Looking beyond paper writedowns in the fair value of its mortgage servicing rights, CEO Varun Krishna is pleased as Q3 mortgage originations climb 28 percent from a year ago.
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Shares in mortgage giant Rocket Companies Inc. dipped in after-hours trading Tuesday after the company reported a $481 million third-quarter net loss and provided Q4 revenue guidance that fell short of analyst’s expectations.
Rocket’s Q3 loss was driven by nearly $900 million in paper writedowns in the fair value of its growing mortgage servicing portfolio. Rocket CEO Varun Krishna put a positive spin on the quarter.
Varun Krishna
“I want to kick off our call by emphasizing and extending one key theme — optimism,” Krishna said on a call with investment analysts. “Optimism is the ability to see a glass as half full.”
Krishna noted that Rocket has set “bold” goals to double its share of the purchase mortgage market to 8 percent by 2027 and boost its share of the refinancing business from 12 percent to 20 percent.
“This quarter was a solid step toward these goals,” Krishna said. “I’m so pleased to share that we expanded both our purchase and refinance market share year over year.”
Shares in Rocket Companies, which in the last year have changed hands for as little as $8.39 and as much as $21.38, fell 10 percent in after-hours trading from Tuesday’s closing price of $15.54 before earnings were released.
At $647 million, Rocket’s revenue was down 46 percent from a year ago while expenses climbed 5 percent to $1.14 billion.
But excluding the impact of the writedowns to the fair value of Rocket’s servicing portfolio, adjusted revenue was up 32 percent, to $1.32 billion. Adjusted earnings before interest, taxes, depreciations and amortization (EBITDA) came in at $286 million.
Rocket executives said they expect Q4 adjusted revenue of between $1.05 billion to $1.2 billion, short of the $1.36 billion average estimate of 10 analysts tracked by Yahoo Finance.
Rocket executives said their scaled-back expectations for Q4 revenue were driven in part by the recent upward movement in mortgage rates but that they continue to expect to take market share from competitors.
At $28.5 billion, Rocket’s Q3 mortgage originations were up 28 percent from a year ago, with comparable profits per loan. Profit margins, as measured by the gain on sale margin Rocket realizes when it sells the loans it originates to investors, were up two basis points from a year ago, to 2.78 percent.
All told, Rocket generated $844 million in revenue from the sale of mortgages it originated during the quarter, up 47 percent from Q3 2023.
Rocket executives said the company’s home equity offering — a second mortgage that lets homeowners cash out equity without losing the low rate on their existing mortgage — continues to be a hit with borrowers. A 78 percent increase in second mortgage originations reinforced Rocket’s position as the leader in the category.
Loan servicing accounting headaches
In addition to boosting its market share as a mortgage lender, Rocket continues to grow its loan servicing business, adding 220,000 new borrowers to its servicing portfolio so far this year.
As of Sept. 30, Rocket was collecting monthly payments from 2.6 million borrowers who owed $546 billion in mortgage debt, earning fees from investors who own the loans.
Loan servicing not only generates $1.5 billion in servicing fee income a year but can give Rocket an advantage over competitors in marketing new purchase mortgages, refinancing and home equity loans to its servicing clients.
Rocket’s online presence and simplified application process helped it dominate refinancing and become the nation’s biggest mortgage lender. But it relinquished that title to rival United Wholesale Mortgage in 2022 when rising mortgage rates put an end to the pandemic-era refinancing boom.
While loan servicing can help smooth out the ups and downs that mortgage lenders endure when home sales wax and wane, it also creates accounting issues.
When interest rates fall, loan servicers must write down the estimated (paper) value of their mortgage servicing rights (MSRs). Lower rates mean servicing clients are more likely to refinance their home and end up with another loan servicer.
Mortgage rates hit a 2024 low of 6.03 percent on Sept. 17, obligating Rocket to write down the fair value of its MSRs by $878 million.
Rates have been on the rise since then — potentially restoring some of those paper losses.
When rates were headed up during the first three months of the year, Rocket boosted its estimate of the fair value of its mortgage servicing rights by $56 million.
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