How Rocket Mortgage plans to win in 2025

Rocket companiesThe third quarter earnings call provided a glimpse into a key element of the 2025 strategy Rocket mortgage – boosting profits through ridiculously high recapture rates and a growing service portfolio.

When mortgage rates fell to the low 6% level in early September, most lenders struggled to really take advantage of the two-week period. But Rocket Mortgage struck, quickly identifying which borrowers in its growing servicing portfolio were “in the money,” and using a combination of people and machines to execute refis, while decreasing fixed costs, executives said this week.

“Our scalable technology platform allows us to flexibly navigate dynamic markets. From my perspective, the most powerful benefit of AI is the boost it gives to operational efficiency and productivity. Simply put, it’s about achieving more with the same resources,” CEO Varun Krishna said on the website revenue calling. “Today we have the capacity to support $150 billion in production volume without adding a single dollar in fixed costs. We proved that this quarter. Not only did we handle more volume – net rate lock volume increased 43% – but we also did it with 7% fewer production team members, year over year.”

Rocket’s strategic expansion into the mortgage servicing market – where the company boasts an eye-popping 85% recovery rate – also represents more than just a simple revenue hedge against a still choppy origination market.

Amid a series of acquisitions, the company now has millions of potential new customers in its ecosystem, and executives say the technological advances are enabling faster decision-making and better results, creating efficiencies that others can’t match as the revisions come. .

It seems like a compelling model in an era of subdued home sales and high origination costs, and it positions Rocket to compete with other major service providers with high recapture rates.Freedom Mortgage, Mr. Cooper, Pennymac And NewRez– as rival lenders without services are increasingly locked out of returning customers.

Here’s HousingWire’s early look at Rocket Mortgage’s 2025 recapture strategy.

The promise of Rocket’s flywheel

During the earnings call, Krishna highlighted the importance of a recent deal with real estate investment trusts Annaly Capital Managementframing it as a growth engine that leverages Rocket’s service flywheel model to bring new origination customers into its ecosystem.

By collecting payments, managing escrow accounts and handling customer queries with limited friction, Rocket can throw big data at its technology engines – including Rocket Logic Synopsis and Navigator – to learn more about customer behavior and capture next origins.

“MSRs are an attractive way to jointly acquire future origination customers. Our origination and servicing businesses are a powerful offering for homeowners that will enable us to acquire new customers and create new MSRs organically,” said Krishna.

While Rocket doesn’t seem motivated to become a massive subservicer, its historical strengths in servicing and refinancing offer an intriguing value proposition for potential asset managers.

“The recapture rate allows an asset manager to protect against the risk of resuscitation or prepayment, and it will be a big part of our 2025 strategy,” said Brian Brown, the company’s CFO.

Rocket Mortgage, with which a sub-service agreement has also been entered into Charles Schwabannounced only that it will redeem “part of Annaly’s mortgage rights” from December.

Krishna framed the Annaly deal as part of a larger strategic vision.

“We ended the third quarter with $3 billion in available cash and $6.8 billion in mortgage liens,” he said. “Together, these assets represent a total of $9.8 billion in value on the balance sheet…[Having MSRs] just shows the power of the platform, and it’s just something that illustrates how we can scale beyond our four walls because we’ve earned the right to have these capabilities benefit others like Annaly.”

A shift in Rocket Mortgage’s MSR strategy

In the third quarter, Rocket has already acquired or committed more than $70 billion in unpaid principal across its service portfolio – an increase of 15% from the end of 2023. That’s 220,000 additional customers in the third quarter. In total, Rocket Mortgage has approximately 2.6 million customers and $546 billion in unpaid balance servicing fees.

In 2023, as losses mounted, Rocket was one of the largest net MSR sellers, HousingWire previously reported. Now, however, the lender appears to be moving into the role of buyer, signaling a shift in strategy as the lender builds out its servicing portfolio for longer-term gains. This shift comes as other major players such as Wells Fargoreduced their MSR holdings in early 2024, and hundreds of IMBs are selling maintenance rights to free up money for new products. Meanwhile, companies like Mr. Cooper and Lakeview Loan Service have expanded their portfolio.

Independent building societies and private equity investors remain very active in the MSR market and use servicing rights as a cash flow tool.

Brown expects Rocket to expand its service presence even further in 2025. “I expect we’ll continue to double down on those opportunities, both from the bulk acquisition market, but I think this subservice aspect is also very interesting for us because if you’re in a place where you didn’t have internal capabilities, protecting those cash flows should be your be the first priority,” he said.

Speaking to HousingWire, Brown said Rocket’s value proposition in MSR is twofold. “We learned that if you give the customer the best service experience, he or she will come back to you for the next loan. And strictly from a financial perspective, the value of getting the customer’s next loan for a company like us can be 10 to 20 times more than just owning that servicing asset,” he said.

Rocket Mortgage prioritizes a high recovery rate over cost efficiency. “It has never been our intention to be the cheapest service provider. We have always strived to be the best service provider, to take care of these customers and recover their revenue,” said Brown.

The MSR acquisition market remains a competitive space, says Tom Piercy, CGO at Incenter Capital Advisors.

“The MSR assets remain an extremely attractive alternative investment for capital,” he said, noting that low-coupon MSRs are in high demand from the production boom in 2020 and 2021, but supply is limited , leading to a slowed bulk MSR sales market.

While the bulk services market is “declining,” Piercy says recapturing the market is top of our agenda. “If I’m not good at recapturing, I’m going to sell it because I’d rather have the money and not the risk,” he said. “I’m not sure you’ll see large amounts of trading in the next six months, which will be few and far between.”

With economic uncertainties ahead, Rocket executives say the company is poised for a strong year in 2025. Krishna expressed confidence in the fundamentals of the housing market, pointing to rising inventory levels and high net worth. “It is clear that the housing market represents a large part of GDP. And the good thing is that we are seeing some signs of rejuvenation. You have more inventory, you have more homes selling at or below list price, and you have home equity at an all-time high. And if you look at the housing inventory, we went from 3.4 months to 4.3 months,” he said.

Krishna added: “The most important thing we look at is our ability to perform in any market… we have immense confidence in our superstack, which we see as a tailwind that gives us a competitive edge.”