Q2 2023 Rocket Companies Inc Earnings Call
Hello, My name is Chris and I'll be your conference operator today at this time I'd like to welcome everyone to the rocket companies, Inc. Second quarter 2023 earnings call.
All lines have been placed on mute to prevent any background noise.
After the Speakers' remarks, there'll be a question and answer session if.
If you'd like to ask a question. During this time simply press Star then the number one on your telephone keypad.
Please limit yourself to one question and one follow up.
Thank you Sharon a vice president of Investor Relations.
To begin.
Good afternoon, everyone and thank you for joining us or rocket companies earnings call covering the second quarter 2023.
With us this afternoon, a rocket companies director and interim CEO , Bill Emerson, our president and CFO , Bob Walter and our Chief Financial Officer, Brian Brown.
Earlier today, we issued our second quarter earnings release, which is available on our website at rocket companies Dot com under Investor Info.
Available on our website is an investor presentation.
Before I turn things over to Bill Let me quickly go over our disclaimers.
On today's call. We provide you with information regarding our second quarter 2023 performance as well as our financial outlook.
This conference call includes forward looking statements. These statements are subject to risks and uncertainties that could cause actual results to differ materially from the expectations and the assumptions we mentioned today.
We encourage you to consider the risk factors contained in our SEC filings for a detailed discussion of these risks and uncertainties.
We undertake no obligation to update these statements as a result of new information or further events, except as required by law.
This call is being broadcast online and is accessible on our Investor Relations website.
A recording of the call will be posted later today.
Our commentary today will also include non-GAAP financial measures.
Reconciliations between GAAP and non-GAAP metrics for our reported results can also be found in our earnings release issued earlier today as well as in our filings with the SEC and with that I'll turn things over to Bill Emerson to get US started bill.
Thanks Sharon.
Afternoon, and welcome to the rocket companies earnings call for the second quarter of 2023.
Rocket, we are dedicated to serving our clients through innovation and we're focused on delivering the best experience to them on every step of their homeownership journey.
On behalf of the board I'm excited to announce the appointment of Maroon Krishna is rocket companies new CEO .
Maroon who is currently the executive Vice President and General manager of Intuit's Consumer group working on products like Turbotax Turbotax live brings a wealth of Fintech leadership experience will be instrumental in driving rockets future success.
Look forward to working with the room in the months ahead to ensure a smooth transition.
Before we go any further I'd like to pause and take a moment to thank our team members for their passion and commitment that drives our achievements.
It hasn't been an easy time in our industry and we have made crucial but difficult decisions to better align resources with the needs of our business in today's mortgage market.
As part of our ongoing companywide focus on efficiency, we recently implemented a voluntary career transition program in July along with other prioritization and cost reduction measures.
I will share more details on that in a bit now turning to our Q2 results.
We reported strong results in the second quarter adjusted revenue came in at $1 billion above the high point of our guidance range, reflecting continued momentum over the past three quarters.
We also achieved positive adjusted EBITDA of $18 million and GAAP net income of $139 million and GAAP diluted EPS of five cents.
And both our strong execution and ongoing focus on operating an efficient company.
We're also very pleased to see our purchase market share grow on both a year over year and quarter over quarter basis.
Focus on servicing clients through innovation in this challenging market is working.
Now I would like to share some thoughts on the current market. We remain encouraged by the fact that consumer demand for homes continues to be robust and we're seeing a healthy purchase pipeline.
People just want to buy homes.
At the macro level the inventory at affordability challenges consumers experienced in the first quarter persists.
According to the National Association of Realtors May 2023 home inventory is roughly one quarter that of May of 2007.
Let that sink in for a second.
While there are no quick fixes low inventory and affordability issues in the industry. We see these market challenges as an opportunity to offer innovative solutions to help our clients. During this time.
For example.
Our bypass and oneplus initiatives, which we'll talk more about in a few minutes, helping increase access to homeownership and address home affordability challenges.
These unique products along with our focus on delivering a great client experience have driven the growth we've seen in purchase approval letters, which are up nearly 20% in the second quarter of 2023 compared to the first quarter.
Far outpacing historical trends.
We believe the increases we're seeing in this important metrics are the result of the investments we've made in the purchase experience for both our clients and real estate agents that work with them.
And the foremost since launch our bypass initiative has resonated strongly with first time homebuyers home sellers and real estate agents.
This unique rocket exclusive collaboration between rocket mortgage the largest retail mortgage company in the United States and rocket homes or 50 state home search platform and real estate agent referral network as far surpassed our initial expectations and lead generation.
With bypass purchase clients can save thousands of dollars in upfront costs, if they work with a rocket homes partner real estate agent and obtained financing with rocket mortgage.
The homeowner can further increase their savings by buying selling and financing through rocket.
Real estate agents are excited about working with rocket and with high intent clients and these initiatives have proven that out as we've seen agent referrals continue to trend higher.
In May we also introduced <unk>, plus a new 1% down whole loan program that aims to increase access to homeownership for millions of low to moderate income Americans.
One plus is available to homebuyers purchasing single family homes, including manufactured homes, whose income is equal to or less than 80% of their area median income.
Helping clients with financial wellness and home buying readiness is just as important as providing an excellent experience for those who are ready to purchase now.
This is why we laid the groundwork for our client engagement program in 2022, which includes rocket money rocket rewards rocket visa signature card and the home buying plan.
Solutions, such as home buying plan are guided digital experience that keeps our clients on track as they prepare for purchase and rocket rewards our loyalty program, which gives our clients tangible value for staying engaged with rocket <unk>.
Crucial, particularly as clients in today's environment are confronted with a much longer home buying cycle compared to historical periods.
And as we have shared previously our client engagement program can meaningfully change our business model.
Broadening rockets acquisition channels, lowering client acquisition costs and lifting conversion through the data insights we get.
Brackett visa signature cardholders began accruing a rocket reward points in the second quarter purchases.
Rocket rewards also expanded the activities eligible for banking points to a home search, including adding a home to a favorites list and saving a whole of a search alert on rocket homes.
We are already observing a meaningfully higher conversion rate from lead to close among mortgage clients.
Our rewards members compared to those who are not as we expand the activities for clients to accrue points across the rocket ecosystem.
We believe we have an opportunity to gain valuable insights personalize, our offering and further lift our conversion.
We are further encouraged by this progress when we consider the large and growing number of rocket accounts.
As of June 30, the number of rocket accounts grew to $29 3 million, an increase of nearly $2 million from the prior quarter.
Rocket money continuing to lead the way.
Rocket account.
Gives us valuable signals of home buying readiness and intense and we believe rocket account holders are more open to transacting with rocket now and in the future.
Finally, I'd like to acknowledge the recent achievement that is a symbol of our enduring commitment to the client experience. This last week rocket mortgage was named the number one in the nation in J D. Power's 2023 study with client satisfaction and mortgage servicing the ninth year rocket mortgage has earned the accolade.
Rocket is among a short list of companies with a comprehensive home buying ecosystem, who can offer a breadth of products and services.
From financial wellness personal loans and home search to first lien mortgages home equity loans servicing and title and closing.
The two months since I've been back at the company one thing is abundantly clear.
Rocket is a tremendous opportunity in the large and fragmented mortgage market and we're changing the game, we're up ending the traditional mortgage business model by diversifying client acquisition channels lowering client acquisition costs and engaging our clients throughout their lifetime, thereby lifting conversion from lead to close.
We are dedicated to growing the business by significantly elevating the client experience through our comprehensive ecosystem.
With that I'll turn it over to Brian .
Thank you Bill and good afternoon, everyone on today's call I'll cover our financial results for the second quarter and our outlook for the third quarter I will also discuss our innovative offerings and how we help our clients in this challenging market and I'll provide an update on our ongoing efficiency efforts.
In the second quarter, we were profitable on an adjusted EBITDA and GAAP net income basis and once again, we exceeded the top end of our guidance range. We are pleased to see that our purchase focused initiatives are working rocket gain purchase market share in the quarter, both year over year and quarter over quarter, our client first approach.
Broach in the efforts we have taken to run a leaner business are paying off.
Rocket reported strong second quarter results, reflecting sequential growth in volume revenue and profitability in Q2, we generated adjusted revenue just north of $1 billion, surpassing the high end of our guidance range. Adjusted revenue is now up in consecutive quarters since Q4 of glass.
Steer with Q2 up 14% from Q1 and up 47% from Q4.
Turning to profitability, we have made significant strides over the last year to improve our profitability profile, even in what has been a historically depressed market in the second quarter, we returned to positive adjusted EBITDA.
Q2, adjusted EBITDA of $18 million improved considerably relative to losses of $79 million and $204 million in Q1, and Q4, respectively. We reported GAAP diluted EPS of five cents.
And in adjusted diluted EPS loss of <unk> <unk> per share we're encouraged by the improving trend in our results and we're excited to be back in a position of growth and profitability.
We have been diligent in prioritizing our resources focusing on operational efficiency and trimming our cost structure, our efforts to streamline our costs have been ongoing and span across expense categories, including our recently executed voluntary career transition plan. In addition to other third party related cost reduction.
Efforts.
As I've shared before we invest with discipline and track our progress closely we are constantly evaluating and making capital allocation and prioritization decisions and we take action to pivot or sunset projects that are not meeting our expectations. For example, most recently, we pivoted from investing in our sales platform for <unk>.
<unk> only offering solar financing through the rocket loans platform. We also recently wound down rocket auto operations.
As a result of these actions, we anticipate cost savings in the range of $150 million to $200 million on an annualized basis.
With a full quarter of cost savings set to begin in the fourth quarter.
In addition, we expect to incur a onetime charge of approximately $50 million to $60 million related to the voluntary career transition program, primarily in the third quarter.
Looking at current market conditions, we continue to see healthy client purchase demand people want to buy homes that said inventory and affordability challenges are resulting in a much longer home buying process than we've seen historically for.
For example, one of the things we monitor internally is the amount of time between when a client chose intend to transact and when they actually find and purchase a home a measure that we referred to as approval letter to application.
This metric has been steadily increasing since February of this year and has recently hit a record high. This is not surprising when you consider that and May inventory was at its lowest level in two decades. According to the National Association of real tourists.
We're helping our clients stay on track, while navigating the longer home buying lifecycle and in inventory constrained market with products like our home buying plan, which provides a guided digital experience to help prepare for home purchase.
For those even earlier in their journey rocket money helps clients improve their credit score budget and reach their savings goals, we're giving our clients tangible benefits to stay with rocket throughout the process with programs such as rocket rewards our loyalty program whereby clients can grow rewards through engagement across the rocket ecosystem.
Yeah.
We are addressing affordability concerns and expanding accessibility to homeownership their recent initiatives such as bypass with bypass purchase clients can save thousands of dollars in upfront costs. If they work with a rocket homes partner real estate agent and obtained financing with rocket mortgage this is something that.
Only rocket can offer at scale through our integrated real estate and mortgage experience. In addition, because of our ability to capture the economics from both the real estate side and the mortgage side of the transaction rocket is uniquely positioned to provide consumers with meaningful savings on their closing costs.
With this increased engagement, we're gathering valuable signals and insights, enabling us to personalize our offerings across financial wellness home search personal loan first lien mortgages home equity loans and more regardless of where the client is in their home buying journey or when they are ready to transact or.
Scale and unique approach to client acquisition engagement and lead conversion continues to distinguish us from other mortgage lenders, particularly in this challenging fragmented market.
From a capital allocation perspective, we have always prioritized, maintaining a well capitalized balance sheet with substantial liquidity capable of navigating different market cycles, while remaining opportunistic.
Rockets financial strength continues to be an important strategic advantage for us, especially in today's market.
We closed the second quarter with $3 8 billion of available cash and $6 4 billion of mortgage servicing rights together. These assets represent a total of $10 $2 billion of value on our balance sheet.
Our $3 8 billion of available cash consists of $883 million of cash on the balance sheet and an additional $2 $9 billion of corporate cash used to self fund loan originations.
Total liquidity stood at approximately $8 $6 billion as of June 30, including available cash plus undrawn lines of credit and our Undrawn MSR lines.
As of June 30, our mortgage servicing portfolio included more than $2 4 million loans serviced with approximately $500 billion in unpaid principal balance Q2 unpaid principal balance was lower compared to Q1 due to the sale of MSR in the quarter.
We also drive considerable recurring revenue from mortgage servicing.
During the second quarter, we generated $343 million of cash revenue from our servicing book, which represents approximately $1 $4 billion on an annualized basis.
Net client retention remained over 90% in the second quarter, well above the industry average.
Moving onto our outlook for the third quarter, we expect adjusted revenue to be in the range of $850 million to $1 billion.
This guidance takes into account current market conditions, including challenges presented by the historically low housing inventory levels.
We expect Q3 expenses to be roughly flat compared to Q2, excluding the $50 million to $60 million in one time charges as.
As we have consistently demonstrated over the last 18 months, we are committed to operating an efficient business with continued focus on profitability.
As always our forward looking guidance is based on our current outlook and visibility.
Despite the continued uncertainty at the macro level, we are very well positioned in the current environment. We remain focused on serving our clients and investing with discipline to drive long term growth and shareholder value.
Before we turn the call over to the operator, I would like to share with you that our 2022 ESG report can be found on the social impact tab of our Investor Relations Web site. Our second ESG report highlights rockets for more than profit philosophy and approach and the positive impact rocket has made on our community.
And our environment with that we're ready to turn it back over to the operator for questions.
Thank you if you'd like to ask a question. Please press Star then one on your telephone keypad and again as a reminder, please limit yourself to one question with one follow up.
The first question is from Kevin Barker with Piper Sandler Your line is open.
Kevin Barker with Piper Sandler Your line is open.
Alright. Thank you for taking my questions I appreciate you coming on first of all I'd like to.
Congratulate Bob Walter.
Retirement also liked it.
Dig into what happened with the CEO search process and try to understand any color you can provide on.
The background on the search process and.
One of the reasons why burn was chosen become the next CEO starting in September . Thank you.
Sure Kevin Thanks for the question. This is bill and thanks for acknowledging Bob So.
Obviously, we went through an extensive search of that search process started back in February as soon as we announced that I was the interim CEO .
Because we were diligent about wanting to make sure that we can find someone we employed a national search firm and as you can imagine with a job like this we got quite a bit of a response.
A number of great candidates. So we have the opportunity as a board to vet.
And going through that process, we were looking for somebody who had great business acumen, and somebody who had consumer product skill sets.
Somebody who was really good with people and as we had the chance to evaluate <unk> in all of the other candidates that we looked at.
He clearly rose to the top as far as someone that would be able to come in here and paying a great strategic vision for the organization someone who had alignment with us in the Fintech space and the abilities that we have and the things that we're looking to do as it relates to expanding our business and our platform and our ecosystem. So as we went through that process.
It was not surprising to see that the board was unanimous in making the decision to bring bruna onboard.
Great. Thank you for that color and then.
Just shifting gears you, obviously put a lot of focus on.
Attracting new originations, particularly in the origination market, particularly in the purchase market I.
Was hoping you could provide a little more color behind.
Some of the.
Some of the progress that you've made with these initiatives, particularly rocket rewards.
Inflation Buster and then the new programs you guys announced in May as well.
Yes, sure I'm sure Brian will have some thoughts on this as well, but you are talking about by plus one plus two programs will be rolled out here in the second quarter.
Inflation, Boston was last year and so.
When you think about.
The problems in the market today, all kinds of inventory challenges right. I mean, we just talked about the fact that inventory levels are one quarter of what they were in 2007, which was the last time, we went through a great recession I mean, the inventory levels are incredibly loyal people want to buy but it's really hard and so.
<unk> plus program gives people the opportunity to save money on the transaction, especially if they're working with us from a mortgage perspective, but also because of rocket homes. If they are able to work with both us and rocket homes, it's real money that they can save on the transaction and I think that really gave us an opportunity to drive lead flow that we hadn't seen.
In the second quarter and allowed us to grow our market share not only year over year, but quarter over quarter as well, which are very very important metrics that we keep an eye on so.
We're excited about what the way that worked we're looking forward to that continuing.
We move forward.
Yes, the only other thing I would add bill is exactly what you said that these products are designed for this market. The two challenges our affordability and inventory and <unk> plus is a good example of an innovative product just to dive a little deeper into the metrics.
It's exceeded our expectations on driving traffic to our sites.
Consumer engagement on the product is beating all of our internal metrics. The real challenge is just getting people into homes with the inventory levels that bill just discussed.
Yes, it's obviously a challenging environment and a lot of these programs are relatively new.
Are you able to provide just that.
Some metrics behind some of the incremental market share that you've taken particularly around the purchase market.
Yes, the way I would comment on that Kevin as I think we've talked about this before but it's a challenge to report market share just if you use the industry forecast and when I say the industry forecast I mean, the MBA Fannie.
And we know that because one there is like any other forecast, it's usually not correct, but the actuals change frequently and get updated. So this is how we look at it.
Look at securitization data, which is of course publicly available and you can get your hands on that and that shows us taking purchase market share quarter over quarter and year over year now thats about 70% of the overall mortgage market, but it's a great sample size and a great indication. We also look at other sources like optimal blue and Corelogic data and that helps us get more.
Real time information and up to date again, maybe not capturing the entire market, but when you look at it every source and even if you do the math on Fannie and MBA. They all point in one direction, which is us taking share in the purchase market.
Great. Thank you for taking my questions.
The next question is from Ryan Nash with Goldman Sachs. Your line is open.
Hey, good evening guys.
Maybe I'll start off looking at the current quarter's results and digging into a little bit on the third quarter guide so.
The results came in just above the high end of expectations can you maybe just talk about what you saw throughout the quarter on the competitive side that led to the better results.
And then when you think about the three Q guide, maybe just talk a little bit about what's driving the sequential decline.
Yes.
At the midpoint of the range, obviously, there's some seasonality with the spring selling in the second quarter, but maybe just flesh out some of the moving pieces in terms of volumes and margins and is there some conservatism similar to what we saw in the second quarter, Thanks, and I have a follow up.
Yeah, Thanks, Brian I'll take the first shot but let.
Let me start with the Q2 performance and even just I'll talk about the revenue beat which is obviously exciting but let me just take a step back and say, we're very pleased with the execution in the second quarter profitable on an adjusted EBITDA basis profitable on a GAAP basis. This isn't a backdrop of a market that shrunk over 60%.
<unk> almost overnight. So we're very this is a this is an execution quarter from the leadership team and our team members and we're very proud of that and here's the good news the profitability was driven by an increase in revenue from the second quarter and that makes three quarters of back to back increases on the revenue side on the gain on sale of <unk>.
<unk> side.
And the outperformance was really simple it was driven by purchase we talked about some of these by plus metrics are absolutely resonating with consumers.
And then we've got a little cooperation from margins as well the margin print is very healthy so that drove the outperformance and then as we think about Q3 I can tell you. We're a third of the way through the quarter as we sit here and talk to you today and the trends are very consistent particularly on the purchase side with what we saw in Q2. So that's the good news.
The challenge comes back to the inventory levels. If you want to believe that Q3 is going to be a healthy purchase quarter you'd need to believe that homes are going to sell and you need to believe that inventory is going to come online. So the guide as is consistent with Q2 852 1 billion.
We're very confident in our execution and our internal performance, but the inventory levels do give us pause as we look into the third quarter.
Got it and then maybe as a follow up you talked about expenses being flat next quarter. But then you also talked about the $150 million to $200 million of cost saves that you're bringing on can you. Maybe just talk about how much of that is going to be in the run rate for the second quarter over and over.
What timeframe you see making it in does this lead to absolute expenses declining overtime and Brian you talked about the progress you've made on revenues and improving getting to positive adjusted EBITDA does this cost saving initiative that you are putting in allow you to move back to sustained profitability. Thank you.
Yeah. So I wanted to be clear that the cost savings that we're talking about the $150 million to $200 million, we'll really start seeing the effects of those in the fourth quarter. They are executed in the third quarter they'll work their way through the system there might be a small benefit in the third quarter, but.
<unk> sort of be a full quarter of realization in that fourth quarter, which again just to touch on the profitability metric again. This is the $18 million in EBITDA in the $140 million of positive GAAP income to support any of these costs that you're being taken.
Take effect, but if you think about what we've done and we've said this before but we're committed to running an efficient business and looking over the cost structure has to be a part of that just as a quick reminder, for the group last year, we took out $3 billion of cost over 40% of the cost structure came out.
This round was really about focusing on efficiency and focusing on prioritization.
Those two things we've committed to and we know how important they are and they can make or break our business. So these are the result of being efficient in terms of how we think about our team structure and our organizational structure and our prioritization. So this $150 million to $200 million range should start being.
Full effect in the fourth quarter and of course, if you. If you just pro forma that and layer that on to the Q2 profitability results. They would have been even better had these cost savings has been in place.
I appreciate all the color Brian .
Thanks Ryan.
The next question is from Kyle Joseph with Jefferies. Your line is open.
Hey, good afternoon, thanks for taking my questions.
One more on the expenses on the $115 million to $200 million of savings does that factor in the changes you guys made in solar and auto that you addressed on the call.
Yes that was part of it for sure Thats, what I was alluding to on the prioritization front.
There are certain things that like Bill mentioned by plus rocket rewards things that are working that will continue to double down on and invest in and then theres. Some other things such as the solar sales arm in the rocket auto business, which were good things at the time and showed some success, but arent meeting our return thresholds. So part of that is.
Inclusive of winding down those businesses.
Got it and then just one quick follow up on me.
In terms of margin kind of by channel. If you could give us a sense if <unk> kind of a good run rate at this point, where you had enough supply come out in the industry that we're kind of getting towards an equilibrium in terms of supply and demand and just any sort of outlook by channel on.
Sure Mark.
<unk>.
Yeah, the way I'd answer that is both channels performed well.
Gain on sale margins are now up for three quarters in a row. There is no question that that's a component of capacity coming out and competition easing, but I would go on to just say that there is still well below historical norms. So theres still room to grow there for sure capacity has come out of the system.
Competition has eased a bit but we're not all the way through that in our view some of that will depend on where mortgage volumes.
Fallout of course, but if you just look at the amount of mortgages being produced in the second quarter. There is still more capacity that can come out and gain on sale margins are an indication of that still below historical norms, but yes. The sequential improvement is definitely a positive sign.
Very helpful. Thanks for taking my questions.
The next question is from Ryan <unk> with Zelman <unk> Associates. Your line is open.
Hey, Thanks, guys nice job on the quarter.
So you've hit on the purchase dynamics, which is helpful and good to see I guess looking forward the midpoint of the adjusted revenue as you referenced.
Purpose referenced previously down a bit from the <unk> results I guess, maybe help us think about the.
The guidance in relation to the comments you made about purchase I believe you said preapprovals for much stronger than historical in <unk>, maybe up 20% I guess that sounded to me like that was an indication.
Kind of a leading indicator of what's happening in <unk> that may lead into <unk>.
So maybe if you could just square that that dynamic with the with the guidance would be helpful.
Yes.
Happy to take that I mean.
The guidance if you look forward to the third quarter I mean, similar guidance for the second quarter and third quarter typically is not going to be a purchase is as heavy a purchase season, just normally than the second quarter. So.
We actually think that's a pretty good a pretty good guide and what Bryan talked about is the length of time, it's actually taking now to make it all the way through the process. So the fact that our pre approval letters are up so great indicator and.
We look forward to that.
Making its way through our pipeline in the next three to six months, but it's taking much longer for all our clients to be able to.
Think about getting a home going through the process finding up the finding of mortgage negotiating the deal everything associated with that is just extended so while I think that bodes well for what the third and the fourth quarter can look like.
We still have to deal with the fact that the third quarter's typically and historically a little bit less robust as it comes to the purchase market.
That's helpful that makes sense.
And then second question on <unk>, plus <unk>, plus so you called out the strong consumer engagement. There I guess can you dig in a bit on the reception from real estate agents.
It seems like it's a very compelling offering not just to consumers, but also to your partner agents with rocket homes. So yeah any thoughts there just high level on the reception of agents in.
Is that program, helping drive interest maybe more generally from from real estate agents out there too to partner with you either on the mortgage side or with rocket homes.
Yes, that's a great question I mean, we believe it is we believe we're seeing referral numbers to rocket homes up significantly.
That indicates to us that realtors are interested in what we have to offer in passing that onto their client right at the end of the day. The realtors cared deeply about what happens for their client and how well they can be triggered through the process. So.
We have been excited to see that increase I know rocket homes, we've been happy to see it. So it seems like to us that the real estate community is reacting positively to this particular program.
That's great. It sounds good thank you.
The next question is from Doug Harter with Credit Suisse. Your line is open.
Thanks.
You mentioned that.
MSR servicing portfolio.
Was down and corn and I was just wondering how you're currently looking at the servicing portfolio and the split between lower coupon borrowers that have less incentive to refi.
Newer production higher coupon mortgages.
See an easier path towards refinancing.
Yeah. Thanks, Doug So our views on the MSR asset haven't changed of course, our superpower there the retention rates.
That's really where we.
<unk> anyone else in the space the asset is a great cash flow asset and obviously it brings a little bit of volatility to the balance sheet, but overall for us.
It's a lifetime value equation, which I think you might be referring to we did have some sales of servicing assets in the third quarter.
The one I'll touch on which is probably the more unique one for US is the sale of the excess strip, we did sell some excess strip off.
About our business, we take enough interest rate risk every single day by originating mortgages and servicing mortgages, so where we have an opportunity to unload a bit of that excess at a really nice exit multiple that can make all the sense in the world for US, we'll we'll trade that for cash but the most important part is we will retain the client and that client relationship through the <unk>.
Mary servicing asset is obviously again, our superpowers. So that's probably what you saw come through in the third quarter, but no change in the overall strategies were a buyer of servicing asset everyday by the loans that we originate we do a lot of looking.
If the client demographics fit our profile and we can make an LTV argument will acquire that portfolio in terms of clients.
Portfolios that we saw it again, it's really through that LTV lens. If there is if theres inability to remarket to them or if theres. Another reason that we don't have the confidence and the recapture those are the ones we'd look to trade.
Is there any way you.
Can you give us a breakdown kind of by coupon how much of your servicing portfolio.
You're above a 5% coupon now or 6%.
Get a sense of what.
If rates came down a moderate amount.
Or where you could start to see more refinance demand.
Yes, the financial disclosures always include a weighted average coupons, so youll see that when we file the.
Q here, but I mean, it's not a surprise that that we've been servicing now for a long time in 2020 in 2021 was big of origination years. So that's going to be a big percentage of your book and Thats going to be lower coupon, but I think you bring up a good question because something I feel like folks do underestimate is this year there'll be a trillion $5 trillion.
<unk> of mortgages produced in all of those mortgages will be at a higher coupon.
And then at some point all of those mortgages will be back in the money and people I think underestimate how much rates have to move to make that beneficial for the clients. So when you look at the weighted average coupon of course, that's going to be low in the book, but we're originating mortgages everyday at these prevailing rates and higher coupons that it only takes a few basis point move.
B back in the money and make it beneficial for those clients.
Great. Thank you.
The next question is from James Fawcett with Morgan Stanley . Your line is open.
Thank you I would've closed one.
Alright.
Quick question on your prepared remarks inventories of existing home for obviously near historic lows.
Versus 2017, particularly striking.
And from the lock in effect.
But it seems like new homebuilders have been putting the gap in many market. What are you doing to capture fair on that Mark and I didn't know you touched on a little bit but are there opportunities for rocket to lean into the basin.
Develop more expansive partnership with homebuilders.
That's actually that's a great question I mean, we work with homebuilders on a regular basis. So we're constantly interacting with them, but as again as you know that's a very long lifecycle right. When you start from scratch and signing a purchase agreement to building the home and the gestation period associated with that I mean, I remember lives to do it years ago was about nine months.
And these days is probably closer to 15 to 18 months right. So.
While we are always encouraged by a little bit of increase in the new construction, it's still relatively small in the grand scheme of life.
And where it's been historically so.
We're constantly working with builders on that but thats not going to show any short term.
Positive impact for us from a closed loan perspective, along the line I think that's right.
<unk> been looking at those stats very closely James and it's a good question, but just keep in mind. The vast majority of homes that will be sold or still existing home. So thats still where the biggest Tam is and then also keep in mind eventually the market will be efficient the homebuilders are doing great in their striking while the iron is hot which is great for them, but.
Existing home sales in every market still are going to be the lion's share of all home sales.
Yeah.
Great perspective, there and then I wanted to ask.
It seemed a little bit.
I don't know.
It seems a little bump that you're asking a question given the expense you've already made.
<unk> announced plan, but where are you in terms of how much more you could cut if needed, but still maintain kind of all the key things that make rocket rocket just trying to get a sense for where the bottom may be or where it could be if necessary.
Well, that's a great question, but I think at the end of the day, where we are right now and the work that we've gotten so we feel good about where we are from a cost structure, we're going to constantly look at it will be efficient in evaluating our business, but we've done a lot of work to.
To get to the place that we're at.
We feel pretty good about what the future looks like from that perspective.
Okay. Thank you.
The next question is from Mihir Bhatia with Bank of America. Your line is open.
Good afternoon, and thank you for taking my questions. Let me also add my congratulations to Bob comment.
And if.
How about a two part question I'll, just ask book box since the related upfront.
So.
You talked a little bit about the color.
I appreciate the comments on the product innovation and introduction of new programs and how that's helping drive purchase volume, but I was curious if you could comment a little bit more on just where the market share gains are coming from where you are seeing them in what channels between the partner or the direct business.
Where that's coming from and also.
Relatedly, there's been some press reports about the on highway Bill can also close the talk maybe talk a little bit about that and just big picture maybe.
As the rate backdrop has gotten more challenging and has become more of a butcher has driven origination market how is rocket changing.
What is staying similar to the last question what is staying true to rocket.
Grew into this juggernaut in the industry mortgage industry and what has changed how we view adopted and what should we expect here over the next year or two.
<unk>.
Well, that's a mouthful right there.
So what I would tell you is I think we've seen growth in both channels. So it's not it's not specific or exclusive to one or the other and we're actually happy about the growth in both.
As it relates to.
Your question on local loan officers and we've had remote local loan officers for a long time and our organization. We've always tried to leverage talent, where the talent exists and we probably saw more of that during COVID-19, right, which opened up our eyes to a little bit by the fact that some folks can work from home and do a good job in a local market.
That would add value to the organization. So our strategy going forward is the same we're going to continue to push our direct to consumer business and we've got our third party origination channel.
I think we're as we look at our direct to consumer business. There is a way to get more local and more regional with that out of a centralized location that I think is beneficial to the interactions that we would have with realtors and builders and that's something that we're constantly working on and evaluating but I think what youre seeing is an organization that is committed to.
Direct to consumer model, the Digitization of the process I think.
The hiring of our new CEO indicates that.
And a big big way because of his experience similar he has been so we still look at this marketplace is a massive opportunity it's still very fragmented and there's still a lot to be accomplished by our organization even in a purchase heavy market.
Okay.
Yeah.
Okay.
The next question is from Don <unk> with Wells Fargo. Your line is open.
Hi, good evening.
There've been a lot of changes to bank regulation I didn't know if there were any potential benefits to your business, even if it's on around just.
Well I mean, I think there is theres a lot of <unk>.
Talk about what's going on with banks as it relates to the SBB Regional bank situation that took place and I know, there's some discussions about increased capital rules and things of that nature, but at this point that stuff is still a proposed rulemaking states. So it's really kind of hard to determine what that's going to look like in the marketplace.
On one hand, if you see capital requirements go up you are already starting to see some regional banks that are pulled pulled away from the warehouse lending space.
That could bode poorly for a lot of our brother in the industry for US I mean, we work with the largest financial institutions. So we don't see an impact there but.
But I think I think the Devil's in the details when we have to see where this where the new regulations and the new rules come out and how that might affect things I mean on one hand, you could argue that.
By doing that might help.
Non depository mortgage lender on the other hand until we really know the reality of life and what those rules are going to do it's hard to say.
It could ultimately have an impact on some of the non depository space for folks who don't quite have the balance sheet that we have.
Thank you.
That will conclude our question and answer session I will turn it over to Bill Emerson for any closing comments.
So first of all thank you all for joining us and I just want to make sure that I.
State this for the record how much we appreciate Bob Walter all the workings bump for this organization over the last 26 years. His leadership I have known Bob that entire time, and while I am very happy for him and the next steps that he is going to take he will be missed at this organization greatly so thank you Sir.
Appreciate you.
And thank you all for being on listening asking questions and until next time.
This concludes today's conference call. Thank you for participating you may now disconnect.
Yes.
Okay.
Yeah.
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