Q3 2024 Rocket Companies Inc Earnings Call
Thank you for standing by and welcome to the Rocket Company's 3rd Quarter 2020 4Earnings Conference Call.
Speaker Change: All lines have been placed on mute to prevent any background noise.
Speaker Change: After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star followed by the number 1 on your telephone keypad. If you would like to withdraw your question, again press the star 1.
Speaker Change: Thank you. I'd now like to turn the call over to Sharon Ng, Head of Investor Relations. You may begin.
Sharon Ng: Good afternoon everyone and thank you for joining us for Rocket Company's earnings call covering the third quarter 2024.
Sharon Ng: With us this afternoon are Rocket Company CEO, Varun Krishna, and our CFO, Brian Brown.
Sharon Ng: Earlier today we issued our third quarter earnings release which is available on our website at rocketcompanies.com under investor info. Also available on our website is an investor presentation.
Speaker Change: Before I turn things over to Varun, let me quickly go over our disclaimers.
Speaker Change: On today's call, we provide you with information regarding our third quarter performance as well as our financial outlook. This conference call includes forward-looking statements.
Speaker Change: 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.
Speaker Change: We encourage you to consider the risk factors contained in our SEC filings for a detailed discussion of these risks and uncertainties.
Speaker Change: We undertake no obligation to update these statements as a result of new information or further events, except as required by law.
Speaker Change: This call is being broadcast online and is accessible on our Investor Relations website.
The recording of the call will be posted later today.
Our commentary today will also include non-GAAP financial measures.
Speaker Change: Reconciliations between GAAP and non-GAAP metrics for our reported results can be found in our earnings release issued earlier today as well as in our filing for the SEC.
Speaker Change: And with that, I'll turn things over to Varun Krishna to get us started. Varun?
Varun Krishna: Thanks Sharon. Good afternoon everyone and welcome to the Rocket Company's third quarter 2024 earnings call.
Varun Krishna: Two months ago, at our first ever Investor Day, we unveiled our vision for Rocket's future.
Varun Krishna: Today, I want to kick off our call by emphasizing and extending one key theme, optimism.
Varun Krishna: Optimism is the ability to see the glass as half full. Over the past few months, the market has thrown our industry almost every curveball imaginable. With inflation easing, the Fed cut rates for the first time in four years.
Varun Krishna: But, in an interesting twist, while the Fed lowered rates, mortgage rates did not follow suit. Instead, both the 10-year Treasury yield and the 30-year fixed mortgage rate actually increased.
Varun Krishna: In my experience, it's always important to take the long view and put things in perspective.
Varun Krishna: Despite the housing market being challenging, we are seeing signs of rejuvenation.
Varun Krishna: The 30-year fixed mortgage rate has declined from nearly 8% a year ago. This is helping improve purchase affordability and opening up refinancing opportunities to lower monthly payments.
Varun Krishna: Plus, housing inventory has increased from 3.4 months to 4.3 months, showing a 26% improvement.
Varun Krishna: We're still below the five to six month range that's considered a balanced, healthy market, but inventory is moving in the right direction.
Varun Krishna: While affordability and inventory are certainly still challenges, the market is showing signs of improvement compared to last year. And we're right there with consumers, navigating their needs together and in service of our mission to help everyone home.
Varun Krishna: Our mindset reflects the importance of optimism in a world that continues to be riddled with uncertainty.
Varun Krishna: That is because home ownership is, and always will be, the cornerstone of the American Dream.
Varun Krishna: Every day we make 30-year bets on clients who are betting on themselves. Our role in opening the door to that dream is what makes us proud to be Rocket.
Varun Krishna: Let me take a minute to reflect on the results of the quarter. At Investor Day, we announced our bold 2027 market share goals to double our purchase market share from four to eight percent and increase our refinance market share from twelve to twenty percent.
Varun Krishna: This quarter was a solid step toward these goals. I am so pleased to share that we expanded both our purchase and refinance market share year over year in the third quarter.
Varun Krishna: We delivered $1,323,000,000 in adjusted revenue, surpassing the high end of our guidance and accelerating growth compared to Q2.
Varun Krishna: Net rate lock volumes surged 43% year-over-year, driven by significant refinance activity alongside growth in purchase volume.
Varun Krishna: Our adjusted EBITDA margins came in at 22%, three times higher than Q3 of 2023.
Varun Krishna: We also reported adjusted earnings per diluted share of eight sets.
Varun Krishna: These numbers are a direct result of one basic thing, execution.
Varun Krishna: Our team members continuously refine every aspect of our sales and operational processes, marketing, and product technology to fight for every inch of progress.
Varun Krishna: That execution excellence is built on decades of investment and toward a durable, competitive advantage, which we call the Rocket Super Stack.
Varun Krishna: This is the key to the strong short-term results we're seeing today, and it's also the foundation for long-term value creation and growth.
Our superstack is comprised of four layers.
a robust end-to-end ecosystem.
multi-channel experiences we create for clients, team members, and partners.
Varun Krishna: proprietary AI driven technology, and lastly our iconic brand. The integration of these four layers serves as the engine that drives growth, scale, and efficiency.
Varun Krishna: Let's dive into each layer and unpack a few highlights from the quarter.
First up is the power of our unique ecosystem.
Varun Krishna: a system that connects each step of the journey from finding and financing a home, to servicing, to title and closing, and the journey beyond. At the very heart of our ecosystem lies our Origination Servicing Flywheel.
Varun Krishna: Once a client enters the flywheel, we provide them with outstanding origination and servicing experiences and we earn the privilege of becoming their lender for life.
Varun Krishna: Last month we announced a strategic subservicing partnership with Enelie. This partnership allows us to expand our servicing portfolio in a capital efficient manner.
Varun Krishna: We're excited to onboard these clients into the Rocket ecosystem this December and provide them with an amazing origination and servicing experience that sets Rocket apart.
Varun Krishna: Our industry-leading 85% recapture rate speaks to the client experience that people love, that keeps them coming back to Rocket, establishing a long-term relationship.
Varun Krishna: There's no additional acquisition costs for clients in our ecosystem, creating even more operating leverage.
Varun Krishna: This very same ecosystem brings innovative mortgage products tailored to today's market to our clients. With home affordability top of mind, our affordable product suite is helping clients get a leg up or bringing the dream of home ownership closer.
Varun Krishna: These products have struck a chord, making up a quarter of our purchase volume since the beginning of this year.
Varun Krishna: or recently launched Welcome Home Late Break is a great example.
Varun Krishna: We reduced rates by two points in the first year, and one point in the second, providing meaningful affordability relief for homebuyers.
Varun Krishna: Since its launch in late August, we've seen our OnePlus and Welcome Home Rate Break product groups grow by more than 20%.
Now on top of our ecosystem sits our experience layer.
Varun Krishna: where we're breaking new ground and delivering the light to our clients.
Varun Krishna: We have made tremendous strides this quarter in expanding our Gen-AI powered chat functionality.
Varun Krishna: Our generative and live chat is now fully integrated across all our digital platforms, handling everything from purchase to refinancing and servicing 24-7, whether clients are logged in or not.
Varun Krishna: This round-the-clock access is key, with 20% of our clients contacting us outside of regular business hours. We're seeing significant growth here as chat interactions with our bankers have more than doubled quarter over quarter.
Varun Krishna: Beyond just the literal growth in the number of interactions, chat is driving real results. Every chat is a chance to deliver personalized, insightful experiences that deepen client engagement, which in turn leads to higher conversion.
Varun Krishna: Clients who use chat are converting three times higher compared to those who don't from first interaction to credit pool
Varun Krishna: We often talk about letting technology do what it does best, freeing our team members to focus on what they do best, helping our clients.
Varun Krishna: Responding with urgency when our clients need us most is the ante to play. I can't think of a better example where this was put to the test than most recently during the hurricanes that hit the southeast.
Varun Krishna: While dealing with a devastating situation, I couldn't be prouder of our team's quick, technology-enabled response to support and be there for our clients.
Varun Krishna: We tracked the storm paths in real time. We activated our emergency playbook. We customized our digital tools before landfall.
Varun Krishna: Self-service options like our website, AI-powered chat, and IVR allowed nearly 70% of affected servicing clients to get immediate answers on credit suppression, late fee waivers, and forbearance.
Varun Krishna: seamlessly connecting them to our team when they needed personal support.
Varun Krishna: We also saw a significant three-fold increase in disaster inspection reports for affected counties compared to the weekly average in the months before. This process can often be delayed at the collateral underwriter review stage where workloads are already substantial.
Varun Krishna: Quickly reviewing this report is critical to getting our clients loans back on track.
Varun Krishna: Thanks to automation efforts we put in place months ago, we cut review times by 71%, allowing us to push through this bottleneck and quickly provide next steps to help our clients move toward closing.
Varun Krishna: Let's move to the third layer that powers our ecosystem and experience, technology.
Varun Krishna: The ability to leverage technology is crucial to scale, drive profitable growth, and adapt to market shifts. Let me share just two quick examples.
Varun Krishna: In our business, constantly we're asking and answering complex questions like which loans are in the money in Wayne County, Michigan, or is this loan compliant with regulations in Nevada?
Varun Krishna: For many lenders, answering these questions takes intense research. It can take many hours or even days, involving multiple data analysts or engineers, pulling data from various sources. This is just the industry norm, but not at Rocket.
Varun Krishna: Rocket is changing the game with a new technology called Navigator, our internal AI-driven knowledge and workflow platform that puts answers to questions within reach in seconds.
Varun Krishna: Navigator empowers our team members to create no-code apps, experiment with AI securely, summarize documents, analyze sentiment, and even role-play scenarios.
Varun Krishna: Navigator's AI automates complex queries empowering more people to drive innovation on their own without involving support from a data analyst or engineer.
Varun Krishna: With Navigator's conversational AI interface, our team now has the answers they need at their fingertips.
Varun Krishna: And the results are impressive. In just a few months, over 2,000 team members have logged more than 52,000 LLM interactions.
and they love it.
Varun Krishna: Daily active users have been climbing steadily since launch, nearly doubling from August to October.
Varun Krishna: By automating complex queries, Navigator is multiplying the number of innovators at Rocket by an order of magnitude. That is the power of AI in a nutshell.
Varun Krishna: We've also continued to build out our proprietary AI-powered loan origination system, RocketLogic. We recently expanded Synopsys to handle all inbound calls and the results have skyrocketed.
Varun Krishna: In early November, we reached a major milestone, processing nearly 1 million calls in a single week.
Varun Krishna: The power of processing these calls through AI results in transformative insights to our business.
Varun Krishna: Each call provides semantic data that lets us extract names, sentiment, call purpose, pain points, and more.
Varun Krishna: These tags create metadata that helps us strategically allocate resources, equip our bankers with valuable real-time insights, and address specific needs, ultimately driving higher conversion rates.
Varun Krishna: With Synopsys, we have insight into a client's purchase journey, whether they have a home in mind, have submitted an offer, or had it accepted.
Varun Krishna: This allows us to connect high-intent clients with the right bankers, creating more meaningful interactions and driving purchase conversion.
Varun Krishna: The last layer of the stack is the icing on the cake, our iconic brand.
Varun Krishna: The Rocket brand is one of our greatest superpowers. While Rocket is already an admired brand, this coming year we will significantly amplify its identity, purpose, and impact in home ownership.
Varun Krishna: Over the past few months, we've zeroed in on the growth audiences that are set to reshape the home-buying landscape.
Varun Krishna: female heads of households, Hispanics, and aging first-time buyers, just to name a few.
By 2030, over half of first-time homebuyers will be Hispanic.
Varun Krishna: Meanwhile, the economic influence of women will continue to surge with women managing two-thirds of household wealth. Our brand will evolve to meet these clients exactly where they are.
Varun Krishna: In February of 2025, we will unveil the new Rocket brand identity.
Varun Krishna: The transformation began with our recent acquisition of Rocket.com, a site that will unify the home ownership experience across home search and mortgage.
Varun Krishna: In the coming months, we will share a greater ambition with the country and establish a brand that represents the ability for our clients to own the elusive American dream once more.
Varun Krishna: Let me quickly summarize. Each layer of our super stack accelerates our execution and propels us forward.
Varun Krishna: The stack is a durable advantage that empowers us to set bold goals and establishes clarity on how we will achieve them.
Varun Krishna: Each layer is unique to Rocket and combines to create a whole that is greater than the sum of parts.
Varun Krishna: What truly excites me isn't just the what of our strategy, but the how, and most importantly, the who.
Varun Krishna: We've built a world-class leadership team bringing in key executives with deep expertise in AI and technology to work hand-in-hand with the best homeownership mortgage and finance leadership team in the industry.
Varun Krishna: Together, we are poised to drive needed change and modernization in the industry and I am so proud to work alongside them every single day.
Varun Krishna: I'm going to close where I started. Our mission is to help everyone home, a mission that reflects the optimism we have toward our future growth.
Varun Krishna: Forecasts for the mortgage origination market indicate a 20 to 30 percent year-over-year growth in 2025. That gets us excited and creates an opportunity to capture share.
Varun Krishna: And no matter how the market evolves in the coming years, our $5 trillion market opportunity reflects our potential and our ambition.
Varun Krishna: We firmly believe Rocket is well positioned to drive disruption and transform the industry to benefit millions of homeowners.
Brian Brown: Thank you, and with that, I'll turn it over to Brian.
Brian Brown: Thank you Varun and good afternoon everyone. I'd like to start by setting the stage and framing how we're responding to market realities and seizing opportunities as they come, and why we're uniquely positioned to capture a bigger slice of the home ownership market.
It's been an interesting couple of months for the industry.
Brian Brown: For most of the third quarter, 30-year fixed mortgage rates have trended lower, from nearly 7% in July to touching 6% during a two-week window mid-September.
Brian Brown: However, stronger-than-expected economic indicators caused the 10-year yield and 30-year fixed mortgage rates to quickly jump back to 7%.
In short, the market's been anything but predictable.
Brian Brown: Since interest rates are impossible to predict with any certainty, the key is scaling up quickly to capture the market opportunity when it presents itself. The third quarter is a perfect example of this.
Brian Brown: When rates briefly dipped to near 6%, clients who had financed homes in the past two years jumped at the chance to lower their payments.
Brian Brown: We also saw a lift in our purchase pipeline as affordability improved, reaching our highest daily production volumes in the past 24 months during that brief window. It was a game-on moment, and we scaled up quickly to capture this volume surge.
Brian Brown: Every layer of our Rocket Super Stack, our ecosystem, experience, technology, and brand played a role in powering execution across the board.
Brian Brown: We captured more top-of-the-funnel leads through all of our channels, including direct-to-consumer, broker, partnerships, and of course our service clients.
Brian Brown: We launched innovative mortgage products like our Welcome Home Rate Break promotion to meet the moment, supercharged our bankers with tools to serve more clients, and boosted conversion throughout the funnel.
Brian Brown: All together, this meant we captured and converted more leads with speed and scale, without adding headcount or increasing fixed costs. We flexed up our capacity seamlessly through our technology platform.
Brian Brown: That's the power of what we're building at Rocket. When these windows of opportunity open, we're ready to act. This lightning-fast execution is unique to us and hard for others in the industry to replicate.
Brian Brown: To take advantage of the brief 6% rate opportunity in the quarter, most mortgage companies would have needed to hire, train, license loan officers and underwriters months in advance.
Brian Brown: Relying on human capital to drive capacity likely means missing the opportunity entirely.
Brian Brown: Equally important to seizing the market opportunity is staying resilient when the market contracts.
Brian Brown: Thanks to our tech platform we can flex our capacity up or down without the whiplash of hiring and layoffs typical in traditional mortgage models.
Brian Brown: No matter what the market throws at us, we stay focused on our goal to capture profitable market share in any environment.
Speaker Change: When we zoom out, as Varun shared, we see reasons for optimism.
Speaker Change: Compared to a year ago, the 30-year fixed rate has trended lower. Housing inventory, measured in months of supply, has increased by nearly 30 percent.
Active home listings have grown for 12 consecutive months.
Speaker Change: and the share of homes sold above the listing price is down 10% year-over-year, signaling a cooling in the competitive bidding for homes.
Speaker Change: While there's still affordability challenges, these are promising signs, and we anticipate even more momentum as we head into the new year.
Speaker Change: Now, with that backdrop, I'll take you through our strong Q3 financial performance, talk more about how AI is unlocking value for our business, and the critical role that our origination servicing flywheel plays in fueling our financial success.
Speaker Change: I'll also touch on our new investment grade credit rating and I'll wrap up with our outlook for the fourth quarter. Let's jump in.
Speaker Change: If I had to sum up this quarter in one phrase, it's light out execution.
Speaker Change: the group purchase and refinance market share revenue and profitability on a year-over-year basis
Speaker Change: Adjusted revenue came in at $1,323,000,000 above the high end of our guidance range.
Speaker Change: This represents a 32% increase from the third quarter of last year and our fifth consecutive quarter of year-over-year revenue growth.
Speaker Change: We generated $30 billion in net rate lock volume, marking a 43% increase year-over-year and our highest volume since the first quarter of 2022.
Speaker Change: This year-over-year growth included double-digit increases in both purchase and refinance.
Our home equity product posted another record high.
Speaker Change: Bean on sale margin held steady at 278 basis points, roughly flat with the same period last year.
Speaker Change: From a channel perspective, our direct-to-consumer sold loan being on sale margins have climbed to over 400 basis points.
Speaker Change: while our partner network margins have increased to roughly a hundred and fifty basis points.
Speaker Change: Our continued focus on driving top-line growth, operational leverage, and efficiency combined to make the third quarter our most profitable quarter in two years.
Speaker Change: Adjusted EBITDA was $286 million dollars, representing a margin of 22%. We reported adjusted net income of $166 million dollars and adjusted diluted EPS of $0.08.
Speaker Change: When we talk about profitability, it's driven not only by our top-line growth, but also by creating operating leverage, powered by our investment in technology.
Speaker Change: Our scalable tech platform is what empowers us to navigate dynamic markets with agility. From my perspective, the most powerful benefit of AI is the boost it gives to operational efficiency and productivity. Simply put, it's about achieving more with the same resources.
Speaker Change: The increase we're seeing in team member productivity translates directly into greater capacity.
Speaker Change: unlock this capacity through technology while others in the industry try to grow it by adding headcount, which is inefficient and has a long runway.
Speaker Change: And when the market contracts, you're left with excess capacity and inflated costs.
Speaker Change: Today we have the capacity to support a hundred and fifty billion dollars in origination volume without adding a single dollar of fixed costs. We proved that this quarter.
Speaker Change: Not only did we handle more volume, net rate lock volume was up 43%, but we did so with 7% fewer production team members year over year.
Speaker Change: Our AI tools are driving these gains, from automating income verification and collateral review, to enabling multiple client chats and insights that boost conversion.
Speaker Change: RocketLogic, our proprietary loan origination system, is driving massive efficiency improvements.
Speaker Change: With recent updates, we're saving over 800,000 team member hours annually, a 14% increase from just two months ago, resulting in more than $30 million in annual savings.
Speaker Change: But it's more than just cost savings. AI is giving us greater speed, accuracy, and personalization, boosting conversion rates, and fueling growth. Operational efficiency is a top priority for us, and we're constantly evolving to keep ourselves lean, agile, and competitive.
Speaker Change: Another key part of our business model is our origination servicing flywheel. As we've discussed on previous calls and at Investor Day, MSRs are an attractive way to acquire future origination clients.
Speaker Change: Together, our origination and servicing businesses form a powerful home ownership flywheel that allows us to source new clients and organically create new MSRs while positioning us to help clients with future transactions.
Speaker Change: See you at their next purchase, refinance, or even home equity loan.
Speaker Change: Earning repeat business is what we refer to as our recapture rate. Our goal is to provide a client experience that is so exceptional that we become the client's go-to for all future home financing needs.
Speaker Change: Our industry-leading 85% recapture rate is a testament to the client experience.
When you shout at something,
Speaker Change: you earn the opportunity to extend that value beyond your own ecosystem and offer it to your partners.
Speaker Change: Our high recapture rate is a win-win for both Rocket and our partners.
Speaker Change: It is a powerful advantage for MSR owners without in-house origination capabilities as it offsets the prepayment risk inherent to owning MSRs.
Speaker Change: This also makes cash flows more predictable for our partners, reducing the need for complex, costly hedging strategies.
Speaker Change: In October, we proudly announced a partnership to subservice a portion of Annaleigh's MSR portfolio.
Speaker Change: This strategic subservicing partnership complements our strategy of growing servicing through organic new originations as well as bulk acquisitions.
Speaker Change: Across bulk acquisitions and subservicing, year-to-date, we've acquired or committed to add over $70 billion of unpaid principal balance to our service portfolio. That's a 15% increase compared to the 2023 year-end balance.
Speaker Change: This growth represents 220,000 new clients who represent prime candidates for future purchases, home equity loans, and rate and term refinances.
Speaker Change: As of September 30th, our mortgage servicing portfolio included 2.6 million loans with $546 billion of unpaid principal balance.
Speaker Change: In the quarter, we generated $374 million of cash revenue from our servicing book, which represents approximately $1.5 billion on an annualized basis.
Speaker Change: We ended the third quarter with $3 billion of available cash and $6.8 billion of mortgage servicing rights.
Speaker Change: Together, these assets represent a total of $9.8 billion of value on the balance sheet.
Speaker Change: Our $3 billion of available cash consisted of $1.2 billion of cash on the balance sheet and an additional $1.8 billion of corporate cash used to self-fund loan originations.
Speaker Change: And as of September 30th, total liquidity stood at approximately $8.3 billion including available cash plus undrawn lines of credit.
Speaker Change: As a testament to our sustained financial strength, I'm proud to share that Sitch recently upgraded Rocket Mortgage to investment grade.
Speaker Change: This makes Rocket Mortgage the first non-bank mortgage company to receive investment grade status from one of the three big rating agencies in almost two decades.
Speaker Change: This achievement highlights our strong balance sheet and financial profile and paves the way to access a wider range of funding sources at a much more favorable cost of funds.
Speaker Change: This added flexibility positions us to continue to allocate capital in service of our growth strategy.
Speaker Change: Turning to our fourth quarter outlook, based on typical seasonality, we anticipate the mortgage market in the fourth quarter to be smaller than the third quarter.
Speaker Change: We expect adjusted revenue to be in the range of $1,050,000,000 to $1,200,000,000. The midpoint of this range represents 27% year-over-year growth and reflects continued market share gains.
Speaker Change: We expect expenses in the fourth quarter to be in line with the third quarter. The fourth quarter includes marketing spend related to our brand re-stage and the annual renewal of banker licenses.
Speaker Change: As always, our forward-looking guidance is based on our current outlook and visibility.
Speaker Change: We're making bold investments setting ambitious goals and accelerating execution, all with a clear focus on creating long term value for our shareholders.
With that we're ready to turn it back over to the operator for questions.
Speaker Change: Thank you we will now begin the question and answer session. If you would like to ask a question. Please press star one on your telephone keypad to raise your hand and joined the queue. If you would like to withdraw your question simply press Star. One again, we ask that you. Please limit yourself to one question only and your first question comes from the line of Jeff Adelson.
Speaker Change: From Morgan Stanley Your line is open.
Jeff Adelson: Hi, good evening, thanks for taking my questions.
Jeff Adelson: Maybe Brian you can start with the drivers behind the revenue outlook for the fourth quarter. It looks like you're looking for roughly a 10% to 20% decline in the range there.
Jeff Adelson: Sequentially can you just break out maybe what youre seeing on volume versus gain on sale margin there or what other assumptions are sort of embedded in that guide. Thanks.
Speaker Change: Jeff. Thanks for your question, let me start and then I'll ask Brian to chime in on the gain on sale margins.
Speaker Change: Start by just saying that we feel very good about our guide is a few things that I think are important to just keep in mind when it comes to Q4.
Speaker Change: We typically expect the fourth quarter to be a little bit smaller than Q3, and when you really think about why that is primarily is due to just home buying slowing down a little bit post labor day, you've got kids going back to school you've got the holiday season. So mortgage financing is just not typically is top of mind.
Speaker Change: The second thing that I would share as you know <unk> seen interest rates tick up a little bit and that has obviously an impact on mortgage applications and so these two factors can compound and just have an effect on the quarter.
Speaker Change: At the end of the day the market size is going to be whatever it is still a big market.
Speaker Change: Our big focus is really just on growing our share with great execution.
Speaker Change: And when you put that together, we definitely believe we have a strong and confident guide and I'll also just call out that the guide is a 27% higher year over year for this quarter.
Speaker Change: And that guide reflects obviously, our continued focus on market share gains.
Speaker Change: Our resilience to be able to grow in any market.
Speaker Change: Then let me ask let me ask Bryan to comment further sure. Thanks fair enough I'll touch on the gain on sale margin piece, we do expect a slight expansion in gain on sale margin in Q4 compared to the third quarter Theres, a little bit of conservatism built in there and Thats just typically because we see some competitors do some pricing plays around the <unk>.
As you think about it and you are in their shoes, you have about the same amount of capacity either way in this volume takes down to Brian's point every once in a while we see some pricing pressure there. So we've considered that in the guide and if you kind of just zoom out.
Speaker Change: While we have said for a long time now that we expect gain on sale margins to expand that doesn't happen exactly linear basis.
Speaker Change: But we are getting back to levels, particularly on a channel or if I look at direct to consumer and partner individually that are really close to the historical healthy levels.
Speaker Change: That we've seen pre pandemic.
Speaker Change: And just on the volume assumption for the quarter are you, maybe just sort of embedded not the level of refi or just the current level of interest rates hold for the rest of the quarter I know the App index were revised down about 50% in total was down about 35%.
Speaker Change: Since quarter end last quarter. So just curious are you assuming things maybe get a little bit better or just hold where they are right now.
Speaker Change: Yes.
Jeff If we think about what we do when we set the guide we obviously take into consideration all of the information we have up to this point in the quarter Theres No question about that.
Has been a volatile start to the quarter to <unk> comments on rates have sort of moved in the opposite direction.
Speaker Change: So all of that is baked in.
Speaker Change: The MBA applications in to be look at that we look at optimal blue.
Speaker Change: But the most important thing if I were to leave you with the takeaway is we truly believe this guide is taking share in the fourth quarter.
Speaker Change: Okay, great. Thank you.
Speaker Change: Your next question comes from the line of Ryan Nash from Goldman Sachs. Your line is open.
Speaker Change: Hey, good afternoon, everyone.
Speaker Change: So.
Speaker Change: Maybe as we look ahead industry forecast, you're obviously, calling for a nice pick up next year in originations call. It.
Speaker Change: 30%, yes.
Speaker Change: So I wanted to drill in a little bit on your expectations into 2025, obviously I'm sure things are fluid given how rates are moving around but maybe just curious how you're thinking about the size of the market. How much progress you can make on your market share goals and then just given your comments about the $150 billion and not needing to add any fixed cost how do you think.
Speaker Change: About the relationship between revenue and cost growth and an improving mortgage market. Thanks.
Speaker Change: Thanks for the question Ryan I'd start by saying that the mortgage market, obviously is not easy to predict but in general when you look at multiple factors our outlook is optimistic.
And there's a few factors that I'll just comment on and then I'll ask Brian to jump in as well I think the first thing to start with obviously as the rate environment.
Speaker Change: Multitude of things that go into that obviously things like unemployment CPI consumer confidence and in general those things signal economic health.
Brian Brown: The reality is inflation is still a part of the system and until it's clear that it's working its way out of the system. You can expect that theres going to be a little bit of pressure on the 10 year Treasury and then correspondingly the 30 year fixed rate mortgage.
Brian Brown: The next thing we look at as the housing market. Obviously, the housing market is a big part of the GDP.
Brian Brown: The good thing there is that we're seeing definitely some signs of rejuvenation, you've got more inventory you got more homes that are selling at or below list you've got equity at an all time high and when you look at housing inventory went from three four months to for three months.
Brian Brown: The number of homes listed for sale, that's up 29% affordability is up 5%. So some really good things happening there that gives us confidence in 'twenty five.
Brian Brown: And then we look at the size of the market to your point good things happening there. The forecasts are expecting that the market will be up over two trillion, that's up 28% compared to this past year and that's still a huge market right and so regardless of conditions theres plenty of share up for grabs and then what I would also say is the most important thing we really look at is just our.
Brian Brown: Execution, our ability to execute in any market and that's something that we feel tremendously positive and a big part of that is our superstar.
Brian Brown: And what we believe is a tailwind to be able to execute against our super stack relative to competitors and so putting all that together that gives us a lot of optimism for 25 being better than 'twenty four and we know that 24 was certainly better than 23.
Brian Brown: That's kind of how we how we think about our outlook.
Brian Brown: And then on the expense side I'll ask Brian to jump in yeah sure. Thanks, Ryan for the question I mean, when it comes to operating leverage I think in the first starting point is think about what we've done this year.
But I do think 24 will be a bit better than 'twenty, three but I still think if you look back five years ahead and you look back at 24, I still think it's going to be looked at as a pretty down market in the big scheme of things, we will see how the fourth quarter shakes out so all that being said in every single quarter. This.
Brian Brown: Year, we printed double digit EBITDA margins, if I take the kind of year to date three quarters in margin, that's about 20% and we've done the good work on the cost side over the past couple of years, we've talked a lot about that but what I'm. Most proud of is the expansion in EBITDA margins is really through topline growth that's been taking share and doing.
Speaker Change: The things that we said, we'd do so to <unk> point. If you look ahead to 2025 and he believes that it is going to be healthier, which we do then 2024 by 20% to 30% a two trillion dollar market is a really healthy market. So you believe in some expansion there and then of course.
Speaker Change: Our share gain goals that we shared at Investor day are exactly what we're <unk>.
Speaker Change: Seeking to achieve the third quarter is another example of that the guide in the fourth quarter keeps us right on track to achieving those share gains. So if I say the EBIT margins this year and 24 in a pretty tough market, we're 20% a little bit of help from the market and taking share gets us very excited about the opportunity to increase operating lever.
Speaker Change: Next year.
Speaker Change: Okay.
Got it maybe as a follow up just thinking about opportunities, Brian you talked about $70 billion of <unk>.
Speaker Change: I'll look MSR and flow year to date, maybe just talk as you look at the 25, what do you think the.
Speaker Change: Both purchase market for MSR has looked like and maybe just talk about how much more capacity you have and what is the appetite to continue to add in this area of the business. Thank you.
Speaker Change: Yeah. Thanks, Ryan So I'll start here, who may want to add in but it's definitely an area that we're very excited about when we talked about our capital waterfall and we talked about being interested in deploying capital MSR still remain right at the top it's right in our bread and butter.
Speaker Change: Mentioned, the 70 billion and one of the things I am most.
Speaker Change: Cited about and you guys have all seen the news we're very proud of this M&A deal in Italy is a world class asset manager and in our business. This flywheel effect that we have been driving for decades now is really.
Speaker Change: Impressive 85% recapture rates, we're collecting the servicing cash flows very efficiently, but when you really think about the revenue opportunity of the next loan compared to the cash flow as Youre collecting 20 times that so I expect us to continue to double down there on those opportunities both from the bulk acquisition market, but.
Speaker Change: The sub servicing aspect is also very interesting to us because if you were if you.
Speaker Change: We're in a.
Speaker Change: Seat, where you didn't have an in house origination capability, but you are really good asset manager protecting those cash flows has to be your number one priority and if youre thinking about choosing between sub Servicers. You know you have one sitting here that is a J D power multiple year, winning experience and does it really.
Speaker Change: Good and then you also have something that I don't think others can offer which is this recapture rate and recapture rate is the thing that allows.
Speaker Change: An asset manager to protect against CPR or protect against prepayment risk. So I expect it to be a big part of our strategy going into 'twenty.
Speaker Change: I would just add.
Speaker Change: This. This example, with MSR is an extensibility is just showcasing the power of the platform and it's just something that really illustrates on a cool way, how we scale beyond our four walls because we've earned the right to take these capabilities to benefit others like annually.
Speaker Change: Youll also see us doing the same thing with integrating our technology as a platform to serve as the mortgage platform for banks. The same platform is being extended to create value for brokers via GPO, even on top of that as Brian talked about these recapture capabilities are only going to get better with investments in technology.
Speaker Change: AI insights notifications CRM capabilities.
Speaker Change: Mobile data driven personalization.
Speaker Change: And as we invest in our platform each of the parties that we extend the capabilities to become beneficiaries of that innovation and so really the power of that platform really lies in its extensibility and the idea that you can write something once you can run it anywhere benefit multiple parties is something that we're very excited about.
Speaker Change: Thanks for all the color guys.
Speaker Change: Your next question comes from the line of Mark Devries from Deutsche Bank. Your line is open.
Speaker Change: Yes. Thanks.
Speaker Change: Brian touched on this at a high level, but.
Speaker Change: Was hoping to get a little more detail on how your rate locks moved during the period in the quarter when mortgage rates were down closer to 6% both purchase and refi.
Speaker Change: And how they moved as rates headed back up and also any context around kind of how gain on sale margins compared in the busier period versus slower periods.
Speaker Change: Yeah. Thanks, Mark I appreciate the question so I think.
Speaker Change: There was a two week window in the month of September.
Speaker Change: Thats, what youre, referring to where mortgage rates came down to the low sixes extending its such a good case study into our strategy at work.
Speaker Change: Two really notable things one first is when rates get down into the low sixes and proved that we are off to the races.
Speaker Change: You have about two years of mortgage production north of that so there is definitely a bunch of consumers that can benefit from a rate and term refinance and we saw that so that's the first thing to note is that.
Speaker Change: What's your sort of Mendoza line there is.
Speaker Change: I'll get into those low sixes in it.
Speaker Change: You're off to the races, but the second thing is if you think about how to capture that opportunity that gives us a bunch of proof points as to what we're building and how impactful. It is because in this case you had a very very short window with a very high intent consumers and a ton of consumer.
Speaker Change: Demand so the ability to scale up very quickly and capture that is exactly what differentiates us between between us and our competitors. If you think about it it's not just about being able to handle it from a processing underwriting and closing perspective, but obviously, that's very important because the.
Speaker Change: Client coming in with high demand and our client coming in with low demand and expect the same level of service. The same closing time. So that is important but it's also just about taking that demand and effectively allocating it to your bankers and keeping your bankers very very efficient and productive because the more clients they can interact with and engage with.
Speaker Change: During that very short window to take advantage of it the better off the client is going to be because theyre going to be saving money and also the better off we are because we're going to capture more share during that period. So it was actually a very interesting of course, we didn't plan on it give us sort of leading up to the fed.
Meeting and we know what happened after that the fed cut 50 basis points, and then rates went up but it did prove to us that one there are a ton of consumers in the money at that rate and the last thing I'll sort of leave you with there Mark is I think just the change in the consumer is interesting because if the pandemic taught us.
Speaker Change: One thing there were clients that is financed multiple times over a couple year period. So today fast forward when consumers are getting a mortgage they are truly in the mindset of I'm not going to have I may have this house for a long time, but I'm not going to have this rate for a long time and so the interesting part about it is <unk>.
Speaker Change: Being that couple week window, there's a lot of headlines around the 10 year Treasury and how mortgage rates are moving and we got to kind of inbounds from our clients. Both of course from our service clients, which you would expect but just from clients that have mortgages from other companies because the propensity for clients to transact now and their sensitivity to rates I would argue is at all.
Speaker Change: All time high.
Speaker Change: The only thing I would just add is that you asked a little bit about capacity margin.
Speaker Change: This is why we're so obsessed with AI and the investments that we've made in rocket logic, which is our proprietary.
Speaker Change: OS is driving big efficiency gains we are on track to save our team members 800000 hours annually.
Speaker Change: The 14% in just two months, so it's almost $30 million in savings and.
Speaker Change: Were achieving that while keeping obviously all fixed cost roughly the same and so.
Speaker Change: The reason, we're obsessed with AI is because when you think about all of the bread and butter aspects of our business analyzing client interactions automating underwriting.
Speaker Change: Applying models to capital market infrastructure automating document processing credit modeling appraisal reviews. These are all the capabilities that make the mortgage business work and they are all benefiting from the implementation of AI and so just continuing to invest in that I mean this is why we have spent upwards of half a billion dollars over the past five years.
Speaker Change: On this investment.
Speaker Change: We've made progress and we will continue to do so and we think there is significantly more gains to be had in the future as well.
Speaker Change: Got it thank you.
Speaker Change: Your next question comes from the line of Derek <unk> from Jefferies. Your line is open.
Speaker Change: Hi, Good afternoon, everyone. I was wondering if you could share any incremental detail on the <unk> partnership maybe portfolio characteristics or how the recapture economic share is going to work.
Speaker Change: Yes, thanks for the question Derek.
Speaker Change: <unk> is obviously the economics.
Speaker Change: Our partnerships, but I think it's safe to say.
Speaker Change: When you look at the things that analysts good at being a great World class asset manager protecting against prepayments is very important to us and Thats, where we come in so I'm.
Speaker Change: Clearly there is a sub servicing agreement as you would expect people. If we do that very efficiently. If you just look at our own servicing but I think the more interesting part about this deal as Julian to recapture opportunities and we think thats. The superpower that we can offer so we're happy to do that for annually. It truly makes it a win win with the partnerships.
Speaker Change: If you think about it there is economics on the sub servicing side and then of course, there's economics on the recapture side. So it's really bringing two great firms together and sort of solving.
Speaker Change: Our challenge of Hey, we need more servicing.
Speaker Change: It's a great.
Speaker Change: Capital light way to do it in their challenge of Hey, we have a lot of servicing that we have to protect against it. So it's truly a win win.
Yeah.
Speaker Change: Got it. Thank you and then just to change gears for a second.
Speaker Change: On second lien products.
Speaker Change: What kind of behavior, you're seeing with the consumer there are you viewing this product as potentially interest rate agnostic.
Speaker Change: I can start and then Bruce may want to add too, yes, I think I think there is a lot of room to run in that product. There's no question about it.
Speaker Change: If you just kind of study that note rates of all the mortgages outstanding but there is a definitely a chunk that's north of six and as we just kind of touched on this.
Speaker Change: Bailable for a rate and term refinance with just a little bit of rate movement, but of course, there is another big chunk, that's three to three 5% out there.
Speaker Change: And likely will remain out there for quite some time unless the homeowner is planning on moving so if you think about it for them.
Speaker Change: The home equity product is a great product and it's going to make a lot of sense for a long time I do think we.
Speaker Change: Saw that couple week period during the quarter were rate and term refinance has become back in favor and even to some extent cash out can start making more sense.
Speaker Change: As rates start touching 6% so.
Speaker Change: And again, we're happy to do that product for a client where it makes sense as well, but generally speaking we.
Speaker Change: The client makes sense for a lot of consumers out there, particularly those consumers that are that are sitting on those very low no rates and by the way. The thing we talked about a lot internally as by layering on that second makes a ton of sense for the client, but it does bring up the weighted average note rate of the two loans and then if and when rates do move a little bit.
Speaker Change: Interesting refinance opportunity in terms of the consolidation of those two leads.
Yes, I would just add that.
Speaker Change: In general our approach is to innovate and meet our clients, where they are and so if we see a market opportunity, we will build products and services to meet our clients there and so there is room to grow there. But this is an example of where we just really focus on delivering value to our clients and then the other thing I would also call out is that it is.
Speaker Change: Important that we build products not just for our existing client base, but also for our new client base.
Speaker Change: <unk> seen us for products like this this actually attracts clients to the rocket brand into the rocket franchise and so by bringing them. In we can then offer them additional products and services that allow us to become their lender for life and that's a really great thing about this product offering.
Speaker Change: Okay.
Speaker Change: Got it thank you for taking my question.
Speaker Change: And your final question comes from the line of Doug Harter from UBS. Your line is open.
Doug Harter: Thanks, I was hoping we could talk about expenses and just take it from a different angle.
Speaker Change: Given the capacity.
Speaker Change: You said of about $150 billion is there opportunity.
Speaker Change: Even the outlook for for volumes to take out fixed costs, even if that means that.
Speaker Change: That capacity comes down somewhat.
Speaker Change: Hey, Thanks for the question Doug.
Speaker Change: The way I'd answer that is our primary focus is.
Speaker Change: Capturing share in <unk>.
Speaker Change: Growing into the market, we just talked about our views on 2025, and admittedly Q4 has been a bit more volatile than anyone would like but still very bullish on the 2025 outlook being higher so right now our focus is being able to continue to capture share grow into a larger market.
Speaker Change: And do it with a relatively flat.
Speaker Change: Fixed cost base and what that does is it really just increases operating leverage even if I look at.
Speaker Change: Just the numbers from Q2 to Q3, I think Q2 excuse me Q3 expenses were up 3% from Q2, but if I just look at it on a rate lock basis volume was up 20%. So you can see us doing exactly what we said we'd do in terms of building that operating leverage of course.
Speaker Change: <unk> option value. There is no question for different markets, but our goal in life here is to avoid the traditional Yo Yo effect of the mortgage market.
Speaker Change: If you think about how most people grow capacity they do it through hiring and we will hire some people to we have the best team members in the business and the best loan officers in the business, but that being said hiring is not always the most efficient way of it for anything it takes a long time you have to recruit people you have to train people you have to license people sooner.
Speaker Change: Very long runway that two week period in the third quarter was such a good example of where you couldnt hire someone there was there is no chance. So if that was your only way to increase capacity and maybe that with a little bit of over time youre going to Miss out on a really big opportunity. So I think the simplest way I can say it is.
Speaker Change: Our focus is growth and our focus is increasing operating leverage the good news is.
Speaker Change: Most folks believe 25 is going to be better and we absolutely believe we'll take share. So we expect growth from both of those angles.
Speaker Change: Yeah.
Speaker Change: I appreciate that Brian I guess, how do you think about it.
Recognizing the importance of having capacity to take advantage of those pockets like you saw in <unk>. How do you think about what is the right level of kind of spare capacity versus kind of having.
Speaker Change: Too much too.
Speaker Change: Too much capacity for the.
Speaker Change: The market opportunity, even factoring in the growth ambitions.
Speaker Change: I would just say Doug that I think what we have right now is the perfect capacity.
Speaker Change: We're not looking to sort of expand or detract and at the end of the day, it's a huge market.
Our team members provide incredible value and they're going to become very scaled and successful as a result of the investments that we're making in.
Speaker Change: Technology, and so we feel really good about our capacity, we think that it will allow us to take share. We think it will allow us to grow, especially as the impact of technology continues to make our team members more and more efficient.
Speaker Change: The big market, we're very ambitious about our growth aspirations and so we feel really good about where we are.
Speaker Change: Okay.
Speaker Change: Great I appreciate the answers thank you.
Speaker Change: Thanks.
Speaker Change: And that concludes our question and answer session I will now turn the call back over to Vern Krishnan for closing remarks.
Varun Krishna: Well. Thank you everyone for listening to our call. We're excited and we look forward to speaking with you again next quarter. Thank you.
Speaker Change: This concludes today's conference call. Thank you for your participation you may now disconnect.
Speaker Change: Okay.
Speaker Change: Okay.
Speaker Change: [music].