Rocket Mortgage’s production volume increases 28% in the third quarter

Based in Detroit Rocket companiesthe parent of Rocket mortgagesaw its strategy to invest in technology and expand its services portfolio start to pay off in the third quarter of 2024. The company made $28.5 billion in loans during that period – an increase of 28% year over year.

A short-lived relief in mortgage rates led to a double-digit increase in mortgage production and a rise in market share during that period, executives said. But the company posted a GAAP net loss of $481 million from July through September, a figure driven by an $878.3 million loss in the fair value of its mortgage servicing rights (MSRs).

“Over the past few months, the market has thrown almost every curve ball imaginable at our industry,” Varun Krishna, CEO and managing director of Rocket Companies, told analysts on an earnings call on Tuesday. “As inflation declines, the Federal Reserve Interest rates lowered for the first time in four years. But in an interesting twist, while the Fed cut rates, mortgage rates did not follow suit. Instead, both 10-year Treasury yields and 30-year mortgage rates have actually risen.

“My experience is that it is always important to look at the long term and put things into perspective. Although the housing market is challenging, we see signs of rejuvenation. 30-year fixed mortgage rates have fallen from almost 8% a year ago. This helps improve the affordability of purchases and opens up refinancing opportunities to reduce monthly payments, while housing inventory has increased from 3.4 months to 4.3 months.”

Rocket’s GAAP net loss of $481 million from July to September was a reversal from its profit of $178 million in the second quarter of 2024, according to filings with the company. Securities and Exchange Commission (SEC). Adjusted earnings, which exclude non-cash expenses and one-time costs, were $166 million in the third quarter of 2024, down from $255 million in the second quarter.

The GAAP net loss was also due to a decline in total revenue, which was $647 million in the third quarter, down from $1.3 billion in the second quarter. Meanwhile, costs rose to $1.14 billion from $1.1 billion in the second quarter.

Operationally, a two-week drop in mortgage rates created a short window for refinancing in the third quarter of 2024, bringing Rocket’s total production volume from July to September to $28.5 billion – up from $24.6 billion in the previous quarter and $22.1 billion in the third quarter of 2023.

The direct-to-consumer channel remained the primary driver, generating $14 billion in volume during the period, compared to $12.4 billion through the third-party originator channel.

Sales margin gain for the third quarter of 2024 was 278 basis points, down from 299 basis points in the previous quarter, but virtually unchanged from 276 basis points in the third quarter of 2023. This was due to a margin of 410 basis points in the direct-to-consumer channel. and 147 bps in the third party channel (TPO).

Executives expect margin expansion in the fourth quarter, a period when competitors typically adjust their pricing strategies around the holidays. According to Rocket’s leadership, current margins are approaching historically healthy pre-pandemic levels.

Rocket’s playbook

While the company doesn’t provide a detailed breakdown of purchasing versus refinancing activity, executives reported market share growth in both areas during the quarter.

Refinancing opportunities largely stem from Rocket’s services portfolio, which reached an unpaid principal balance (UPB) of $546.1 billion at the end of the third quarter. With 2.6 million loans, Rocket’s servicing business generated approximately $1.5 billion in annual fee revenue.

Rocket, like its peers, has been actively acquiring maintenance assets. In the third quarter alone, it invested $311 million to add $22.4 billion to UPB, bringing its total UPB acquisitions from January to October to $70 billion.

Executives expect portfolio acquisitions to remain a key capital deployment strategy, in addition to opportunities arising from subservice agreements such as Rocket’s partnership with real estate investment trusts. Annaly Capital Management. The company’s total liquidity was $8.3 billion as of September 30, including $1.2 billion of cash on the balance sheet.

Rocket reported an 85% recapture rate on its service portfolio.

The company uses technology to more effectively navigate mortgage market cycles. Chief Financial Officer Brian Brown told analysts that the company can “support $150 billion in production volume without adding a single dollar in fixed costs.”

Additionally, Krishna says Rocket Logic, the company’s proprietary loan origination system, now saves more than 800,000 team member hours per year – a 14% increase in just two months – resulting in annual savings of more than $30 million.

Looking ahead, Rocket Projects adjusted fourth-quarter 2024 revenue between $1.05 billion and $1.2 billion, a seasonally slower period due to the holiday season. Executives said higher mortgage rates have also dampened application volumes.

Rocket shares fell 11.3% in the aftermarket, after the earnings call, to $13.78.