Q3 2022 Rocket Companies Inc Earnings Call
Cycles are nothing new for rocket.
The company has experienced and successfully navigated through several significantly challenging time periods throughout a 37 year history.
Each time, we've been nimble pivoting and operating with flexibility and thoughtfulness that allow us to capitalize with every market shift.
And each time, we've also invested heavily in strategies that provide us with a deep competitive advantage when the market corrects.
As we continued to the current challenging cycle and when we ultimately emerge we expect a robust capitalization and superior positions and brand technology data insights client experience and client engagement paired with the sheer scale of our existing client interactions to allow rocket to further expand its.
Market leadership.
Housing will always be critical to the American economy.
It's nearly 20% of U S GDP and we believe there's a huge long term opportunity for the winter in this industry.
The investments, we're making today will fundamentally disrupt and transformed the way mortgages are done.
From client acquisition to conversion to loan production.
We will continue to lead and innovate and further widen the gap between rocket and other mortgage lenders.
In just 2022 alone more than 2.4 million Americans have transacted with us on the rocket platform.
Presenting unique clients across homes loans rocket money in other businesses, showing the true depth and breadth of our reach.
The home purchase market, which remains highly fragmented and inefficient represents a significant opportunity for rocket Ah.
National Association of Realtors report showed that four in 10 homebuyers are now millennials.
75% of the clients, who apply using rockets online platform or App, our first time homebuyers and or millennials.
Rocket money's clients also share similar demographics, and we continue to nurture and place them on the path to being future first time homebuyers in rocket mortgage clients.
In the past few quarters, we've responded quickly to our clients needs in these challenging times of high inflation.
Rates by bringing to market a slate of new innovative mortgage products.
Fast rollout relaunch of these products was made possible through the power of our platform and a collaborative efforts of our capital markets product strategy technology and marketing teams.
In September we introduced our inflation Buster program, which reduces of homebuyers monthly mortgage payment by one percentage point in the first year, if they're alone.
Inflation Buster gives homebuyers, a reprieve when they need it most in their first year.
When they have the highest housing related expenses, such as moving costs and furnishing at home and.
Inflation Buster has resonated with homebuyers in pairs well with our rate drop advantage program, which covers many of the costs to refinance in the years ahead if rates fall.
Last quarter replaced renewed emphasis on Ah Rachel program.
Which gives our purchase clients confidence in a rising rate environment by logging in rates for 90 days, while they search for a new home.
Our home equity loan product has proven very popular for existing homeowners, who are looking to tap the equity currently available in their house without sacrificing the favorable interest rates they have on their first mortgage.
We are also innovating to better serve our enterprise partners last quarter, we announced a new partnership with Santander, which went live in under 60 days.
Mortgage volume through this partnership is ramping up quickly with client applications outpacing initial projections over.
Over the next several quarters, we will extend our partnership to include full digital capabilities and additional client segments.
Turning to our platform the rocket platform and its engagement tools are the engine that will expand the top of our final lifts conversion and lower our costs to acquire new clients.
By driving growth in revenue and profitability over the long term.
These tools allow us to keep our clients connected to an active within our brand until the moment, they're ready to transact.
This helps us eliminate the need to re acquire previously or compete directly for new leads reducing our costs to acquire clients.
Rocket can leverage the valuable insights, we gain from our platform to make more personalized recommendations.
Rocket money a key component of our platform continues that's impressive growth.
Nearly doubling paid premium members year over year.
To put the size of the opportunity into perspective.
Today, we have more than $24 million rocket accounts.
Single sign on solution for the entire rocket ecosystem.
With these accounts, we have deeper insights into our clients, allowing us to provide a much richer experience through our platform.
Last week, we announced our new rocket rewards loyalty program.
A key component of our platform.
Rocket rewards gives our clients points for taking certain actions such as applying for a pre qualified approval letter utilizing mortgage affordability calculator or reading informational articles about the home purchase process ultimately.
Ultimately, helping to drive education and brand loyalty across the rocket ecosystem.
Early signs are very encouraging.
Within the first 72 hours over 70 million points were awarded to both new and existing rocket clients for completing over 17000 activities.
While you may have seen membership or loyalty programs and other consumer industries, such as hotels restaurants traveling ecommerce.
This is an industry first and we believe a game changer for rocket.
Who will be surveyed our clients a resounding, 88% told us they value a rocket.
Filiate rewards program in a way that would encourage a longterm relationship with our brand.
Rocket rewards will continue to create real value for first time homebuyers were affordability is the biggest challenge to achieving their goals.
With these $24 million rocket accounts and robust engagement tools, such as rocket rewards and rocket money. We are building ongoing relationships with our clients engaging with them, reducing our cost to acquire and extending lifetime value.
A robust capitalization or fortress balance sheet and most importantly, our team members incredible passion for building. These experiences will allow us to not only weather the storm, but grow in today's environment and through the market recovery.
The investments, we're making today will create shareholder value as we capture opportunities in the financial services space, the mortgage market and beyond.
In these turbulent times, we remain focused on fulfilling our mission to be the best at creating certainty and lives most complex moments so that our clients can live their dreams.
With that I'll turn it over to Brian to go deeper into the numbers.
Thank you J and good afternoon, everyone before we begin I'd like to Echo Jay's remarks regarding Julian Angelo I value my partnership with each of them and I wish them, both the best and their new roles as.
As you heard from J, the mortgage industry is facing significant headwinds and the second half of the year rocket is operating in this difficult environment from a position of financial strength and with clear competitive advantages and today's call I'll cover the actions, we're taking to improve our efficiency, including reducing our cost structure by more than $2 billion on an annual.
Wise basis.
Also walk through the investments, we're making and the rocket platform to continue to grow our business over the long term.
It's important to begin by putting 2022 into perspective rapid increases in interest rates and declining housing affordability are impacting demand for home purchases and refinancing at the same time.
As of mid October industry, refinance applications were down 86% year over year and home purchase applications were down 37%.
Volume is clearly under pressure there continues to be substantial excess capacity in the mortgage industry.
Creasing the competition for every loan the industry is flooded with loan officers, who are struggling to produce in fact, our estimates suggests that industry volume per loan officer is near an all time low at less than one loan or loan officer per month, the economics are simply not sustainable and.
Capacity in the industry will continue to come out.
Against this challenging backdrop rockets third quarter results landed within our guided range for closed loan volume net right box and gain on sale margin regenerated closed loan volume of $25 $6 billion net right box of nearly $24 billion in our gain until margin was 269 basis.
Which was above the midpoint of our guided range.
Rocket companies generated $888 million of adjusted revenue in the third quarter, we delivered GAAP net income of $96 million, resulting in gap EPS of four cents per diluted share.
Adjusted EPS basis, we reported a loss of eight cents per share.
Turning to our balance sheet rockets financial strength as a major strategic advantage for us as we whether the current market environment. We ended the third quarter with $4 billion of available cash and seven $3 billion of mortgage servicing rights together. These two assets represent a total of $11.3 billion.
A value on our balance sheet equating to more than $5.50 per share.
Or $4 billion of available cash consists of $826 million of cash on the balance sheet and an additional $3.2 billion of corporate cash used to self fund loan originations.
Liquidity stood at $8.8 billion as of September 30th including available cash plus undrawn lines of credit and Undrawn MSR lines, which includes a new 1.5 billion dollar MSR facility put in place during the quarter.
As of September 30th or mortgage servicing portfolio included two and a half million clients with $531 billion in unpaid principal balance.
At the end of the third quarter the value of our mortgage servicing rights with $7.3 billion.
This reflects an increase of $1.9 billion a year to date.
During the quarter the value of the MSR acid increased by $600 million, including a 400 million dollar positive mark to market adjustment. We also drive considerable recurring revenue for mortgage servicing during the third quarter, we generated $360 million of cash revenue from our servicing book, which.
Cents more than one $4 billion of cash revenue on an annualized basis net client retention remained over 90% in the third quarter well above the industry average.
Regarding our expenses, we continue to execute a disciplined and prudent approach to cost management.
Last earnings call, we committed to a further reduction in total expenses from the second quarter to the third quarter of $50 million to $150 million and we did just that reducing expenses by more than $100 million. During the quarter looking ahead to the fourth quarter, we anticipate a further reduction in total expenses a fifth.
Three two $100 million compared to the third quarter.
Over the past 12 months, we have taken significant action to reduce our overall cost structure. In fact, if we look at the third quarter of this year compared to the third quarter of last year on an annualized basis, we have reduced our expenses by more than $2 billion or approximately one third of our total cost.
As we navigate and adjust to the current environment, we're continuing our long term strategy of investing in our platform with an eye toward the future rocket leaves with competitive advantages and brand technology data insights client experience and client engagement.
These competitive advantages are difficult to replicate and help us drive superior unit economics and increase client lifetime value.
Constantly looking to leverage these advantages to reinvest in our business and drive longterm growth.
The investments that we're making our platform will expand the top of the final and bring more clients into our ecosystem in the past we've had considerable success retaining our mortgage servicing portfolio, which today represents two and a half million clients.
During the record profitability years, 2028, and 2021 nearly half of our mortgage volume came from existing clients already on our platform all at a nominal client acquisition costs, resulting in highly profitable unit economics.
The broader rocket platform, including rocket money and the recently announced rocket rewards program helps expand our reach an increase conversion across the broader universe of $24 million rocket accounts. This.
This is crucial because our platform helps keep our clients connected and active and also helps provide the valuable data and insights needed to make personalized recommendations.
So at a size of 24 million accounts and growing we believe we have a tremendous opportunity in front of us.
The platform can also improve our already industry, leading unit economics, one of the biggest challenges in the mortgage industry is the cost to acquire client, which typically runs in the thousands of dollars. In contrast, racket money can acquire a new client for less than $100, which is a significant difference by breeding.
Clients into our final at a lower cost of acquisition and engaging and nurturing them in our ecosystem.
In building loyalty earlier in their life cycle. We believe this will be a game changer for rocket.
With a larger top of the funnel at a lower client acquisition costs higher conversion through deeper client insights and personalised offerings, Ian client retention with increased lifetime value rocket has a significant advantage over others in the space.
I would like to emphasize that we are investing with discipline and we are laser focused on tracking our progress and success. This is a process I personally led with our operating leaders and will continue to monitor closely as the CFO .
Turning to our outlook, we will be transitioning to a revenue base guidance approach going forward. We believe revenue is a better representation of the totality of rocket businesses and more closely aligned with how we manage the company starting in the fourth quarter, we plan to provide one quarter forward looking guidance on and adjusted.
Revenue basis, this quarter will be the last time that we provide forward looking guidance on net rate lack volume and gain on sale margin.
<unk> and gain on sale margin will continue to be disclosed in our financial statements for the fourth quarter. We expect adjusted revenue to be in the range of $600 million to $750 million closed loan volume to be in the range of $17 billion to $22 billion in net right lock volume to be in the range of 15 to 20.
The $1 billion, we anticipate gain on sale margin to be in the range of 230 to 260 basis points as we expect the impact from promotional products, such as inflation Buster to contribute to a quarter over quarter decline in March.
However, these products are still incrementally profitable to rocket the need for innovative products like inflation Buster speaks to the affordability challenges that homebuyers are facing today.
<unk> assumes that the core mortgage business will continue to face headwinds given the challenging economic environment.
And that seasonality will also play a role as a fourth quarter is traditionally a seasonally low quarter, especially for homebuy activity.
As always are forward looking guidance is based on our current outlook and visibility into the fourth quarter, despite broader industry and economic headwinds and a challenging market. We are well positioned in the current environment and will continue to invest in the business to drive long term shareholder value with that we're ready to turn it back to the.
Operator for questions.
Thank you as a reminder, if you would like to ask a question. Please press start than one on your telephone keypad.
First question is from James Faucet with Morgan Stanley . Your line is open.
Great. Thank you. So much you know I want to go back to one of the things that you said at the outset and it should be self evident but.
Do you guys have had amazing staying power through multiple mortgage cycles.
And rockets history, and as you pointed out that's really a hard thing to do because they can be so volatile.
In terms of your upcoming execution and like where do you think this experience has proved to be most valuable how's it.
How is it driving your decision, making and core business areas I guess as part of that.
You've done obviously, good job, reducing your expense space, but at the same time, you've always talked about trying to take advantage of these periods gainshare. So just wondering how you're balancing those out right now.
Yeah. Thanks, James I'll start and then Brian can jumping as well.
We're seeing all of the lessons that we've learned at least in the 2007 years I've been here come to play at this point in time.
Certainly the first thing that we've touched on before it's just getting close to your business and so is Brian and the team has done an amazing job of taking expenses out of the business, but it's critical that those expenses Don.
Lowest down when it comes to the long term vision of what we're creating and so the only way to achieve that has to be very close to your business. So you can continue to execute on a long term strategies not get caught up in the day to day and chase loans, maybe that are profitable or make decisions that could harm you six months 12 months later.
But stick to that strategy. So the second piece of that is actually have a strategy.
You heard me today spent a lot of time talking about that.
Regardless of what interest rates do.
We at rocket to continue to grow the platform.
To allow for our growth.
We cannot be thinking about when interest rates may come down we've got to be thinking about how we increase our conversion rates engage our client base drive lifetime lifetime value of loans and that puts us in a position to to win in a great market and so that's exactly what you're seeing is due and that's exactly what we've been talking about on today's call probably.
The rocket rewards comments.
Comments are the most relevant.
If you think about the marketing dollars that we're spending today.
Drive people in who are thinking about purchasing or refinancing their alone as we know many people aren't going to purchase right now home columns have become more expensive.
And there may not be an opportunity to pull cash out or save money out amongst the mortgage payment.
So how do we keep those clients on their mission to achieve their goal certainly you can add E. Mails and you can text message if you have a brand.
But that on its own would reach the cost to acquire numbers of lifetime value that we need to separate ourselves from our competition. So this rewards program allows our clients and we saw that in the first few hours or I should say days of the program 70 million points.
Distributed 17000 actions taken.
Starts to prove out what we heard from our client base that a program like this that allows them to participate engage drive down costs and will continue to expand the program and the value has to our platform. That's a critical piece of the puzzle that we've been building.
So would we be able to roll out inflation Buster would we be able to roll out the rewards program would we be able to read Ah brand.
Brand rocket money, if we did not have these long term strategies, where we're deploying our tech and product strategy resources, we wouldn't you'll get distracted in the day to day movement of the market. So that's probably the biggest lesson for me and I think for our leadership team we cannot control with the 10 year Treasury will do on any given day, what we can control is investment in our Kappa.
<unk> in the long term value to differentiate our brand and our platform from everybody else and so and and that's exactly what you're hearing is talk about each and every call because that's what we're doing right I'll, let you chairman yeah. Thanks, James and the only thing I would add is.
To be able to do those things.
As in an accident either it's because of the financial strength of the company and we look at over $8 billion of equity over $8 million of liquidity and $4 billion of cash on the balance sheet. This is a luxury that others. In this space don't have so this isn't an accident that we ended up you're all we all knew rates with Ryan none of us knew exactly how fast it is but we're well positioned.
<unk> for this market because of that financial policy in that financial strength to exactly right.
That's great. Thank you very much.
Of course.
The next question is from Kevin Burger with Piper Sandler Your line is okay.
Good afternoon. Thanks for taking my questions I just wanted to follow up on some of the cost cutting efforts that you're making I mean, obviously you've been very aggressive.
The first three quarters, which is.
Really not like rocket.
And you gave the guidance of $50 million to $100 million.
Would you be willing to expect to cut expenses further going into early 2023, if we continue to have.
It was pretty.
Pretty aggressive or at least really tough origination market.
And then when you think about the cost cuts that you've made here.
How much more <unk>.
Properly CEB on the long run if we were to return to like a normal market, where we start to see maybe two and a half trillion dollars of origination.
Yeah, Brian speak to some of the other ways that we're thinking about cost cutting, but maybe taking in a lift lifting up about 50000 feet and.
Tying into your investments that we're making today both on the marketing side, the regeneration side or the tech side.
The decision making of course is not based on the profitability of a day a week or a month. The decision making is based on the metrics that will tell us that the investments, we're making you're going to pay off in the long run I think Brian touched on the fact that in 2021, nearly 50% of the mortgage.
Is that we did.
Clients that were in our servicing book, so there's virtually no cost to acquire so if you think about in one of the driving forces for this platform.
Tech Bill that we've been doing for years now is to think well how could we have 5 million clients in our database how could we have 7 million clients in our database how can we engage those 24 million people that have already created a racket account. So as we see rates shift and adjust if there is an opportunity to help close we're not marketing.
225 million dollar client base, we're marketing to a $10 million client base and and that's the vision of what we're creating and then you can take what we've done in the past and think about what that would mean to the profitability of the organization. So as we're making investments today.
The first priority is to have that confidence to say, okay. What we're doing now will lead to that that long term vision, which we know is highly profitable for organization in the long run.
And a guy talked earlier about the.
The at the time, three or four days into the process. We had we had done $70 million.
Rewards points I think we're now up to $170 million or watching the.
The growth of this each and every day clients in engaging reading, giving us data and all of that is what we use to determine and Brian touched on this are the investments are the marketing dollars leading to the engagement that we know in the future will lead to a loan origination because when that turned.
The profitability we received is.
An order of magnitude greater than what.
What we might invest today that will <unk> will.
Will not be.
The highly profitable right now because we're focused on what it will be in the future. Brian I know you touched on this new remarks, as well, yeah, and I think Kevin the way I think about it is see cost reductions in these expense cuts protect those investments that we're making.
Just to reiterate if we look at Q3 Q3 of last year, it's $2 billion in costs taken out of the system. That's about a third of our cost structure and Q2, we said we take out 200, and we took out $300 million in Q3, we've said, we do $50 million to $150 million and we did over 100.
And then to your point haven't we said another 52 100 this quarter. If we achieve that that's two $5 billion over a year almost 40% of the cost structure. So it's not insignificant and it's important work and will continue doing it but by doing that it protects the things that are important for us and those are the gross.
Strategies that you talked about.
Strength, so given those comments it seems like you would.
You're constantly looking to improve efficiency to fund.
Lot of these other projects that will enhance the value of the franchise longer term is that right.
I think we're seeing today when we when we go through and we think about the right way is to make the cost and again, Brian can touch on this it needs to be tied to tack advancements Bob for many of our calls talk about rocket logic.
Which is a powerful origination tool that we spent years building what does it do it makes banking and operations more efficient.
So these are the type of things that allow us to be thoughtful about the cost reductions because we're leveraging the tech build that that we've got so we get the reductions without sacrificing the investments in the long term growth that we know what benefits company and again that's not this goes back to James question. This is not the first time, we've kind of fought through this.
And the 27 years I've been here, we've always taken these moments where.
The market is is contracted instead, okay, where do we put the dollars where do you put the team members time energy and effort.
Wow us to have significant market share growth in the future.
And that's the same exact strategy that we're employing today.
Thank you.
The next question is from Brian Ashworth Goldman Sachs. Your line is okay.
Hi, good evening everyone.
[noise] huh.
Maybe the S. Kevin's question in a little bit of a different way but.
If you look at the way the furthest.
Financial conditions in the housing market and it sounds like we're going to be in this restrictive territory for an extended period of time so.
As you said none of US are right economist, it's pretty clear that rates are going to be elevated for an extended period of time. So.
I'm just curious like can you give us sort of a blueprint print of how you plan to manage in terms of your willingness.
To lose.
Money for an extended period of time before taking it.
More close look at the organization. Thanks.
Yeah, I think so.
You up more is how do we drive efficiency and control the entire funnel.
So.
If you go back to where we were in 2008.
We originated mortgages, we did not have a large marketing apparatus. We did not have lead generation apparatus, we do not have servicing.
So that allowed us to only pull a few letters if you listen only been building the last four or five years.
From top to bottom.
We control the entire entire phone and now we're adding the glue.
That engages clients from the very top through our lower my bills strategies through.
Our rocket money engagement.
The rewards that holds those things together leads us into origination, but then also the services component of this and.
So.
Brian has touched on the fact that will continue to look and determined where we might be able to continue to remove costa aren't leading us down.
A profitable path either short run, but more importantly, what we're focused on as long run.
But I think the vast majority of energies of this organization are thinking whether the market is a 1.2 trillion dollar market per year or 1.5 trillion dollar market for a year. So pressure that that will put most originators under.
Now this capacity that will come out I'd be very curious to see how many boxers.
Up their licenses here. This fall most unceasing activity is done here in November and December . So we know that there are north of I think 500.
Thousand right around that number coming in I'll be curious to see how many come out into 2023, so as that contraction occurs.
And Brian talked about the cat.
Capitalization that we've got this allows us to to keep investing to increase the the the cost will reduce the cost to acquire and so even if the market remains a smaller for a year or two years.
On a path to grow marketing to grow market share because we've got all these elements.
That other originators don't have I've got a point. This out you are seeing it right now with purchase.
Certainly.
Right from a private low and everyone was looking to buy a home.
You can go out there and you can find somebody who is days or a week away from signing purchase agreements.
In a market like today's market, you're going to have to engage with clients who are six months 12 months 18 months away from finding their home.
So the question is how you achieve that.
Those are the solutions that we have been working on bringing them into the top of the final with our.
Listings at rocket homes will rollout additional technology products here in the coming quarters that allow those quest to be engaged have them joined rewards and drive down there closing costs, all while participating more in learning more about rocket.
Gives us a strategic advantage to win those purchase clients and have confidence that our marketing dollars today will pay off in the future meeting we can continue to spend them and I don't see anyone else in our industry doing this and that's why I mentioned in my remarks, that's why I think over the course of the next quarter to the separation between our organization.
And others that are working well capitalised that can invest in these long term strategy to grow.
Their business for as others, who are forced to do that one option cut cut.
That's it.
I think that separation is really going to be pronounced as we get into the next quarter too.
I guess, maybe that's one follow up you referencing your prepared remarks that as.
As you just articulated if people are going to have to cut cut cut and also we could start to see consolidations across the industry. We're already seeing people exiting businesses from south part of the businesses I guess, how are you planning and thinking about using your relative strength weather.
Pick up things are potentially be in a fire on the cheap and maybe just talk about what your priorities are from a capital allocation perspective.
Yeah, I'll I'll touch on that Brian can as well.
We're always being strategic and Scott Elkins leaves those efforts.
Reminding us that.
We've got to be thoughtful because everything you've just mentioned is playing out.
For us if.
If you think about the rocket rewards program just rolled out our servicing.
Efforts that we've got some.
Some other products that will be announcing here in the coming months.
It will allow us to have a different effect on top of the funnel lead flow than other originators.
And so we will be thinking about those learning and then how does that set our strategy for the type of business as we might may want to acquire doesn't mean, we won't also look at unique originators that brings something very special to the table, maybe a niche market that we're not able to participate in are not able to respect level. We want we just rolled out.
Are manufactured housing lending you are in the last 48 hours a very robust program would be curious to see where that goes could there be something that ah surfaces, there, but it would have to be something strategic for us. The general originators in the marketplace don't really bring something of value to the table that we can't create an R.
On our own so that's how I think about it either a unique company that plugs into all this platform engagement work that we're doing.
A niche originated and that brings us some market share that we currently don't have reach into giant wrench hated assets. It has to be a different audience different product or a differentiated assets. The Brian <unk> I just wanted to go back to your earlier comments that I think is worth mentioning.
To your point I'm, not trying to be a amateur economist and predict twenty-three, but what I can talk about is what we're experiencing right now in the fourth quarter and if you think about the fourth quarter. It's also a seasonally low quarter to begin with and then when you go back and you look over time and you look at fourth quarter compared to third quarter work homed buying at home.
Purchasing represents the majority of the market is down even more traditionally from Q3 to Q4 and also Jamie some comments about just in sheer number of loan officers, which is one good way to measure capacity and we're at a record high in terms of loan officers and we're at a record low if you.
Do the division and say, how many loans per month per loan officer. So those two things make us think that the fourth quarter is not also the new normal we don't know what what twenty-three will hold necessary, we're not making predictions there, but it's not fair to base your whole business strategy office seasonally low quarter, either with that excess capacity.
Great point Brown, I think we're at whatever seven or eight X with the typical <unk> in.
The industry is doing right now based on our systems, which give us some efficiency but.
This is an interesting quarter with the way that Homer portability was really hit some of the lack of price adjusting that is occurring in the seller's market.
Steep rise in interest rates, which have driven down revised are driven down the origination recent by so quickly and this capacity of L. O's, we're still trying to figure out where they are going to stay in this business or leave and find a new career. So we got to work our way through this this period of time, It's 90 day period of so we're really no more as light as a Q1 yeah.
Awesome appreciate all the Congress.
Yep.
Okay.
The next question is from Dark Huerter with credit Suisse. Your line is open.
Clearly you have a strong.
Can you just talk about her you might think about capital return and additions or continue to progress in the business.
Yeah sure I'll start I'm sure Jay will have thoughts too, but it kind of goes back to the previous comments. If you think about what we've said in the capital waterfall. The best dollar expenses reinvesting in the business will continue to be thoughtful around acquisitions, and then will return capital.
We're doing essentially exactly what we said if we're doing by reinvesting capital into the business right now and as we talked about it's not it's not we're not here because of the luck. We're here because of planning we knew and I have been thinking a lot about this platform investments over the past couple of years and we plan for it and we saved illiquidity.
And capital to do it.
Alright and to continue to do it while we're being thoughtful on the expense side of the house and looking at things that are not key to the operation to this business.
The only other thing I'll add is trampling it directly to loan volume.
To go out and acquire alone today.
Especially if you're basically buying Malone. If you don't have any brand. If you don't have any follow up mechanisms. If you don't have any engagement you're gonna bite alone put around your your platform you've got to think about is at one time value and if you look at the pricing in the industry without the sale of the MSR almost immediate with no cash which was a negative cash.
Transaction for a lender.
So we're really trying to think about a completely different lines, which.
Which is acquiring a client that engages on our platform. That's why we're talking about the $24 million rocket account users that we've got in this robust content rewards program that we're gonna engage them with because when you have confidence kind of like an Amazon.
Send somebody up maybe they buy a book today, but I know once I get that book it won't be but a few months and now it will be the tide pause and it'll be the dog food.
Buying continues to grow and so you start projecting a long term value of the client that you've acquired because of the robust experience you can provide them.
That's how we're thinking about where we would deploy our capital particular to the acquisition of a client versus.
Simply not that we don't think about buying or marketing and generating a closed loan, but we're not out just trying to buy clothes loan volume or drive a closing that doesn't have any long term value for us. We've got to think about the lifetime value of that client that may be in that we can do marketing today to drive people into rocket money and it may be three years before.
They make their first home purchase that's okay. We got line of sight on that.
There may be a situation, where we can buy msr's others aren't buying because we know we're going to engage them in our platform using rewards.
Have a higher capture rate on their next purchase but if this full ecosystem, that's working together to give us the insight we need to make these decisions.
Mhm.
Thanks.
The next question is from March device with Barclays. Your line is open.
Yeah could you discuss the competitive dynamics, you've been observing in the wholesale channel.
And in an environment like this.
Given given all the market challenges is it easier or more challenging to sign new partners.
Well I think we've seen and I think that this could be off a number of two here, but I think we've seen 50% of the top 10 wholesale lenders gonna come out of the market in the last 12 months.
They've either been pushed out by something called the ultimatum.
Or then decided not no longer participate in wholesale wholesale on its own.
Is a very challenging business right now because as we as I just touched on without the sale of that MSR. Every loan you are originating is is losing your cash.
And so.
From our brokers perspective, what they've seen as his.
Loss of choice.
And I don't know 50 per cent of the brokers out there give or take probably have one or two lenders. They can rely on now so that means that they're not as price competitive which will bode well for our retail system.
As they continue to lose choice for us signing up a partner is becoming easier because of the thing I've just mentioned, if you're fighting to save your business and you're in a situation where your choices continue to get eliminated.
Then then you're looking for a new a new partner someone who probably has more open to a free market system.
And so we're seeing.
R. R. R. New partners are partners flipping back there, but that business on his own is a very challenge business right. Now I think the average broker in America is doing I know less than one year to the month I think it's closer to a 0.6 0.7 units a month.
So regardless of.
What you're earning per loan that's that's gonna make it tough so.
Brian and I mentioned will probably see quite a few licensed originators leave the market as we get into 2023, which will be healthy because.
It will take out a lot of the the capacity.
Cuz, they're struggling because of lack of choice that's been now kind of forced upon them.
Okay. That's helpful. Thank you.
The next question is from Derek summers with Jeffries or lighting system.
Hi, Good afternoon could you provide some commentary on the trends are seeing in the cash out refined product and other trends across the product mix spectrum.
Well, we're doing quite a bit of cash out we're doing.
First mortgage and second mortgage.
It's an interesting situation because if people continue to see there are other debt increased red zone. It's it's always a comparison for our for our clients.
Clients in general is the cost of the mortgage payment.
Going up higher or faster than the cost of credit cards.
Student loans other debt instruments that they've got and as we watch savings drop.
And people will spend more on their credit cards, they're under more pressure and so.
Although it's not always of course, the right decision for a client to.
To take cash out of their first mortgage.
That's why we have the home equity line product.
I would like the loan product that we rolled out that's why we have our rocket loan product that we've rolled out.
I think we've touched on the fact, we've got a beta card and market and other financial products that will be rolling out so as we do marketing and we're bringing clients in joining a rewards program and then they're thinking about how they're going to save money and a rising rate market.
They have access to all those different strategies to benefit their financial situation not just.
A cash out on their on their first mortgage but today that is that if I had to take a guess I would say that we're north of 90% in the industry in terms of people point some form of cash out when they do a refinance.
Got it thank you.
The next question is from Ryan <unk> with a gentleman and associates. Your line is open.
Hey, this is Kevin Costner gone for Ryan.
I realize it's only been maybe a month and a half, but how does the inflation Buster program.
Senior term purchase market share and the associated gain on sale margin.
Well I think it's been very warmly received we've noticed some competitors copying the program with a different name. So that always tells me that.
That.
It's getting attention from our perspective people visiting the inflation Buster website, which we have a direct landing page for that phone calls all those things are up so much.
Much more of a direct response based advertising model stuff that we've done for years and years in the past year can see us you'll see us continue to lean into that moving into 2023.
With great market and that one for me a great program.
If you are our clients today buying a home.
And your payment has gone up three four $500 from where it had been.
Six seven months ago.
Initial savings is very very helpful. As you move in and take your moving expenses and sign up for your utilities and buy furniture et cetera. So I think somewhere close to 20% of all of the purchase transactions were doing today are accusing to use that program and remember we've only been marketing. It now for a few weeks. So that's an exciting one and it's a great place to start and you'll continue to see.
Launch additional.
Programs that allow our clients to still buy a home even in a rising rate market.
Okay. Thank you for that and.
Can you talk about the expansion into the correspondent channel for instance, looking out a few years into the future how does it tie in with your broader strategic initiatives, how might we think about growth in volumes and or market share and what types of economics, our margins should we be modeling.
Well.
Our our focus here in the technology that our team did an incredible job of rolling out. This year is really kind of assisted corresponded.
So it's not just buying.
Fully closed loans and not participating in any of the processing of that loan. This program that gives brokers another opportunity to take.
I have a little bit more flexibility in how their pricing loans, but it's a similar market think of the the wholesale broker market and the corresponded or assistant corresponded as a piece that I'm going to guess, maybe 10 or 12% of the broker Martus market is currently using today.
And so having this program allows us to make sure that we can reach any broker that wants to utilize it if they wanna do assisted correspondent wonderful got that technology, if they want to stay with the traditional GPL program, we've got that for them as well.
But it's yet another tool for us to go out and win market share.
In the brokerage community. So that's how I think about it inside of the total broker market share now where that's going to be touched on some of the challenges I think that.
Space will face.
But will be there with the products for all of the brokers who want to take.
Take advantage of these these great price that we're rolling forward.
Okay is it possible that you guys could venture into the delegated underwriting space at some point.
When we think about this goes back to our capital allocation, let me think about all of the opportunities that we've got here on the table.
And our retail brand.
The millions of clients that no rocket that have already created an account at rocket.
All the services top to bottom bundle that we're building out of execute or not and now I'm just kind of hanging together.
For us.
We we balanced out against.
Correspond spun it loaded it really it's kind of apples and oranges, we'd rather than help that client through the system and then more importantly retain that client in our servicing book and help them through the lifetime of their loans, so you'll probably see us spend most of our our energies either helping our existing broker.
<unk> or anyone who wants to join that broker base and in our retail clients.
Okay. Thanks, a lot.
Our final question today is from Erin <unk> with city. Your line is open.
Yeah, I just wanted to ask about the strategy that you had.
Previously talking about <unk>.
Originate loans that were essentially profitable and not wanting to chase.
Right essentially when business is that is that still your strategy. I mean, you have decided to a certain level of fixed costs or I would assume that having additional volume in this environment.
Might be a net plush but.
Curious.
Tied with.
Taking a way forward guidance on <unk>, some gain on sale margin.
If that was tied to that at all thanks, Yes, a very good question. It's a great question to end on here.
This is exactly why we've been talking about the platform and the engagement tools that we have for our servicing clients are lead flow that isn't ready to transact yet.
Because now through our lens as opposed to thinking is this a profitable alone today, yes or no.
Which again it you'll see many many.
Lenders out there, saying I know I'm only going to do this one once I have no mechanism to retain their client longterm, but I just need to layer. It on my my my system is I'll do it even though.
I'm gonna lose money to do so.
We have the ability to say, let's understand what our retention rate will be with that client over the long term with purchase with refinance with.
Capturing.
Real estate fees when they purchased a new home through a rocket homes company with a personal loan that they may do to rocket loans with other additional products now that we've built out that technology to be loaned agnostic gives us the ability to add other.
Loan programs for our client base. So we can filter that through and think about the marketing dollar we're spending today and have much greater confidence up a longterm or the lifetime value of that client.
So you may see us do alone and someone would look and say on that particular transaction.
That loan cost the company $500 I'm, making this up Brian you can jump in but we know based.
Based on everything else they've signed up for the rewards program. They signed up let's say in the future for a credit card or whatever it might be we know what the retention rate will be and we can apply that future revenue to still make that marketing decision today and so that's exactly why I referenced in my remarks, the excitement around the 300 plus technology.
People that didn't like four months built offer rewards program for us so critical because it's that.
Final glue, we needed to watch our client base move from website to website landing page to landing page product to product watch that engagement and then allow us to plug that into our marketing decisions to extend the right marketing dollar for the lifetime value of the client yeah, that's exactly right and and to be clear when we.
We are talking about acquiring clients were talking about a number of ways through a lifetime value plans and also through a contribution margin lens and even at these margins that we're talking about here and we're guiding Q Q for these are positives loan products on a contribution margin basis to find his revenue minus direct and variable expenses you mentioned the fixed cost base and we've talked a.
About that here, but if you think about what makes a platform business a special businesses Superior unit economics, which we have and we have investments to make them, even better and the scale ability, which clearly we've proven a number of times, including in 2000 2002 thousand 21.
Thank you.
That concludes our question and answer session I will turn it over to J foreigner for any closing comments.
No just thanks, everybody for the great questions really excited about the incredible work. Our team has done this year as we touched on in the early part of these questions when when times get challenging the ability for an organization to determine what matters stay focused and hold to those priorities.
Is really what separates I think successful companies for <unk> from companies that will struggle and so that's been our team and our tech product strategy, our mortgage bankers operations, everyone here staying focused on a long term strategies that will lead to the growth continued growth of the organization. So Ah.
I appreciate everyone who's listening.
Because all of this hard work will pay off for us in 2023 and beyond.
Well see all of the next next call.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.
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