Q2 2022 Rocket Companies Inc Earnings Call
We've been very pleased with our acquisition of <unk> now known as rocket money in the business is quickly becoming the core of the rocket engagement platform.
Rocket money has continued to grow rapidly with paying premium members, surpassing $2 million in July 2022, more than doubling year over year to put this in perspective. It took rocket mortgage nearly 30 years to originate 2 million mortgages.
It was only a few years ago that our servicing book surpassed 2 million clients, making the growth of rocket money even more impressive.
Rocket money has launched its credit card in beta offering unique features like smart pen that help members take control of their credits. The early response is very positive.
As I mentioned rocket money provides valuable insights and helps keep clients actively engaged in our ecosystem for consumers managing their financial lives, especially during times of high inflation. The services rocket money provides become even more valuable to its members.
The Companys members linked our financial and credit accounts, providing insight into our clients' lives, which are industry, leading marketing engine can then leverage to help craft bespoke experiences delivering the right offer to the right client at the right time.
Rocket homes or home search platform and real estate agent referral network grew overall real estate transactions by 25% from Q2 of 2021 to Q2 of 2022.
Which is even more impressive considering the overall housing industry declined over that same period.
Rocket homes also notch two record months in the quarter for closed units. The web traffic grew by nearly 60% over that same time period, reaching nearly 3 million unique visitors per month.
Rocket solar continues its national expansion in June and is now available in 42 metropolitan areas covering a meaningful portion of the U S population, including Arizona, Florida, and South Carolina.
In addition, as of this week, we are proud to highlight another example of our flywheel in action as rocket solar is now working directly with rocket loans to provide solar financing options to our clients. This partnership is made possible by the incredibly flexible AI powered loan Decisioning engine and product agnostic platform developed by rock.
Loans over the last few quarters.
Just one of the many examples of our investment in technology, continuing to pay off for our company.
We look forward to continually growing our solar footprint and expanding the use of the rocket loan lending engine through the remainder of 2022 and beyond.
As we continue to focus on our future. We're also keeping our sights firmly set on maximizing the opportunities before us.
Homeowners are sitting on a record 28 trillion dollars of home equity the cash out refinance opportunity remains very healthy we see our clients using cash out refinance to consolidate debt or remodel their existing home.
We've also launched a home equity loan product just a few days ago that will provide even more optionality to clients, who may not want to refinance their first mortgage due to favorable terms, but they still want to tap into the equity currently available in their home to illustrate.
And an example of the power of our platform.
We're able to develop and go to market with our new home equity product in just under 60 days by leveraging our flexible technology platform in internal resources.
With client insights from rocket money, we can offer our home equity loan and other products to come to the right clients at the right times as client pool represents tremendous future opportunity once they are part of our ecosystem.
Well, the first and second mortgages together when the market is once again right for refinancing or take advantage of other rocket offerings down the road.
The purchase market was more muted than we expected in the second quarter with home buying activity impacted by affordability inventory and consumer confidence, we are prepared and ready to help our clients. During these uncertain times and when the macro environment improves.
This is exactly why our engagement platform is so crucial it allows us to keep our clients engaged and active with our brand until the moment they are ready to transact eliminating the need to market broadly.
Reducing our cost to acquire clients.
Over the past few weeks, our capital markets and marketing teams collaborated to launch new products to address our clients' immediate concerns over rate uncertainty. We have placed renewed emphasis on a ratio of program, which gives our purchase clients' confidence in a rising rate environment by locking in rates for 90 days, while the search for a new home. We also launched.
Our rate drop advantage at the end of July which provides homebuyers with a onetime credit on typical closing costs to refinance their mortgage if rates drop within three years of their purchase something made possible and profitable by our efficient origination process.
We're also very happy to share that we signed two significant premier enterprise relationships, we've entered into a new agreement with global financial leader Santander to originate mortgages for the bank.
You May remember earlier this year Santander exited the U S mortgage market in light of challenging conditions.
We also signed a new partnership with Q2 banking platform leader, who provides digital banking applications to over 500 financial institutions.
Work with Q2 to embed the digital rocket mortgage experience directly into the online banking apps used by their clients through.
So the Q2 banking platform partnership rocket mortgage will enable the financial institutions to offer mortgages without the need to manage their own mortgage operations consumers will enjoy a comprehensive seamless experience through one app to apply for a mortgage make mortgage payments deposit checks and build their savings.
We're having initial conversations with banks and credit unions, now and expect to make this technology available to them in the fall.
These challenging markets spurred financial institutions to scale down or exit the mortgage business, creating a compelling case to partner with the industry leader rocket.
More and more financial institutions are seeking out rocket to help offer mortgage products and in particular purchase mortgage products to.
To their clients without having to make the investment to originate on their own and compete with our strong brand.
It is a tailwind for our enterprise partnerships channel and presents an opportunity unique to rocket to grow our client base and market share.
As we look forward, we will invest through the cycle.
And further prove rockets track record of execution.
Rocket is incredibly well positioned to seize the opportunities in the financial services space the mortgage market MBR by continuing to build out our platform and comprehensive end to end home buying in financial services ecosystem.
We're excited to continue to move forward and fulfilling our mission to be the best at creating certainty in life's most complex moments so that our clients can live their dreams with that I'll turn things over to Julie to go deeper into the numbers.
Thank you Jay and good afternoon, everyone as we navigate through these challenging and rapidly changing market conditions rocket remains focused on serving our clients executing on our vision and investing in the key areas of our business I won't be hearing some detail on our cost management program as well as the actions, we're taking to drive short.
Term result, while continuing to invest in our long term growth.
Year to date, we have seen a seismic shift to a smaller mortgage market. The average weekly 30 year fixed rate mortgage jumped from three 2% at the beginning of the year to nearly 6% at the end of June as EBIT and fastest drive in over 50 years.
The rise in rates had a significant impact on rate and term refinance demand.
More recently purchased demand has also been affected as consumer sentiment has declined at a rapid pace to levels not seen in more than a decade and looming apprehension over the economy has driven fears of a potential recession.
Consequently, consumer behavior has changed significantly and in particular potential homebuyers are staying on the sidelines.
In Q2 rocket companies generated $1 1 billion of adjusted revenue.
We delivered GAAP net income of $60 million.
Resulting in GAAP EPS of <unk> <unk> per diluted share on an adjusted basis, we reported a loss of <unk> <unk> per adjusted share.
In the second quarter gain on sale margin continued to show strength coming in at 292 basis points, which was above the high end of our guided range and largely consistent with recent quarters. As a reminder, Q1 gain on sale margin was 286 basis points. After excluding a 15 basis point lift from the one time benefit.
Associated with the rapid move in bond markets in Q1.
We generated close loan volume of $34 5 billion.
And net rate locks of $29 4 billion.
Both coming in around the low end of our guided range.
Both net rate lock and closed loan volume were lower than anticipated largely due to muted demand in purchase attributable to declining consumer sentiment and recession fears.
Regarding our expenses, we continue to execute a disciplined and prudent approach to cost management.
We communicated on our last earnings call that we would undertake significant cost reduction measures during the second quarter.
At that time, we forecasted a roughly $200 million reduction in total expenses from Q1 to Q2.
However, as we closely monitor the challenging macro environment during the quarter, we made a concerted effort to accelerate expense reductions.
We took additional cost savings measures beyond the career transition plan, including but not limited to marketing production and other vendor related costs, which resulted in a reduction in cost of $300 million as compared to the first quarter.
Our total expenses in the second quarter were $1 3 billion.
Down from $1 6 billion in the first quarter, including a partial quarter of savings from our career transition program, which will result in a cost reduction of approximately $50 million on a four quarter run rate basis.
Looking ahead to Q3, we expect our core mortgage business to continue to face headwinds for.
For the third quarter, we expect closed loan volume in the range of 23% to 28 billion and net rate lock volume between 23 and $30 billion.
We expect third quarter gain on sale margins to be in the range of 250 to 280 basis points, our guidance assumes that concerns of recession and subdued consumer sentiment will persist throughout the third quarter.
As always our forward looking guidance is based on our current outlook and visibility into the third quarter.
For Q3, we anticipate a further reduction in total expenses of between 50 and $150 million from Q2, driven by production and marketing related expenses and the full quarter savings associated with the career transition plans put into effect in Q2.
We will continue to be diligent about managing our cost balancing the current macro environment as well as our long term objectives.
Today's environment essentially how important it is for us to continue to invest in the rocket engagement services platforms. The rocket engagement platform increases the number of clients that we interact with improved conversion and lowers our client acquisition costs together with the services platform. This enables us to capture market share and grow profitably.
Turning to servicing.
As we've talked about on prior earnings calls our servicing book is a strategic asset for rocket as of June 30, our servicing portfolio included $2 5 million clients with $538 billion in unpaid principal balance.
At the end of Q2, the value of our mortgage servicing rights were $6 7 billion.
Including newly created MSR and the mark to market adjustment.
This reflects an increase of $1 $3 billion year to date, including a $1 $1 billion mark to market adjustment due to changes in assumptions.
While the mark to market change in the MSR portfolio value is excluded from our adjusted net income metric, it's worth noting that the positive market adjustment on the portfolio is counter cyclical in a rising rate environment.
As a reminder, the mark to market increase in value of the servicing portfolio is a result of the assumption that with higher interest rates prepayment speeds slow which extends servicing cash flows and therefore, our recurring cash generation from this asset will be greater.
We also drive a considerable amount of annualized recurring revenue from servicing our clients mortgages during the second quarter annualized recurring cash revenue from our servicing book with over $1 4 billion.
When considering the cash flows from our servicing portfolio and rocket money, formerly known as true Bill we generate over $1 $5 billion of annualized recurring cash revenue as of June 30.
As we have shared with you before the first priority within our capital allocation waterfall is reinvesting in our business, even during challenging times and Thats exactly what were doing today.
I mentioned in his remarks that our investments over the years have enhanced our ability to emerge stronger from challenging environment in.
In 2004, we invested in our core operations process, making it vastly more scalable and efficient which allowed us to grow production by 70% and double our market share in the next three years in.
In 2008 and 2009 during the financial crisis, we began investing in our brands and held some excess operations capacity, which allowed us to triple our market share over the next few years.
Through our continued brand investment rocket has become the number one most differentiated brand in mortgage.
We have made continuous investments in technology over time building, our next generation Fintech lending platform the foundation for rocket mortgage, which we launched in 2015.
In 2018 as interest rates began to rise we continue to focus our energy on investing in technology and growing our GTO business.
These investments in technology allowed us to more than quadruple our mortgage origination volume from 2018 to 2021 and today, our GTO business is the second largest in the space.
These examples demonstrate how our continued investment in the business throughout the cycle gives us a competitive advantage and the time to make that investment is upon us. Once again, we will also maintain a well capitalized balance sheet with substantial liquidity capable of navigating different market conditions. Our strong balance sheet is one of our many competitive moats.
We exited the second quarter with $950 million of cash on the balance sheet and an additional $3 $1 billion of corporate cash used to self fund loan originations, our total available cash and self funding of $4 billion.
Total liquidity stood at $7 3 billion as of June 30th including available cash plus undrawn lines of credit and our Undrawn MSR line.
Since June 30, our total liquidity has increased as subsequent to the quarter end, we put in place a new $1 billion MSR facility.
On a pro forma basis, including this new MSR facility. Our total liquidity as of June 30 would have been $8 3 billion.
Our $4 billion of available cash and self funding combined with $6 $7 million of mortgage servicing rights represents a total of $10 7 billion of asset value on our balance sheet as of June 30.
This equates to $5 42 per share.
Despite broader industry headwinds and a challenging market, we remain focused on serving our clients and taking care of our team members and we are committed to investing in the expansion of our engagement services platforms to position rocket well to deliver short term results and drive long term growth.
We will continue to deploy our capital in a strategic and disciplined manner to generate long term shareholder value.
Before we turn the call over to the operator I wanted to make you aware that our inaugural ESG report for 2021 can be found on the social impact have on our IR website.
This first ESG report highlights rockets for more than profit philosophy and approach and the positive impact socket has made on our community and our environment.
With that we're ready to turn it back to the operator for questions.
At this time I would like to remind everyone in order to ask a question press star and the number one on your telephone keypad.
Your first question comes from the line of Ryan Nash Youre.
Line is open.
Hey, good afternoon, everyone.
Hey, Brian .
Yes, Jay.
Maybe to kick it off I know in the Mark.
Turning remarks, you mentioned.
Youre going to continue to execute on.
Prudent cost management approach.
I think you even said another $50 million to $150 million of cost reduction next quarter can you, maybe just talk a little bit more about what's driving some of the cost declines and if we're going to be in a mortgage market sub two trillion I guess, how much more cost leverage is there beyond what you've identified.
Or do you think you could maybe take the run rate to in this kind of environment.
Yes.
Julian make some comments on how we think about the cost moving past Q3, but I think just to frame up how we think about this.
We've got our core mortgage business right and so although I look across all of our KC I think about the operations underwriting core mortgage technology and how that is functioning.
Mortgage volumes and we strive to have that as a profitable.
Part of our business. We then have our platform and we talked a lot about that in my prepared remarks because.
If you think about a mortgage market, whether it's 17182 trillion in Netherlands, sure, but you.
<unk> got to find a way to bring down the cost to acquire.
And what you're watching right now in the industry are there still too much capacity.
And people are.
Fighting very hard for every particular loan that may be out there.
So strategically win in the long run.
We've got to we've got to make sure that.
Our engagement rates with our clients are up our lead flow is still very very strong, but not every client is ready to transact right. Now in particular, we referenced is the purchase market has slowed a bit because people are concerned about the increase in there in their monthly payment. So how do we stay engaged with that client how do we increase conversion of those leads over time driving down our cost to acquire.
And increasing the lifetime value of the client.
We've done a lot of work on the services side of our platform, so offering homes offering auto offerings solar which is growing rapidly.
But the acquisition of <unk> now rocket money, that's our engagement side of the platform with the budgeting with the managing of assets in the balance sheet with the managing of credit with the subscription canceling and we will as we move forward into the second half of this year, we will make further announcements about how we're going to engage with that client base.
<unk> Daily weekly monthly.
Those efforts and now nearly 2000 or over 2000 people are focused on that here and thats the strategic advantage of truly referenced that.
Every every so often we've got to put a lot of effort into something outside of the core mortgage to grow the overall platform and grow mortgage and so back to back to your question that that's what you're watching US do right now we're taking those resources those salaries and we're accelerating that engagement component of our platform. So as we get into.
<unk> 2023, and what we expect to still be a fairly challenging mortgage market that will lead flow that we're generating will be staying in our ecosystem staying in contact with us and we will drive down the cost to acquire thereby allowing us to actually spend more on marketing and drive more mortgage.
Volume and take market share. So we can continue to work on expense reduction again.
We'll touch on that but really the focus is taking the assets that we have our team members and accelerating our ability to drive revenue growth and Thats, what youre seeing is due in Q2, Thats, what youre seeing us do in Q3 and the expense reduction is coming more from.
The career transition plan that we did our team is doing an amazing job of working through all of our vendors and contract costs, what's getting smarter about that but.
But we've got to keep putting money into the tech the product strategy. The data science, because thats, how were going to grow market share in a more challenging market mortgage market in 2023, Julie I'll, let you add comments sure I'll make a few comments on our census tiers to add to that so looking at the second quarter here, we reduced expense.
By $300 million over the first quarter and exceeded our targeted $200 million by $100 million. So we've really taken allowance moves to reduce our cost into the quarter here and as we look ahead into the third quarter, we have opportunity of about another $100 million.
You add all that up $400 million Thats, an annual run rate of $1 $6 billion of safety.
Significant cost reduction has already taken place as we look ahead. There is more opportunity. We do believe as Jay mentioned on the vendor side of things. Some of these things take a little bit longer to work into as our contracts mature as we look at how these are going to be coming for up for renegotiation, we will still see some of these cost savings happening going forward.
As well so theres opportunity there.
Attrition, we believe there will be some of that that will continue as last year.
Our marketing as well.
Got it that was very helpful color and context regarding the entire platform and how do you think about it so maybe if I could just squeeze in one follow up.
R. J so rates have obviously come in a bit and I'm. Just wondering do you think this it all helps the trajectory of volumes, particularly on the refinance side.
Do you think <unk> represents the trough for volumes just based on the market conditions.
If so what do you see as the drivers of originations from Trs market sentiment doesn't improve as Jay you highlighted you expect 'twenty three to be challenging too.
What do you see as the drivers of originations as we look forward.
Given the uncertainty.
The economic backdrop.
Yes, I think that.
In a moment, where you've got to transform your business and how youre thinking about it.
The.
The current environment that we're in.
Is causing.
Like I said, a lot of a lot of kind of scrambling and scraping and so forth more capacity has to come out we're very fortunate in our ability to continue to invest.
And I touched on this.
It's not investing in although we have a little excess capacity that excess capacity for us to stay around because as we implement all of these things we're working on with our engagement platform for the rest of this year and that drives market share gain we will need that capacity as we move into 2023 as we grow market share again, so it wouldn't make a lot of sense.
For us it through a.
<unk> capacity reduction only to turnaround have to hire again, four or five months later, but I don't see a lot of people in the mortgage space, making.
Millions and millions and millions of dollars of monthly investment that we're making in an engagement platform like that.
I don't see folks signing up.
Partners like Santander <unk> like we are and so I think.
We're going to see the rest of the industry contract as we continue to move forward.
And without something that allows you to bring a client on your platform and continue to work with them maybe it's the second mortgage product that we just released another thing that again without our tech platform. There is no way, we could have gone from not having that to doing all of the programming, creating the docs and launching at less than 60 days our capital markets.
He was working on additional products that will launch as we get into the second half of this year to help our client base. So we're going to leverage all of that tech, but those type of things that will allow us to grow market share.
If you don't have those things I think it's going to be a challenge for you to grow market share as we finish up this year and roll into 2023.
Thanks for all the color.
Alright, great. Thank you.
Your next question comes from the line of Kevin Barker Your line is open.
Great. Thanks for all the color on the operating efficiencies.
A follow up question is some of that.
Ryan has already asked.
You had one 3 billion of expenses was there additional $61 million in there from.
The changes.
Employees.
Embedded in that $1 3 billion, and then where could we expect a lot of the expenses to come out.
Within going into third quarter, there's a lot of G&A and marketing expense or is it other items that can really drive some.
The efficiencies that you laid out.
Yes, we've got continued thoughts around marketing, although as you probably know from a performance marketing perspective.
We're very we're very thoughtful about making sure that we don't cut anything that is profitable for us there and again as we start getting more and more signal around how that marketing will work not in not only in the short run, but the long run.
It allows for us to continue to spend marketing there.
We will continue to see attrition as Julie talked about we're being really thoughtful about that if there is attrition in places that are critical for us from a technology perspective to keep building out. The platform. Then we can we will backfill, but in other places we won't and so you'll continue to see those those salaries drop.
There is additional work with the vendors in contracts that we've got as Julie referenced before even once you go through and identify areas, where you need to make adjustments either renegotiating or.
Waiting for contracts to season can take a bit of time, it's not something you can work through in a matter of a month or a quarter. So all of that work continues forward and we'll continue to.
Move forward and we're pretty diligent about it we've got a great.
Team here in our procurement group and they are working every single day to be smart, but I just want to reiterate smart, but also making sure that we have all the proper resources to do what we what we've always done in years past, which is to grow market share and so as we think about the expenses and we think about the revenue will continue to work on the expense.
But our main focus is driving up that revenue by bringing down.
The increase in the conversion rates and bringing down the cost to acquire our clients and that's that's what I referenced in my remarks, our senior leader team.
We're dedicating many many hours a week reviewing line by line, where all of our resources are at the work that is being done I have not seen.
I'm not going to say that this is more intense than ever before but we are equal intensity than we've ever been in the 27 years I've been at the organization in terms of being all over these projects and I'm watching a team of people that are highly energized because they see the work that we're doing that no. One else is doing that would really differentiate this company moving forward.
To be far broader than just a mortgage lenders. So Julian if you have any anything I missed there the only thing I'll add to that.
Cash at up to $61 million in career transition expenses and you are correct that $1 billion. III does include $61 million of expenses in connection with that career transition program. We had a couple of nonrecurring items. This quarter. There was a $24 million per item is related to just the tax adjustments that we made so expenses would have been $1 $2 76 in the second quarter had it not been for.
Couple of adjustment.
Okay, Great and then.
Your leverage is very low you have a lot of cash.
Mentioned over $8 billion, our access to liquidity today on a pro forma basis.
Is there anything you could do to potentially accelerate your diversified revenue diversification efforts. Besides what you've already built within rocket homes or rocket auto.
Perhaps maybe look at M&A opportunities to potentially diversify or offset some of the revenue headwinds you're seeing on the mortgage side.
Yes, I think Thats, a great question and we've got our team out constantly looking at those opportunities. If you think about the waterfall approach.
You've got the bottom services layer.
Actually generates the true revenue mortgage.
Auto solar is growing and growing rapidly.
I know I kind of touched on it just briefly but all the tech work that we did in rocket loans to really build an AI driven loan agnostic technology platform, so whether to Seoul alone today in auto refinance loan for example, tomorrow that tech allows us to do that very quickly.
So that's the that's the revenue component of that you've got the top of the funnel, whether its our quick and loan side, our core digital or mobile site or rocket mortgage site. Other assets. We are building and you've got the middle layer the engagement layer, so as we drive traffic.
Got to find a way to make sure that you can engage that client base and so when we think about M&A do you think about other services you can add to drive revenue and you think about other ways to drive top of the funnel.
Critical that lease that's why we said 2000 people accelerating the growth of the engagement layer because thats good.
That's the kind of secret sauce that unlocks our ability to bring the clients and keep the clients and thats why the growth of <unk> doubling in a year is so excited.
Because it's taken us so many years to get to a place where we've got north of 2 million people now I think almost $2 6 million in our servicing book, but to watch and be able to add millions of people a year, where they're linking their bank accounts, where we have access to their credit data asset data that informs all was up funnel to how we're buying.
These are engaged with class was down funnel and to opt into how we generate revenue that component is critical. So that's why we really are trying to point out. The work. We did the last few quarters and the work move to the next two quarters. It gets us to kind of phase one completion of that engagement layer, which unlocks all the other M&A activity that we're doing right.
Now.
Okay. So in regards to M&A.
We'll see.
An opportunity we're still looking at.
That means right now even though okay.
Thank you. Thank you Joe.
Got it.
Thank you Jay.
Sure.
Sure.
Your next question comes from the line of Doug Harter.
<unk> is open.
Thanks.
Can you just talk about the impact on on rates.
Youre seeing on both purchase and cash out refinance kind of as you went through the second quarter into the third.
Yes, certainly.
Certainly I think we're all seeing the fact that it has taken many consumers out of the market right now that was why growing the second mortgage.
Equity loan was so critical for us because it allows us to monetize lease low today, but more importantly, it allows us to put that clients into our servicing portfolio and into rocket money and be there to service them Tomorrow. So we've really got a waterfall approach here. The first is the cash out refinance on the primary mortgage the second is the.
The second HELOC loan we've now just rolled a few days ago, maybe last week, if I remember correctly and then we've got a rocket loans loan or those that don't fit I know, we referenced the fact that our data credit card comparability in market. So we're really stacking a full suite of products that allow our client is looking.
For cash out and I think we're all watching where it comes out every week that consumer that continues to grow and as inflation occurs that variable rates keep rising so theres more and more demand. We just got to have a full product selection for those clients and again I think we're uniquely positioned to help clients across the board, where others that we compete with aren't.
Now purchase is another interesting thing because.
A slight increase in interest is fine certainly for.
All purchasers, but first time homebuyers as well.
The increase we've seen probably cooled off purchases more than we had expected going from Q2 and into Q3, which is reflected in some of our guidance. Our team is working on ways to solve that for consumers to help them have an affordable payment and still purchase a home and we will talk more about that as we get into <unk>.
Our future earnings calls our press releases when we can discuss those things. So it is having an impact.
That's why it's so critical that all these other investments that we're making we accelerate so we can fund those avenues to grow even as the mortgage market itself may shrink for a while.
I guess, just a follow up too.
Kind of what the economics look like on home equity loans as Youre looking to sell those to someone else would you put those on your balance sheet, what type of gain on sale margins might you be able to generate on those.
Yes.
We're in a unique position to be thoughtful about that and as you know we use some of our path to self funding for a while especially when it's nice.
Opportunity for us to gain interest income on that.
In most cases at some point in time, we do a windup securitizing or selling mortgages, whereas the first or second.
And so we're kind of continuing to keep that same that same philosophy there.
So that's kind of if we think about from an economics perspective, I think is really important to remember although the revenue because these loan sizes are smaller although the revenue is lower.
The cost to approximate or I can close we've already got capacity number one and number two there is no cost of acquire those types of already here already bringing them is upper first mortgages. So in the second makes more sense, we're not incurring any additional marketing costs. So at the end of the day the profitability and the loan still looks good.
Even if a loan types is closer to $100000.
200, $250000. So that's how we think think about that particular product and then again as I referenced there is other products that follow after that again all of those represent revenue opportunity client engagement with no cost to acquire.
Thanks, Rick.
Yes.
Your next question comes from the line of James Faucette.
Your line is open.
Hi, Jerry.
Hi, This is actually Blake matter on the line for James Thanks for taking my questions.
Sure.
So first off in the current environment. Your strong balance sheet gives you the flexibility to play offense and defense. So looking ahead. How are you planning on leveraging this optionality to our advantage.
Well.
I think <unk> touched a bit on it already but we're going to continue to be prudent around our expense.
Management, I think Julian team did an incredible job of kind of exceeding our expectations in Q2 as I referenced already that the group is all over that.
The next quarters as well to ensure that we're being thoughtful there but.
The other color.
Ask.
The first step is the folks that we've got.
Building the engagement platform and all the services I talked about if we were to go back in time, five or 10 years and we didn't have all of these opportunities you wouldn't have those those 2000 plus people working on it right and so that's why I referenced we kind of think about it I think about the business in three tranches.
Mortgage kind of separate and then you've got this investment so.
In the services and engagement platform and Thats, how I think about it as a capital investment that we're making because the best use of our capital is to build out this technology that maximizes our marketing that reduces our cost to acquire that increases our lifetime value. So when we think about our investments we say what's out there from an M&A perspective.
What could we built internally and how do we get to this place where we grow market share in 2023, and that's where we're putting a big chunk of our capital right now is that internal investment in technology.
But we've also got Scott Elkins and our.
Kind of the acquisitions team out there looking at opportunities we need to be thoughtful about the fact that we.
We're not all the way through this.
Cycle, and so others, who don't have the same ability to invest may continue to see their values drop and if so we'll be thoughtful about when and if we pull the trigger on those acquisitions when it's the right timing but.
Certainly.
One very strong possibility for us to get into niche markets that we want to enter into that fits nicely into our ecosystem.
Okay, great and as a quick follow up given where the market's heading how much in operating losses are you willing to endure.
Or would you saw some of the MSR book to reduce cash burn.
Or Conversely would you be willing to buy servicing portfolio that others in your.
You seek to gain market share.
Well <unk> is very interesting, especially as we think about how those msr's will interact inside of everything that I've just described.
Not only short term returns, but better lifetime value.
And certainly we've demonstrated the fact that we are.
Were thoughtful, but not afraid to deploy some of our cash or having a.
Small burn like you've just talked about if we're deploying it in technology and product strategy building half thats going to build our business and that's where that capital is doing today, but more of our focus is how do we leverage that to grow market share in 2023, which will make us a stronger company and that's where our <unk>.
<unk> is here, it's not a long term thought around burning cash its about investing now to see growth in 2023.
Alright, thank you.
Yeah.
Your next question comes from the line of Matt Here <unk> your.
Your line is open.
Hi, good afternoon, and thank you for taking my question I wanted to maybe just touch on the partnerships a little bit if you announce something there in Q2 today.
Let me just expand a little bit on those partnerships specifically actually on the Q2, just does that tie to the Salesforce partnership you previously announced or is this just another way to sort of credit unions.
And just generally maybe even broaden the discussion also.
Seems like you're leaning in a little bit on partnerships here over the last few.
Quarters, maybe just talk at a high level about that decision is it just driving more volume to the platform what happens once the customers on your platform can you actually.
No.
Click them as rocket customers are there so customers of the popular Inc.
Yes.
You've kind of touched on all of the reasons why we're very interested in this.
We think that partnership opportunities will accelerate because all of the questions. We're getting here, many folks who engage in mortgages one of their business lines.
We will probably decide to move out of that space. As we continue forward through the end of this year and into next year, creating opportunity for us to step in and be there their mortgage partner and this is really leveraging the technology of the client experience and the brand that we've built if someone's thinking of getting out of the space.
But wants to remain offering that for their clients I think were the obvious choice for them and so we think the partnerships will continue Q2 is different than salesforce similar concept, but different technology platform that we're using so salesforce gives us reach into a certain set of banks and credit unions now Q2 gives us reach into another set of 100.
The banks and credit unions, and so it's an exciting exciting.
Moment in time and through the end of this year will be will be finding those first banking credit names and plugging them in as we enter into 2023. So partnerships are strong.
We are differentiated in that space and so you'll continue to see us do more and more of that as we move forward.
Okay.
Thank you and then just if I could just follow up one.
You mentioned.
Talked a little bit about your strong balance sheet, but I did want to ask you've announced quite a few products no.
So lower home equity credit card how.
How much how many of those are you funding off your balance sheet currently and is that like the near term goal is like just fund those off the balance sheet and as they grow then.
Oversupply out other partners or do you have box notes for something like credit card, where there's like actually issuing Boston smartphone brand like relationships.
As we always talk about and Julie can comment we're a capital light business. So if we see an opportunity to leverage the cash that we have for a short period of time.
He was a nice spread between the lending rate, where we are.
These are borrowing money youre using your own cash we'll do it with.
A small portion of the lending we do because in the end.
We're selling those loans to partners et cetera are securitizing them, we're not going to hold them for a long period of time.
Let me agree J M.
And as we think about these new products that we're getting in queue. We do live to sellers in Q, either a whole loan market or into the securitization. If there is a market for that right. Now there is not a great securitization market. So we have some loan sales arrangement is set up for those products. So that we while we may financing for a short period of time, we will be.
Selling those and.
Having a day off of our balance sheet.
Thank you.
Okay.
Yes.
Your next question comes from the line of Mark Devries.
Your line is open.
Yes. Thank you Jay I think you mentioned several times you see the need for industry to remove capacity just isn't getting your thoughts on how long you think it'll take for capacity to fully rationalize a growth industry.
What the implications are for margins over the.
Coming quarters.
Yes, it certainly has taken longer than we have seen in the past I think that's a function of course of 2020, one and people building up.
Reserves and so their ability to kind of hang on through the cycle a bit longer than usual.
I don't know if I have a crystal ball to tell you when the capacity will come out, but I have a feeling we'll see that steadily happen here moving forward.
There is a strategic advantage I've already touched on whether theres excess capacity or not for our ability to drive down the cost to acquire which is more powerful than 10 or 15 basis points in margin in either direction.
The other important component.
And I'll bring.
This up now as we have multiple business lines.
And we think about our gain on sale margin one of those of course is our <unk> and we've got a great set of partners that we work with them very very closely we're going to be launching new products for them as we get into the second half of this year to strengthen their business, but we've also made it very very clear that.
Moving forward, if youre not a partner of ours, we will be taking advantage of all of our data information.
Our massive sales force they are incredible skill to win those partners over into our retail retail channel and so we've launched some initiatives here in the last few months to really dial that in strategically bind each one of those clients and start bringing them onboard so that'll that'll change.
Got an impact on margin as well as we move more towards that retail channel winning those clients again protecting the third party originators that are partners of ours, but being very clear about the fact that.
We're going to be we're going to be full steam ahead, if youre not a partner of ours, we're winning those clients onto the rocket platform using our retail group.
Okay great.
And just a question for Julian on the margin guidance.
It looks like you're calling for a little bit of weakness in <unk> is that a reflection of that you expect a little bit more weakness across channels or is it more of a mixed shift to lower margin partner channel.
It is attributable to net and that is driving that decrease in margin. We are seeing the direct to consumer margin holding very nicely quarter over quarter and the other thing that's impacting margins is that in July as rates have moved around a bit we do have an MSR component.
The gain on sale margin.
A fairly significant driver of our guide down as well and that changes quarter to quarter, but that was part of it.
Got it and then just one last quick one on the Santander partnership.
They are going to be offering that in their branches or is this going to be exclusively a digital offering for them.
No I think it's across the board, how theyre going to interact so there'll be offering that my understanding is too.
Loan officers that are in their branch system that can plug directly and guide clients into our rocket ecosystem.
Okay, great. Thank you.
Okay.
Your next question comes from the line of Erin <unk>. Your line is open.
Thanks.
Hoping you could talk a little bit more about the rocket solar opportunity in.
How are you having these loans funded.
Are they in Houston.
Houston Warehouse lines, and then sold to bank partners or is it purely capital markets. Just curious because theyre generally solar loans are fairly large in size.
Well, yeah, a few things and just taking a step back on so there's three really important components here.
Number one.
I point this out a lot.
Our assisting the millions of <unk>.
Clients that come to us for a mortgage and so.
It's an interesting opportunity for us because there's no cost to acquire these clients as we bring them into our solar platform number two we're engaging the actual assistance, helping the clients plan out the solar so it's not just financing we're doing the sales of that as well and there is a nice revenue opportunity attached to that component.
Now the thing that we've just plugged in as the actual solar financing itself and so rocket loans, we'll be providing that.
When it's appropriate to leave ourselves many solar partners, including rocket loans and then of course once the solar loan is originated.
Within 12 to 18 months typically people will roll the solar into their first mortgage. So we're really create we've got lower expenses that our competition, while we create three revenue opportunities through that client as we help them.
And save money on their on their.
Utility bills and of course, they are very excited about the new environment as well now Julie can speak to what we're doing or what rocket loans is doing with the solar loan itself.
Because possibility there yes.
As I mentioned, when we enter into new products would you have to get liquidity in the markets for them, we're doing solar or right now is self funding.
Many of the origination of the firm very strictly at times, we do have a partner that will be buying those loans from us we may look to get warehouse financing down the road, if we need it right now that we count the capital to be able to do that while we startup this channel.
Okay got it.
And then.
Another question on the expense decline okay.
How much of the say roughly $400 million over there.
The next quarter and this past quarter.
Is variable because youre.
I would assume that a decent amount of that is variable just because your production levels have dropped off a decent amount.
Yes, a portion of that is certainly variable when you think about the conditions that we have the production costs that we have associated with the origination that did come down but a substantial portion of that is us looking at additional vendor cost that we can impact through contract renegotiation.
Other things that we're doing to impact of cost of it is a mix of both looking at marketing marketing and down as you saw by about $100 million quarter over quarter.
And other things that we're doing outside of production impact those costs.
Yeah.
Does that answer your question.
This concludes the Q&A session, Jay Farner, CEO I turn the call back over to you.
Thank you and thanks, everybody for joining today.
And in particular, thank you to the team members for joining as I said here on the call and in the.
Corresponds I'll be sending out shortly.
The opportunity that we have right now in this market to lean in to invest and to differentiate and really transform. This company again is like maybe the four or five times prior that Julie referenced in her remarks, and so certainly appreciate all of your commitment to what we're doing because it's going to make all the difference in the world as we grow.
This company moving forward. So thanks to all of our team members and thanks, everybody joining us.
See you next quarter.
This concludes today's conference call you may now disconnect.
Okay.
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