of the city's most important companies."

Rocket's stock, which is down roughly 30% year-to-date, was trading down after-hours after closing at $10.29 per share Thursday.

Farner said the company continues to see opportunities around cash-out refinances, but acknowledged that the purchase market slowed in the second quarter due to affordability, inventory and consumer confidence issues.

He emphasized the importance of the company's engagement platform to keep consumers coming back to Rocket for various products and services, and said Rocket Mortgage recently has rolled out new products in response to what's happening in the housing market — for example, a program that covers a chunk of closing costs on a refinance if interest rates fall and the customer refinances within three years of buying a house.

Farner also noted opportunities around striking new partnerships with businesses looking to exit the mortgage business. Rocket Mortgage in July, for example, signed an agreement to originate mortgages for Santander Bank. It also entered into a partnership with banking platform Q2.

Meanwhile, Truebill, a personal finance app Rocket bought in December, will rebrand to Rocket Money this month. And Edison Financial, the company's Canadian digital mortgage broker, will become Rocket Mortgage in Canada.

Rocket Money saw paying premium members surpass 2 million users in July, more than doubling year-over-year, Rocket reported. 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.

Still, executives acknowledged the challenging market conditions.

"Year-to-date, we have seen a seismic shift to a smaller mortgage market," said Julie Booth, Rocket's chief financial officer and treasurer.

"The average weekly 30-year fixed rate mortgage jumped from 3.2% at the beginning of the year to nearly 6% at the end of June — the steepest and fastest rise in over 50 years. The rise in rates had a significant impact on rate and term refinance demand," she added.

"More recently, purchase demand has also been affected as consumer sentiment has declined at a rapid pace, to levels not seen in more than a decade. And looming apprehension over the economy has driven fears of a potential recession. Consequently, 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, a reduction of $100 million more than executives had forecast. Cuts came from marketing, production and vendor-related expenses, among other areas, Booth said.

The company is eyeing further cost cuts in the third quarter of between $50 million and $150 million, from production and marketing expenses as well as savings from staffing reductions implemented earlier this year. 

In the third quarter, "We expect our core mortgage business to continue to face headwinds," Booth said. The company's guidance assumes that recession concerns and subdued consumer sentiment will persist.

Rocket is forecasting closed loan volume of between $23 million and $28 billion and a gain on sale margin of between 2.5% and 2.8% in Q3.

At the end of the second quarter, the company reported having total liquidity of $7.3 billion and an available cash position of $4 billion.

Pontiac-based competitor United Wholesale Mortgage Holdings Corp. will report second-quarter earnings on Tuesday.

jgrzelewski@detroitnews.com

Twitter: @JGrzelewski