Rocket Cos. records most profitable quarter in four years

As measured across all channels, Rocket Cos. regained the No. 1 spot among mortgage originators, with profits up strongly year-over-year in the second quarter.

In one of the toughest spring housing markets because of diminished affordability and rising rates, Rocket thrived, gaining market share in both purchase and refinance, Varun Krishna, CEO, said on earnings call.

"We delivered our most profitable quarter in four years," Krishna said. "We expanded adjusted EBITDA margins and integration of Redfin and Mr. Cooper are well ahead of plan."

Later in the call, Brian Brown, president and chief financial officer, pointed out Rocket is now expecting an additional $100 million in synergies now with Mr. Cooper integrated; this is beyond the original $400 million target.

The company reported net income of $229 million, down from $297 million in the first quarter, but much improved from the $34 million for the same period last year.

Rocket closed $49.1 billion for the period. This includes $28.1 billion from the direct-to-consumer channel, $11.1 billion via Rocket Pro and $10 billion in correspondent acquisitions.

This compared with $39.7 billion at United Wholesale Mortgage. Rocket is now both the largest originator and servicer, Krishna said, noting its recapture focus connects the two. It is also now the nation's largest home equity lender.

Purchase market share increased to 6.2% from 5.5% in the fourth quarter of last year, while refinance share grew to 14.3% from 12.2% over the same period.

"This performance was not a coincidence," said Krishna. "It was the result of years of deliberate investment, focused execution and a business model that has fundamentally evolved."

Rocket now services $2 trillion or 9.1 million loans. It did sell $53 billion during the second quarter for $795 million of cash proceeds. But it retained the subservicing and recapture rights on nearly 80% of this, Krishna said.

With its acquisitions, which include Redfin, the partnership with Compass and investments in artificial intelligence, "this is the business we've been building; one with a stronger floor in difficult markets and significantly more upside when housing activity returns," he continued. "That's what gives us confidence that Rocket's long-term earnings power is fundamentally stronger than it was just a few years ago."

Competitors might have pieces of its business model, but no one has integrated it like Rocket has. Along with its investments in AI, this is why as origination activity picks up in the future, Rocket management believes it can grow its profitability faster while not seeing its cost structure increase at the same pace, Krishna said.

Looking forward, Brown said Rocket expects the housing market to remain challenging in the near-term. Examining real-time data, the third quarter's mortgage market should be smaller than the period just ended, something which has not occurred since 2022, he said.

Meanwhile, Rocket has over $11 billion in liquidity, is the only independent mortgage banker with an investment grade rating along with a leverage ratio under 1 times, Brown said.

When asked about Rocket's mortgage servicing rights hedge strategy, Krishna said it uses low-cost instruments like mortgage TBAs and Treasury futures. It does not place bets on rates rising or falling, it is only hedging the interest volatility of the MSR asset.