The mortgage industry is struggling with higher rates and a sharp drop in buyer demand. Rocket
says it’s got a plan to turn things around.
There’s turmoil in the sector. Volume of originations and refinances has plunged. The Market Composite Index, a measure of mortgage application volume, fell to 255 in the week ending Sept. 9. A year ago, the index stood at 707.9.
Buyers — and sellers too — are hesitant. And that’s pushed lenders to take steep cuts.
“The way this business works is that sometimes, too much capacity is put into the system, and that’s exactly what happened in 2020 and 2021,” Jay Farner, CEO of Rocket Companies, a Detroit-based group that is one of the nation’s largest mortgage lenders, told MarketWatch.
“It can be painful … some companies are closing their doors, others are shutting down divisions of their companies. Others are doing layoffs,” Farner added. “Unfortunately, that’s part of the process — that capacity comes out.”
But Rocket is trying to hold steady amid the storm. It’s pushing deeper into its recent acquisition of a personal-finance app; it’s competing hard among its peers to win over customers; it’s trying to improve efficiency.
“All of those things will give us the opportunity to increase conversion and grow market share,” Farner said.
“‘Too much capacity is put into the system, and that’s exactly what happened in 2020 and 2021.’”
— Jay Farner, CEO of Rocket
Rocket, which owns companies like Rocket Mortgage, Rocket Money, Rocket Solar, and more, went public during the pandemic in early August 2020 on the New York Stock Exchange. It raised $1.8 billion, offering $18 a share to interested investors. (It even became a meme stock at one point.)
But after two years of stellar performance, alongside the rest of the sector, the company is recuperating from damages sustained from a storm caused by higher rates and falling buyer demand. The stock was trading below $8 a share on Monday.
Rates are up from 3.16% this time last year, to 6.02% in mid-September, according to a weekly survey by Freddie Mac. The massive drop in sales and the sector more broadly has led to some experts calling it a “housing recession.”
Many lenders are laying off staff, from banks like Citi
to JPMorgan Chase
and startups like Better. Some smaller outfits have even shut down fully, 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 sizable share of the market, at about two-thirds of mortgages, Inside Mortgage Finance said.
Unlike traditional banks, customers can’t open checking or savings accounts at a non-bank lender. And unlike banks that fund loans with their own customers’ deposits, non-banks borrow money from capital markets to offer mortgages to borrowers.
When rates went back up to 2008 levels, these non-bank lenders were stuck. Mortgage demand is down by nearly 30% from the same time last year.
“The monthly mortgage payment has increased about 60% compared to a year ago,” Nadia Evangelou, senior economist and director of forecasting at the NAR, said in a statement.
For the buyer, affordability has seriously worsened. Back in April 2021 when rates were at 3%, the annual income needed to buy a home at median price at $340,700 was $79,600, researchers at the Harvard Joint Center for Housing Studies said on Friday.
In July 2022, with a rate of 5.41%, and that median price rising to $403,800, the annual income needed for someone to afford a home would be $115,000.
“The massive drop in sales and the sector more broadly has led to some experts calling it a ‘housing recession.’”
Consequently, buyers are fleeing the market. And Rocket hasn’t been spared: In April and August, the company trimmed its workforce in response to the drop in business.
In the second quarter, the company reported total revenue of $1.4 billion, down from $2.7 billion in the first quarter. Net income was $60 million in the second quarter, down from $1 billion in the first quarter.
the heat is on grab a bigger piece of the pie, Farner said.
“You got a market that was about $4 trillion in mortgages. And now you’re gonna have a market that’s going to be $2 trillion or so, give or take,” he said.
It may have shrunk, but “that’s still a huge market,” Farner added. And he’s looking to increase market share.
Rocket’s market share is about 6.4% currently, Inside Mortgage Finance said, which is the largest among all banks and non-banks, as of the first quarter of this year.
“2020, 2021 were the highest volume years ever,” Mike Fratantoni, chief economist at the Mortgage Bankers Association, told MarketWatch. “During the pandemic, lenders really struggled to hire to fill their openings … we were hearing about seven figure sign-on bonuses for high producing officers.”
“In April and August, Rocket trimmed its workforce in response to the drop in mortgage business. ”
A mortgage advisory firm, Stratmor Group, said one lender referred to them as “monster signing bonuses.”
But after rates went up and business dried up, capacity needed to be reduced “to right-size the whole industry,” Fratantoni added.
With the Federal Reserve set to hike rates further, which is likely to push mortgage rates even higher and pressure the business, mortgage companies have been embarking on efforts to be more competitive and entice buyers.
Last Friday, Rocket announced its ‘Inflation Buster’ program, which offers to shave off one percentage point off a buyer’s mortgage for the first year of their loan.
In other words, if a buyer takes out a 6% mortgage, Rocket is offering 5% for a year. That saves a buyer who’s taking out a 30-year mortgage at 5.75% for a $400,000 home nearly $3,000 in that first year.
It also took over mortgage originations from Santander Bank
as the company exited the U.S. mortgage market. Rocket recently spent $1.3 billion on. the acquisition of Truebill, a personal-finance app.
“‘You got a market that was about $4 trillion in mortgages. And now you’re gonna have a market that’s going to be $2 trillion or so.’”
— Jay Farner, CEO of Rocket
The acquisition of Truebill, now rebranded as Rocket Money, is another move to try to deepen its connection with customers, the CEO said, and offer more targeted products, without excessive paperwork.
Rocket Money has access to consumers’ credit information, with their permission, which makes monitoring financial health a lot easier, he said. “Updating the data will allow us to get to a place where we can have them mortgage ready at any moment in time,” Farner said.
There will be stiff competition for those who do wish to take out a mortgage, experts say. And there are still a lot of cuts to come, based on Fratantoni’s estimations. Now that refinancing has dropped off, with rates more than double what they were a year ago, margins are shrinking for lenders, he said.
Expect employment in the mortgage industry to drop by 20% to 30%, Frantantoni added. As of the second quarter, lenders had only trimmed 2% to 10% of their workforce.
Others say the drop in activity was something of a wake up call for the industry. “The economy hasn’t fallen apart,” Melissa Cohn, regional vice president at William Raveis Mortgage, told MarketWatch. “It’s just that the mortgage business was too big.”
(Emma Ockerman contributed to this story.)
Got thoughts on the housing market? Write to MarketWatch reporter Aarthi Swaminathan at email@example.com