Rocket Cos. produced guidance lower than what analysts expected in its latest earnings, as management warned of a difficult fourth quarter in line with industry expectations.
"There were no real surprises in the [third] quarter, but the fourth guidance was weak," Bose George, an analyst with Keefe, Bruyette & Woods, said in a report. "Guidance implies an earnings per share loss of seven cents versus consensus at zero."
The mortgage industry as a whole should expect several more quarters of financial pain, Marina Walsh, the Mortgage Bankers Association's vice president of industry research, said at the group's annual convention a few weeks ago.
Rocket expects adjusted revenue of $650 million to $800 million for the final three months of this year. Before the release, Wedbush Securities had expected this metric to come in at $958 million when the current period ends.
"That guidance takes into consideration difficult market conditions marked by record low affordability and inventory levels, further magnifying the traditional loan seasonality in the fourth quarter," Brian Brown, chief financial officer, said on the earnings call.
That seasonality, driven by the winter months and fewer working days due to the holiday period, will put pressure on Rocket's gain on sale margins in the fourth quarter, Brown continued.
On the other hand, expenses should be reduced by between $50 million and $100 million compared with the current quarter, net of a $51 million one-time charge in 3Q, Brown said.
In the third quarter, adjusted revenue was slightly over $1 billion, which beat the high end of Rocket's guidance for the period.
This result was "reflective of continued momentum over the past four quarters," said Varun Krishna, who became CEO of both Rocket Cos. and its mortgage business on July 31. "This was the result of strong execution and continued expansion in gain on sale margin."
That helped Rocket achieve profitability under standard accounting principles for the second consecutive quarter, at $115 million. This is compared with $139 million in the second quarter and $96 million for the same period last year.
Adjusted net income was $7 million, compared with a $33 million loss in the second quarter and a loss of $166 million for the third quarter of 2022. The adjustments among other things remove net income from a non-controlling interest and mortgage servicing rights valuation changes.
"Relative to our estimate, the stronger than expected results reflected higher than expected other income and lower than expected operating costs," Wedbush analyst Jay McCanless said in his report.
Rocket originated $22.2 billion at a margin of 276 basis points for the third quarter. That was similar to the $22.3 billion produced in the prior three months at a 267 basis point margin. Rocket generated $25.6 billion in new loans at a 269 basis point margin in 3Q 2022.
The direct-to-consumer business produced just under $12 billion of that total, with the margin at 403 basis points in the third quarter of this year. In the second quarter, it produced $12.4 billion at a 367 basis point margin.
For the third quarter last year, Rocket's direct-to-consumer unit did $16.5 billion with margins of 447 basis points.
Its partner network, which is primarily but not exclusively wholesale, added $10.3 billion of loan originations, with the gain-on-sale at 122 basis points. This is higher on both counts from the second quarter, where it did $9.6 billion at 93 basis points.
Rocket's partner channel made up $11.8 billion of its third quarter 2022 volume, with margins of 117 basis points.
Its servicing business added $356.8 million of income, including a gain of $12.8 million from changes in the value of its mortgage servicing rights. This compared with $386 million that encompassed $42 million MSR gain in the second quarter. For the third quarter last year, this business added $514.5 million in income, with a $150.3 million increase in the MSR value.
When asked during the call about a recent MSR portfolio purchase, Brown said, "It's a nice hedge, of course. to the origination business and we definitely like the returns on the cash flows right now. It's proving to have very valuable [returns on investment]."
But it looks to buy portfolios with higher average loan-to-value ratios that it believes will create an opportunity to recapture those consumers when they refinance, Brown continued. And in fact, Rocket sold a portfolio where the LTVs are low because it didn't provide that opportunity.
Krishna's opening remarks on the call included a discussion of artificial intelligence and its use in the mortgage business.
After the call, McCanless lowered his 2023 full year adjusted earnings per share estimate to a loss of 13 cents from a 9 cent loss. For the next two years, the adjusted EPS view was dropped by 5 cents to income of 40 cents for 2024 and 65 cents for 2025.
