‘Some companies are closing their doors, others are closing divisions’: Rocket CEO outlines plans to navigate dramatic mortgage decline

‘Some companies are closing their doors, others are closing divisions’: Rocket CEO outlines plans to navigate dramatic mortgage decline

The mortgage industry is struggling with higher rates and a sharp decline in buyer demand. Rocket RKT,
says it has a plan to change things.

There is turmoil in the sector. The volume of new loans and refinancing has decreased. The Market Composite Index, a measure of mortgage application volume, fell to 255 in the week ending Sept. 9. A year ago, the index stood at 707.9.

Buyers – and sellers too – are hesitant. And that has prompted lenders to make significant cuts.

“The way this company operates is sometimes too much capacity is put into the system, and that’s exactly what happened in 2020 and 2021,” said Jay Farner, CEO of Rocket Companies, a Detroit-based group that runs a of the largest in the country. mortgage lenders, told MarketWatch.

“It can be painful… some companies close their doors, others close down departments of their companies. Others are in the process of getting laid off,” Farner added. “Unfortunately, that’s part of the process — that capacity is coming out.”

But Rocket tries to hold out in the midst of the storm. It takes a closer look at the recent purchase of a personal finance app; it competes hard among its peers to win customers over; it tries to improve efficiency.

“All of these things give us the opportunity to increase conversion and increase market share,” Farner said.

“Too much capacity is being put into the system, which is exactly what happened in 2020 and 2021.”

— Jay Farner, CEO of Rocket

Rocket, which owns companies such as Rocket Mortgage, Rocket Money, Rocket Solar and more, went public on the New York Stock Exchange in early August 2020 during the pandemic. It raised $1.8 billion and offered $18 a share to interested investors. (It even became a meme share at one point.)

But after two years of excellent performance, along with the rest of the industry, the company is recovering from the damage it sustained from a storm caused by higher tariffs and declining buyer demand. The stock traded below $8 a share Monday.

Rates are up from 3.16% around this time last year to 6.02% in mid-September, according to a weekly survey by Freddie Mac. The massive drop in sales and the industry in general has led some experts to call it a “housing recession.”

Many lenders are firing staff, from banks like Citi C,
to JPMorgan Chase JPM,
and startups like Better. Some smaller outfits are even completely shut down, like Reali, a real estate tech startup, and Sprout Mortgage. Plano-based First Guaranty Mortgage Corp has filed for Chapter 11 bankruptcy.

Rocket and its non-bank counterparts have significant market share, about two-thirds of mortgages, according to Inside Mortgage Finance.

Unlike traditional banks, customers cannot open checking or savings accounts with a non-bank lender. And unlike banks that fund loans with their own customers’ deposits, non-banks borrow money from the capital markets to offer mortgages to borrowers.

When rates went back to 2008 levels, these non-bank lenders were stuck. Demand for mortgages has fallen by almost 30% compared to the same time last year.

“The monthly mortgage payment is up about 60% from a year ago,” Nadia Evangelou, senior economist and forecasting director at the NAR, said in a statement.

Affordability has seriously deteriorated for the buyer. In April 2021, when rates were 3%, the annual income needed to buy a home at an average price of $340,700 was $79,600, researchers at the Harvard Joint Center for Housing Studies said on Friday.

In July 2022, with a rate of 5.41%, and that median price rising to $403,800, the annual income a person needs to pay for a house would be $115,000.

The massive drop in sales and the industry in general has led some experts to call it a “housing recession.”

As a result, buyers flee the market. And Rocket was not spared: In April and August, the company cut its workforce in response to the downturn in business.

In the second quarter, the company reported total revenues of $1.4 billion, down from $2.7 billion in the first quarter. Net income was $60 million in the second quarter, down from $1 billion in the first quarter.

For Rocket RKT,
the heat is about to take a bigger piece of the pie, Farner said.

“You have a market that has about $4 trillion in mortgages. And now you have a market that will be $2 trillion or so, give or take,” he said.

It may have shrunk, but “that’s still a huge market,” Farner added. And he wants to increase his market share.

Rocket’s market share is currently about 6.4%, said Inside Mortgage Finance, the largest of all banks and non-banks, as of the first quarter of this year.

“2020, 2021 were the highest volume years on record,” Mike Fratantoni, chief economist at the Mortgage Bankers Association, told MarketWatch. “During the pandemic, lenders really struggled to hire people to fill their vacancies… we heard about seven-figure sign-up bonuses for high-producing officers.”

In April and August, Rocket reduced its workforce in response to the decline in mortgage business.

A mortgage consulting firm, Stratmor Group, said a lender called them “monster signing bonuses.”

But after rates rose and things dried up, capacity had to be reduced “to get the entire industry to size,” Fratantoni added.

With the Federal Reserve planning to raise interest rates further, likely to push mortgage rates even further and put pressure on the business, mortgage companies have made efforts to be more competitive and entice buyers.

Last Friday, Rocket announced its “Inflation Buster” program, which offers to take a percentage point off a buyer’s mortgage for the first year of their loan.

In other words, if a buyer takes out a 6% mortgage, Rocket will offer 5% for one year. That saves a buyer taking out a 30-year mortgage at 5.75% for a $400,000 home nearly $3,000 in that first year.

It also took over mortgages from Santander Bank SAN,
when the company exited the US mortgage market. Rocket recently spent $1.3 billion on it. the acquisition of Truebill, a personal finance app.

“You have a market with about $4 trillion in mortgages. And now you have a market that will be about $2 trillion.”

— Jay Farner, CEO of Rocket

The acquisition of Truebill, now rebranded as Rocket Money, is another step in trying to deepen relationships with customers, the CEO said, and offer more targeted products without too much paperwork.

Rocket Money can access consumer credit information with their permission, which makes monitoring financial health a lot easier, he said. “Updating the data will put us in a place where we can have them mortgage ready at any time,” Farner said.

According to experts, the competition for those who do want to take out a mortgage will be fierce. And many more cuts are on the way, based on Fratantoni’s estimates. As refinancing has slowed, with rates more than double what they were a year ago, margins for lenders are shrinking, he said.

Expect employment in the mortgage sector to fall by 20% to 30%, Frantantoni added. As of the second quarter, lenders had reduced only 2% to 10% of their workforce.

Others say the decline in activity was something of a wake-up call for the industry. “The economy hasn’t fallen apart,” Melissa Cohn, regional vice president at William Raveis Mortgage, told MarketWatch. “It’s just that the mortgage business was too big.”

(Emma Ockerman contributed to this story.)

Do you have ideas about the housing market? Write to MarketWatch reporter Aarthi Swaminathan at aarthi@marketwatch.com

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