Rocket rebounds to 2nd-quarter profit from spring home sales

The spring home-buying season spun Rocket Companies Inc. a profit of $139 million in net income after two consecutive quarters of losses.

The results more than doubled its $60 million in profits for the same quarter a year ago as interest rates steadied and positive economic growth and a strong labor market encouraged buyers. Limited inventory of homes to buy, however, limited business. The 2023 profit was on $1.236 billion of net revenue, an 11% decrease from a year ago.

"We remain encouraged by the fact that consumer demand for homes continues to be robust, and we're seeing a healthy purchase pipeline," Interim CEO Bill Emerson said during an investor call. "People just want to buy homes. That said, at the macro level, the inventory and affordability challenges consumers experienced in the first quarter persist."

The Detroit-based company reported adjusted revenue of more than $1 billion, down 11%. That beat the top-end of the forecast of $850 million to $1 billion. Its guidance for the third quarter is between $850 million and $1 billion in adjusted revenue compared to $888 million in the third quarter of 2022.

There's reason for Rocket to be hesitant for the rest of the year. Interest rates for a 30-year fixed-rate loan on Thursday were nearing 7%, averaging 6.9%, up nearly 2 percentage points from a year ago, according to Freddie Mac.

The Federal Reserve last week increased its benchmark lending rate an 11th time since March 2022 by a quarter of a point to its highest level in 22 years and suggested rates could rise again. That combined with strong economic reports and credit downgrades by Fitch Ratings of the United States government, Fannie Mae and Freddie Mac are contributing to the increases.

“Despite higher rates and lower purchase demand," Sam Khater, Freddie Mac’s chief economist, said in a statement "home prices have increased due to very low unsold inventory.”

Emerson cited a statistic from the National Association of Realtors, noting home inventory in May 2023 was roughly a quarter of that in May 2007. Meanwhile, Rocket's purchase approval letters were up nearly 20% in the second quarter.

Since February, the time between a home buyer receiving a pre-approval letter and closing on a home has increased to a record length, said Brian Brown, chief financial officer. New programs like Buy+ and Sell+ that incentivize working with Rocket Home real-estate agents have "exceeded expectations," he said, in driving traffic to the company's website, while programs like Rocket Rewards help to keep customers engaged with the lender as they wait three to six months to find a home. Its retention rate over the past year was 97%.

The company also introduced a 1% down home loan program for lower-income buyers. Its servicing book's unpaid principal balance, which includes subserviced loans, was $504 billion at the end of June.

Its total serving portfolio included 2.4 million loans, down slightly from 2.5 million a year ago, but both generating roughly $1.4 billion of recurring fee income on an annual basis.

Rocket generated $22.3 billion in closed loan origination volume during the second quarter, down 35% from a year ago. Rocket's quarterly gain-on-sale margin fell year-over-year to 2.67% from 2.92% in the April-to-June period.

The results come after a third round of buyouts at the company since April 2022. In July, the offer was made to all staff members of Rocket Central, which provides human resources services for Rocket Cos., and a portion of Rocket Mortgage employees. The total number of employees who received the offer wasn't shared.

Rocket expects that workforce reduction as well as other spending cuts such as winding down its Rocket Auto platform and part of its solar sales unit will save it around $150 million to $200 million on an annualized basis. The buyouts will cost it $50 million to $60 million in the third quarter. The cuts are on top of $3 billion — 40% of its cost structure — that was eliminated last year, Brown said.

Additionally, the company is putting into place new leaders. This week, Varun Krishna, the head of financial software company Inuit Inc.'s consumer group, was named CEO effective Sept. 5 following the retirement of Jay Farner in June.

"We were looking for somebody who had great business acumen," Emerson said, "somebody who had consumer product skillsets, somebody who was really good with people, and as we had the chance to evaluate Varun and all of the other candidates that we looked at, he clearly rose to the top as far as someone that would be able to come in here and paint a bright strategic vision for the organization, someone who had alignment with us in a fin tech space and the abilities that we have and the things that we're looking to do as it relates to expanding our business and our platform and our ecosystem."

Bob Walters, CEO of Rocket Mortgage and president and chief operating officer of Rocket Cos., also is intending to retire Sept. 5 with Krishna succeeding him as Rocket Mortgage CEO. Emerson will become president and COO of Rocket Cos.

Rocket's total expenses for the second quarter came in at $1.1 billion, down 16% from a year ago. The company's total liquidity was $8.6 billion, including $900 million cash on hand, at the end of June.

Rocket's stock was nearly flat in after-market trading. Shares were rising 0.1% to $10.13.

Rocket posted its first-ever net loss as a publicly-traded company in the fourth quarter of 2022 and saw full-year profits plummet 88% from 2021, reflecting a contraction in the mortgage industry fueled by rising interest rates.

Rocket Cos. is a portfolio of businesses that includes Rocket Mortgage as well as other ventures such as Rocket Homes, Rocket Loans and Rocket Money.

Pontiac-based rival United Wholesale Mortgage Holdings Corp., which in the third quarter of 2022 first surpassed Rocket Mortgage in originating loan volume, reports earnings on Wednesday.

bnoble@detroitnews.com

Twitter: @BreanaCNoble