‘Some companies are closing their doors, others are closing divisions’: Rocket CEO outlines plans to tackle dramatic decline in mortgages

‘Some companies are closing their doors, others are closing divisions’: Rocket CEO outlines plans to tackle dramatic decline in mortgages

The mortgage industry is struggling with higher interest rates and a sharp drop in buyer demand. RKT Missile,
he says he has a plan to turn things around.

There is turmoil in the industry. The volume of originations and refinancings has fallen. The Market Composite, a measure of the volume of mortgage applications, fell to 255 points in the week ended September 9. A year ago, the index was 707.9 points.

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

“The way this business works is that sometimes excess 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 is a among the largest in the country. mortgage lenders, they told MarketWatch.

“It can be painful…some companies are closing their doors, others are closing parts of their companies. Others are making layoffs,” Farner added. “Unfortunately, that’s part of the process — that capacity comes out.”

But Rocket tries to hold steady amid the storm. It digs deeper into its recent acquisition of a personal finance app. competes fiercely among its peers to win customers. tries to improve efficiency.

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

“The system has gone into too much capacity and that’s exactly what happened in 2020 and 2021.”

— Jay Farner, CEO of Rocket

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

But after two years of stellar performance, in line with the rest of the industry, the company is recovering from the damage it suffered from a headwind caused by higher interest rates and declining buyer demand. The stock was trading below $8 a share on Monday.

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

Many lenders are laying off staff, from banks such as Citi C,
at JPMorgan Chase JPM,
and startups like Better. Some smaller sets have even closed entirely, such as 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 significant market share, about two-thirds of mortgages, Inside Mortgage Finance reported.

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

When interest rates returned to 2008 levels, these non-bank lenders were stuck. Mortgage demand fell by almost 30% compared to the same period last year.

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

For the buyer, affordability has seriously deteriorated. In April 2021, when rates were at 3 percent, the annual income needed to buy a home at the median price of $340,700 was $79,600, researchers at Harvard’s Center for Common Core Studies said Friday.

In July 2022, with a rate of 5.41% and that median price rising to $403,800, the annual income needed to afford a home would be $115,000.

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

Consequently, buyers leave the market. And Rocket wasn’t spared: In April and August, the company cut its workforce in response to declining business.

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

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

“You have a market that was 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 it seeks to increase market share.

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

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

In April and August, Rocket cut its workforce in response to falling mortgage business.

A mortgage consultancy, Stratmor Group, said one lender referred to them as a “monster signing bonus”.

But after interest rates rose and business dried up, capacity had to be reduced “for the whole industry to adjust properly,” Fratantoni added.

With the Federal Reserve raising interest rates further, which is likely to push mortgage rates even higher and squeeze the business, mortgage companies have begun efforts to be more competitive and attract buyers.

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

In other words, if a buyer takes out a 6% mortgage, Rocket offers 5% for one year. That saves a buyer taking 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 SAN,
as the company exited the US mortgage market. Rocket recently spent $1.3 billion. the acquisition of Truebill, a personal finance app;

“You have a market that was about $4 trillion in mortgages. And now you’re going to have a market that’s going to be about $2 trillion.”

— Jay Farner, CEO of Rocket

The acquisition of Truebill, now rebranded as Rocket Money, is another move to try to deepen its connection with customers, the CEO said, and offer more targeted products without excessive red tape.

Rocket Money has access to consumers’ credit information, with their permission, which makes monitoring financial health much easier, he said. “Updating the data will allow us to get to a place where we can have them ready for a mortgage at any time,” Farner said.

There will be stiff competition for those looking to take out a mortgage, experts say. And there are still plenty of cuts to go, based on Fratantoni’s estimates. Now that refinancing has fallen, with interest rates more than double what they were a year ago, margins are shrinking for lenders, he said.

Employment in the mortgage industry is expected to decline by 20% to 30%, Fradantoni added. As of the second quarter, lenders had cut only 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 crashed,” 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.)

Thinking about buying a home? Write to MarketWatch reporter Aarthi Swaminathan at aarthi@marketwatch.com

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