By Aarthi Swaminathan
Rocket, which owns Rocket Mortgage, Rocket Money and more, plans to diversify its approach to reach more consumers amid weak demand.
The mortgage industry is struggling with higher interest rates and a sharp drop in buyer demand. Rocket (RKT) says it has a plan to turn things around.
There is turbulence in the industry. The volume of lending and refinancing has collapsed. The Market Composite Index, a measure of the volume of mortgage applications, fell to 255 in the week ended September 9. A year ago the index was 707.9.
Buyers – and sellers too – hesitate. And that has pushed lenders to make steep cuts.
“The way this business works is that sometimes you put too much capacity into the system, and that’s what happened in 2020 and 2021,” says Jay Farner, CEO of Rocket Companies, a Detroit-based group that is among the country’s largest mortgage lenders , said MarketWatch.
“It can be painful…some companies are closing their doors, others are closing departments of their companies. Others are making layoffs,” Farner added. “Unfortunately that’s part of the process — that capacity comes out.”
But Rocket tries to stand her ground amid the storm. It’s digging deeper into its recent acquisition of a personal finance app; it competes fiercely with its competitors to attract customers; it tries to improve efficiency.
“All of these things give us an opportunity to increase conversion and increase market share,” Farner said.
Rocket, which owns companies like Rocket Mortgage, Rocket Money, Rocket Solar and more, went public on the New York Stock Exchange during the pandemic in early August 2020. It raised $1.8 billion and offered interested investors $18 per share. (It even became a meme stock at one point.)
But after two years of excellent performance, the company, along with the rest of the sector, is recovering from the damage caused by a storm brought on by higher interest rates and falling buyer demand. The stock traded below $8 on Monday.
Interest rates have risen from 3.16% this time last year to 6.02% in mid-September, according to a weekly poll by Freddie Mac.
Many lenders are laying off employees, from banks like Citi(C) to JPMorgan Chase(JPM) and startups like Better. Some smaller companies have even closed entirely, 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 peers have a sizeable market share with 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, which fund loans with their own customers’ deposits, non-banks borrow money from the capital markets to offer mortgages to borrowers.
When interest rates rose back to 2008 levels, these non-bank lenders were stuck. Mortgage demand has fallen by almost 30% compared to the same period last year.
“Monthly mortgage payments are up about 60% year over year,” said Nadia Evangelou, NAR’s senior economist and director of forecasting, in a statement.
For the buyer, affordability has seriously deteriorated. In April 2021, when interest rates were at 3%, the annual income required to buy a home at an average price of $340,700 was $79,600, researchers at the Harvard Joint Center for Housing Studies said Friday.
In July 2022, at a rate of 5.41% and the median price increasing to $403,800, that would be $115,000 in annual income needed for someone to be able to afford a home.
As a result, buyers flee the market. And Rocket isn’t spared either: In April and August, the company cut staff in response to the downturn in business.
In the second quarter, the company reported total revenue of $1.4 billion compared to $2.7 billion in the first quarter. Net income was $60 million in the second quarter compared to $1 billion in the first quarter.
Rocket (RKT) is about grabbing a bigger piece of the pie, Farner said.
“You have a market of about $4 trillion in mortgages. And now you’re going to have a market that’s going to be about $2 trillion, give or take,” he said.
It may have shrunk, but “this is still a huge market,” Farner added. And he wants to gain market share.
According to Inside Mortgage Finance, Rocket’s market share is currently about 6.4%, which is the largest among all banks and non-banks in the first quarter of this year.
“2020, 2021 was the highest volume year ever,” Mike Fratantoni, chief economist at the Mortgage Bankers Association, told MarketWatch. “During the pandemic, lenders really struggled to hire to fill their vacancies … we heard about seven-figure sign-up bonuses for high-profile officials.”
A mortgage advisory firm, Stratmor Group, said a lender called them “monster signing bonuses.”
But after interest rates rose and business dried up, capacity had to be scaled back “to right-size the entire industry,” Fratantoni added.
With the Federal Reserve set to raise rates further, which is likely to push mortgage rates higher and weigh on business, mortgage companies have made efforts to become more competitive and attract buyers.
Last Friday, Rocket announced its “Inflation Buster” program, which offers to cut a buyer’s mortgage by one percentage point for the first year of their loan.
In other words, if a buyer takes out a 6% mortgage, Rocket is offering 5% for one year. That saves a buyer who takes out a 30-year mortgage at 5.75% on a $400,000 home nearly $3,000 in the first year.
It also took over mortgage origination from Santander Bank when the company exited the US mortgage market, on which Rocket recently spent $1.3 billion. the acquisition of Truebill, a personal finance app.
The acquisition of Truebill, now renamed Rocket Money, is another step to try to deepen its connection with customers, the CEO said, and offer more targeted products without excessive paperwork.
Rocket Money has access to consumers’ credit information with their permission, which makes it much easier to monitor their financial health, he said. “By updating the data, we can get to a place where we can always have a mortgage ready for them,” Farner said.
There will be stiff competition for those looking to get a mortgage, experts say. And there are still many cuts ahead, Fratantoni estimates. Now that refinancing has fallen and interest rates are more than double what they were a year ago, margins for lenders are shrinking, he said.
Expect employment in the mortgage industry to fall by 20% to 30%, Frantantoni added. By the second quarter, lenders had only cut 2% to 10% of their workforce.
Others say the drop in activity has been something of a wake-up call for the industry. “The economy hasn’t collapsed,” Melissa Cohn, regional vice president at William Raveis Mortgage, told MarketWatch. “It was just that the mortgage business was too big.”
(Emma Ockerman contributed to this story.)
Do you have thoughts about the housing market? Write to MarketWatch reporter Aarthi Swaminathan at [email protected]
(ENDS) Dow Jones Newswires
Copyright (c) 2022 Dow Jones & Company, Inc.