Here’s why Rocket is taking steps to diversify its business
The mortgage banking business is a feast or famine affair. After feasting on easy refinancing activity during the COVID-19 pandemic, originators are starving as origination activity has been cut in half this year. Since rates rose, few homeowners have a financial incentive to refinance, and a combination of soaring house prices and rising rates has impacted housing affordability. Rocket (RKT 1.06%) recently announced its second quarter results and the mortgage business took a hit. Here’s how the company responds to it.
Rocket is more than just a mortgage company
Rocket describes itself as a fintech, and in many ways it is. However, origination of mortgage loans is its core business. During the second quarter, total origination fell 59% year-over-year to $34.5 billion. Earnings per share for the quarter fell from $0.40 a year ago to $0.02. The company is focused on reducing expenses and expanding its other business areas. If investors only focus on the origination part of the mortgage, they will miss a lot of what happens behind the scenes.
During the quarter, Rocket announced an agreement with Santander Bank (NOT 0.75%) to offer its mortgage products to nearly 2 million Santander customers. The company announced that it would start offering home equity loans. Finally, Rocket partners with smaller banks to create loans under the Rocket name using the company’s technology.
Rocket collects fees on 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 buying transaction. Rocket Homes is the real estate brokerage arm of the company and will retain a portion of the realtor’s 3% commission on the sale. Amrock, which is another Rocket company, will collect fees on valuation, title and closing costs. Rocket Solar could line up financing for solar panels on the property. Rocket is also in the personal loan business and recently purchased Truebill, which will be rebranded as Rocket Money. Finally, Rocket Auto is getting into the car loan business.
Rocket Money will help the company sell its other products
Truebill, which is best known for tracking subscription fees, will be a key part of Rocket’s strategy to become a one-stop-shop for personal finance. Along with managing subscription fees, the app will help track recurring charges and build a budget by tracking expenses and improving one’s credit score. Rocket Money also recently launched a credit card. The synergies are quite obvious. Rocket Money might see that you have a large amount of unpaid credit card debt and suggest refinancing that high-cost debt with a cash refinance or home equity line of credit.
These businesses are still in their infancy and it will take time before they are able to compensate for the extreme volatility in mortgage origination activity. But it’s clear that Rocket’s strategy is to bolster the ancillary business of its Rocket app. For this reason, Rocket remains a compelling long-term investment. In the immediate term, the mortgage origination business will struggle given the macro backdrop and its share price will remain captive to the origination cycle.