Rocket returns to profitability in 1Q, claims market share gains

Rocket Cos. for the first quarter turned around losses compared to the year ago period as it reported both increased net gain on sale as well as positive net servicing income.

But that gain-on-sale growth is likely short-lived as management predicted the level will return to close to where it was in the second half of last year.

Yet, on the earnings call, management painted a positive picture of the current interest rate surge — earlier today, Freddie Mac reported the 30-year fixed at 7.22% — benefiting Rocket as an opportunity to take market share from its competitors, primarily banks.

"If rates are to stay higher for longer, and let's say it's not a $1.8 trillion market, it's something less than that, there's a view you can get to pretty easily that that actually benefits us even more given our capitalization levels, given our liquidity and some of the investments we've made over the past two years in terms of technology to increase capacity," Brian Brown, Rocket's chief financial officer said.

The Detroit-based firm had first quarter GAAP net income of $290.7 million, versus a fourth quarter loss of $233 million and a first quarter 2023 loss of $411.5 million.

Gain-on-sale totaled 311 basis points on closed loans of $20.2 billion. For the fourth quarter, it was 268 basis points with $17.3 billion of production, while one year ago the gain-on-sale was 239 basis points on volume of $16.9 billion.

That first quarter margin benefitted from a pair of market conditions that are not likely to reoccur, Brown stated. The first was the lower interest rate environment during the period versus where they are currently.

"Another factor was our extremely strong execution in the securitization markets for home equity loan products," he continued. "Therefore, our expectation is that the second quarter gain on sale margins will return to levels closer to those observed in the second half of last year."

Rocket executives claimed the company gained both purchase and refinance market share during the quarter, taking it "from large industry players and big banks in particular," CEO Varun Krishna declared.

In dollar terms, the net gain-on-sale, which includes the fair value of mortgage servicing rights Rocket originated, was $699.2 million, versus $469.6 million one year prior.

At the same time net servicing income increased to $402.3 million, compared with a loss of $31.9 million for the first quarter of 2023.

The servicing line included a $56.5 million gain in the change of the fair value of its MSRs; one year ago, it had a $398.3 million loss.

In March and April, Rocket acquired four portfolios with $8.2 billion of MSRs for a total consideration of $110 million. Those rights have higher coupons than what Rocket currently averages.

The company sees these borrowers as a customer recapture opportunity, especially if rates go down.

"Despite recent market volatility, we are steadfast in our belief that there's tremendous opportunity ahead for Rocket," Krishna said.

He pointed to the reduction in industry capacity — a trend Rocket was a part of — as benefitting his company, declaring, "The months to come are expected to put further pressure on smaller players already struggling with capacity and liquidity."

The next factor was the decision by a number of banks to reduce their mortgage lending businesses because of "profitability challenges," as well as changing capital rules.

Finally, Krishna said that the National Association of Realtors settlement regarding buyer brokers' compensation "has the opportunity to change the home value equation and to pave the way for a better experience for both buyers and sellers of homes."

Rocket's balance sheet gives it the opportunity to take advantage of these trends, he claimed.