By Aarthi Swaminathan

Rocket, which owns Rocket Mortgage, Rocket Money and more, plans to diversify its approach to reach more consumers in the face of weak demand.

The mortgage industry is struggling with higher rates and a sharp drop in buyer demand. Rocket (RKT) says he has a plan to turn things around.

There is unrest in the area. The volume of originations and refinancings plunged. The composite market index, a measure of the volume of mortgage applications, fell to 255 in the week ending September 9. A year ago, the index stood at 707.9.

Buyers – and sellers too – are hesitant. And that prompted lenders to take deep cuts.

“The way this company works is that sometimes too much capacity is put into the system, and that’s exactly what happened in 2020 and 2021,” said Jay Farner, CEO of Rocket Companies, a group based in Detroit which is one of the largest in the country. mortgage lenders, MarketWatch said.

“It can be painful…some businesses are closing, others are closing divisions of their businesses. Others are making layoffs,” Farner added. “Unfortunately, that’s part of the process – that ability comes out.”

But Rocket tries to hold steady amidst the storm. He delves into his recent acquisition of a personal finance app; it is fierce competition between peers to win customers; he is trying to improve efficiency.

“All of these things will give us the opportunity to increase conversion and increase market share,” Farner said.

Rocket, which owns companies like Rocket Mortgage, Rocket Money, Rocket Solar, etc., went public during the pandemic in early August 2020 on the New York Stock Exchange. It raised $1.8 billion, offering $18 per share to interested investors. (It even became a meme stock at one point.)

But after two years of outstanding performance, alongside the rest of the industry, the company is recovering from the damage suffered following a storm caused by rising tariffs and falling demand from buyers. The stock was trading below $8 per share on Monday.

Rates rose from 3.16% at the same time last year to 6.02% in mid-September, according to a weekly survey by Freddie Mac. The massive drop in sales and the industry in general has led some experts to call it a “housing recession”.

Many lenders are laying off staff, from banks like Citi(C) to JPMorgan Chase(JPM) and startups like Better. Some smaller companies have even shut down completely, like Reali, a real estate tech startup, and Sprout Mortgage. Plano-based First Guaranty Mortgage Corp filed for Chapter 11 bankruptcy.

Rocket and its non-bank peers have a large share of the market, accounting for about two-thirds of mortgages, Inside Mortgage Finance said.

Unlike traditional banks, customers cannot open checking or savings accounts with a non-bank lender. And unlike banks that fund loans with deposits from their own customers, non-banks borrow money from capital markets to provide mortgages to borrowers.

When rates climbed back to 2008 levels, these non-bank lenders were locked in. Demand for mortgages is down almost 30% compared to the same period last year.

“The monthly mortgage payment is up about 60% from a year ago,” said Nadia Evangelou, senior economist and director of forecasting at NAR, in a statement.

For the buyer, affordability has seriously deteriorated. In April 2021, when rates were 3%, the annual income needed to buy a home at the median price of $340,700 was $79,600, researchers at the Harvard Joint Center for Housing Studies said Friday.

In July 2022, with a rate of 5.41%, and this median price rising to $403,800, the annual income needed to afford a house would be $115,000.

Therefore, buyers flee the market. And Rocket was not spared: in April and August, the company reduced its workforce in response to the drop in activity.

In the second quarter, the company reported total revenue of $1.4 billion, compared to $2.7 billion in the first quarter. Net income was $60 million in the second quarter, compared to $1 billion in the first quarter.

For Rocket (RKT), the heat is taking a bigger slice of the pie, Farner said.

“You have a market that was about $4 trillion in mortgages. And now you’re going to have a market that’s going to be about $2 trillion, more or less,” he said.

It may have shrunk, but “it’s still a huge market,” Farner added. And it is looking to increase its market share.

Rocket’s market share is currently around 6.4%, said Inside Mortgage Finance, which is the largest among all banks and non-banks, in the first quarter of this year.

“2020, 2021 was the highest volume year ever,” Mike Fratantoni, chief economist at the Mortgage Bankers Association, told MarketWatch. “During the pandemic, lenders have really struggled to hire to fill their openings…we were hearing about seven-figure sign-on bonuses for high-performing officers.”

Mortgage advisory firm Stratmor Group said one lender called them “monster signing bonuses”.

But after rates rose and business dried up, capacity had to be reduced “to properly scale the whole industry”, Fratantoni added.

As the Federal Reserve prepares to raise rates further, which risks pushing mortgage rates even higher and putting pressure on the business, mortgage companies have embarked on efforts to be more competitive. and attract buyers.

Last Friday, Rocket announced its “Inflation Buster” program, which offers to reduce a buyer’s mortgage by one percentage point for the first year of their loan.

In other words, if a buyer takes out a 6% mortgage, Rocket offers 5% for a year. This saves a buyer who takes out a 30-year mortgage at 5.75% on a $400,000 home almost $3,000 in the first year.

It also took over mortgages from Santander Bank, as the company exited the US mortgage market. Rocket recently spent $1.3 billion. the acquisition of Truebill, a personal finance application.

The acquisition of Truebill, now rebranded as Rocket Money, is another move to deepen its connection with customers, the CEO said, and deliver more targeted products without excessive paperwork.

Rocket Money has access to consumers’ credit information, with their permission, which makes it much easier to monitor financial health, he said. “Updating the data will allow us to get to a place where we can prepare for it at any time,” Farner said.

There will be stiff competition for those who want to take out a mortgage, experts say. And there are still plenty of cuts to come, according to Fratantoni’s estimates. Now that refinancing has fallen, with rates more than double what they were a year ago, margins are shrinking for lenders, he said.

Expect employment in the mortgage sector to drop 20% to 30%, Frantantoni added. In the second quarter, lenders had reduced only 2 to 10% of their workforce.

Others say the drop in activity has been something of a wake-up call for the industry. “The economy hasn’t collapsed,” Melissa Cohn, regional vice president of William Raveis Mortgage, told MarketWatch. “It’s just that the mortgage activity was too much.”

(Emma Ockerman contributed to this story.)

Do you have ideas on the housing market? Write to MarketWatch reporter Aarthi Swaminathan at [email protected]

-Aarthi Swaminathan

 

(END) Dow Jones Newswire

09-21-22 0949ET

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