The mortgage banking business is a feast-or-famine affair. After feasting on easy refinance activity during the COVID-19 pandemic, originators are starving as origination activity has been cut in half this year. Since rates have increased, few homeowners have a financial incentive to refinance, and a combination of soaring house prices and rising rates have impacted home affordability. Rocket (RKT 4.11%) recently announced its second-quarter earnings, and mortgage activity took a sizable hit. Here is how the company is responding to it.
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Rocket is more than just a mortgage company
Rocket describes itself as a fintech, and in many ways it is. However, mortgage origination is its primary business. During Q2, total origination fell 59% on a year-over-year basis to $34.5 billion. Earnings per share on the quarter fell from $0.40 a year ago to $0.02. The company is focusing on expense reduction and building its other lines of business. If investors focus only on the mortgage origination part, they will miss a lot of what is going on behind the scenes.
NYSE: RKT
Key Data Points
During the quarter, Rocket announced a deal with Santander Bank (SAN +0.36%) to offer its mortgage products to Santander's nearly 2 million customers. The company announced that it will begin to offer home equity loans. Finally, Rocket is partnering with smaller banks to originate loans under the Rocket name using the company's technology.
Rocket earns fees through the entire home transaction
Rocket Mortgage is the most visible part of Rocket's business. However, the company is involved in many other parts of the typical home purchase transaction. Rocket Homes is the company's realty brokerage arm and will retain a portion of the 3% realtor commission on the sale. Amrock, which is another Rocket company, will earn fees from the appraisal, title, and closing fees. Rocket Solar might line up financing for solar panels on the property. Rocket is also in the business of making personal loans and recently bought Truebill, which will be rebranded as Rocket Money. Finally, Rocket Auto is getting into the auto loan business.
Rocket Money will help the company sell its other products
Truebill, which is known primarily for tracking subscription fees, will be a key part of Rocket's strategy to become a one-stop-shop for personal finance. In addition to managing subscription fees, the application will help keep track of recurring charges and help with budgeting by tracking spending and improving one's credit score. Rocket Money has recently rolled out a credit card as well. The synergies are pretty obvious. Rocket Money could see that you have a large amount of credit card debt outstanding and suggest refinancing that high-cost debt with cash-out refinance or a home equity line of credit.
These businesses are still in the early stages, and it will take time before they are able to offset the extreme volatility of the mortgage origination business. But it is clear that Rocket's strategy is to bolt on ancillary businesses to its Rocket app. For that reason, Rocket remains a compelling long-term investment. In the immediate future, the mortgage origination business will struggle given the macroeconomic backdrop, and its stock price will remain captive to the origination cycle.
