Rocket Companies, Inc. Q2 FY2020 Earnings Call

Ladies and gentlemen, thank you for joining us and welcome to Rocket Companies' Second Quarter 2020 Earnings Call. All participants are currently in listen-only mode. After the presentations, we will have a question-and-answer session. I would now like to hand the call over to your speaker today, Jason McGruder, Vice President, Investor Relations. Please proceed.

Good afternoon everyone and thank you for joining us for a Rocket Companies earnings call covering the second quarter of 2020, its first as a public company. My name is Jason McGruder, and I'm the new Vice President of Investor Relations for the company. I had the opportunity to email a number of participants on this call earlier this week, and I look forward to working closely with all of you in my new role. We are excited to share the results of a terrific quarter with you. But before I turn things over to Jay Farner to get us underway, I will read the policy regarding forward-looking statements. Today's call is to provide you with information regarding our second quarter 2020 performance in addition to our financial outlook. This conference call includes forward-looking statements. For more information about factors that may cause actual results to differ materially from forward-looking statements, please refer to the earnings release that we issued today, as well as risks described in filings with the SEC, particularly in the section of these documents titled Risk Factors. Our commentary today will also include non-GAAP financial measures. Reconciliations between GAAP and non-GAAP metrics for our reported results can be found in our earnings release issued today. Please refer to our filings with the SEC for more information. And with that, I'll turn things over to Jay Farner to get us started. Jay?

Thank you and good afternoon, everyone. Welcome to Rocket Companies second quarter earnings call, our first as a public company. Before we get started, I'd like to thank our 20,000 team members for their dedication and unwavering commitment to our clients. Because of their efforts, I'm proud to share that Rocket Companies achieved record-breaking results in the second quarter. Culture is the foundation of everything we do here at Rocket Companies. Our Founder, Dan Gilbert created 19 principles known as ISMs, and they are the heart and soul of our culture and drive every decision we make. They are who we are, our DNA. Our culture has been the secret to our success over the last 35 years and the second quarter was no exception. One of those ISMs is do the right thing, a charge that we take very seriously. Earlier this year, when we saw the impacts of COVID-19 overseas, we quickly invested in the tools and technology that were needed to ensure that all our team members could effectively work from home, weeks faster than many other large businesses. This allowed us to keep our team members and community safe, while also meeting the needs of our clients as mortgage rates began to fall. This is just one of the many examples of our company making sensible investments in the future. We spoke to many of you during the IPO process about our focus on investing for the long-term. We're extremely proud of protecting our team members and achieving record results in the second quarter, but that performance has been years in the making. Thousands of our technology team members have continuously built and refined a platform that has truly risen to the occasion, allowing us to scale to meet unprecedented demand, all while 98% of our team is working from home. It's a pleasure to be here today to talk about our second quarter results, the way we think about our business and why we believe Rocket Companies is well-positioned to capitalize on the substantial opportunities ahead. In the second quarter, Rocket Mortgage closed $72.3 billion in loan volume, more than any quarter in our 35-year history. Record low interest rates are driving demand for home loans and as we've highlighted, the power of our platform is proving to be a key differentiator for Rocket Mortgage. In fact, we've been able to achieve record volumes while maintaining impressive long turn times. Industry-wide capacity constraints have led to significant gain on sale margins during the second quarter with overall margins increasing to 5.19%, up from 3.25% in the first quarter. Our ability to scale volume at these elevated margins led to substantial incremental profitability in the quarter. While second quarter gain on sale margins were certainly elevated by historical standards, this is exactly the kind of market environment we built our platform to perform in. Quite simply, we're able to meet the needs of our growing client base and provide award-winning client experience. Our mortgage servicing business was a key driver of overall performance in the quarter, which Julie will talk about in a moment. I'm also proud to share that we recently earned an unprecedented seventh consecutive J.D. Power Award for Customer Satisfaction in Mortgage Servicing, an award we've won every year we've been eligible. This award is based entirely on feedback from our clients and it's an honor our team members take tremendous pride in. Turning to our broader ecosystem of businesses, we believe we have substantial opportunities to apply the same focus on client experience, technology, and operations across multiple industries. When we look at our companies holistically, Rocket Companies generated 300% year-over-year growth in adjusted revenue and $2.8 billion of adjusted net income in the second quarter. We are delivering profitable growth at substantial scale. As you continue to get to know Rocket Companies, you will also learn we are passionate about the communities where our team members work, live, and play. We are keenly aware of the role our company plays in building the American dream and how communities are the foundation of progress, education, and pride. We recently announced the very important Changing the Course initiative here in Detroit. Unfortunately, Detroit ranks last in digital connectivity among all major cities. We saw the effects of this digital divide truly manifest with the onset of COVID-19, when many of our community members found themselves without access to the technology needed to participate in telemedicine, schooling, or find a job. We knew we needed to step in and make a change. Through the Rocket Mortgage Classic, our PGA Tour event in Detroit, we have risen to the task to ensure that by 2025, every Detroiter will have access to technology within a 10-minute walk from their home. As a technology company and the largest employer in the City of Detroit, this is a program that is near and dear to all our hearts and one we look forward to bringing to life. Finally, many of you have asked us how things will change now that we're a public company. The short answer is they won't. We have many more investors today than we did as a private company, including all of our team members who once vested will become shareholders, but that doesn't affect who we are. We are committed to providing you with the same plainspoken transparency that has been a hallmark of our company. We also commit to you that we will continue intense dedication to our culture, our focus on the long-term, and our commitment to doing the right things the right way. Julie will talk more about our current outlook in just a minute. But as we look to the second half of the year, we continue to see strength and durability in consumer sentiment. Record low interest rates and an improving U.S. real estate market continue to drive demand for home loans. The purchase market, in particular, continues to recover following COVID-related disruption in the second quarter. In fact, we expect the third quarter to be one of our best for purchase origination volume ever at Rocket Mortgage. Demand for a completely digital experience has never been stronger and Rocket is delivering. With that, I'll turn things over to Julie Booth, who will take you through our second quarter results in more detail.

Thanks Jay and good afternoon, everyone. We spoke to many of you during the IPO process about the multiple drivers that we have to profitably grow our business. In the second quarter, broad-based strength across these areas led to record financial performance, highlighted by adjusted revenue of $5.3 billion and adjusted net income of $2.8 billion. Strength in both our direct-to-consumer and Partner Network channels drove record closed loan volume of $72.3 billion, an increase of 40% from the first quarter of 2020 and 126% compared to the second quarter of 2019. Closed loan volume of $46.8 billion in our direct-to-consumer channel increased to 143% year-over-year. The Partner Network also contributed strong growth with volume of $19.7 billion compared to $11.2 billion in the same period one year ago, an increase of 76%. Net rate lock volume of $92 million significantly exceeded closed loan volume in the second quarter. As a reminder, we recognized revenue at the time when we locked the interest rate with our client. Rate lock typically occurs 30 to 45 days prior to the closing of a loan. As a result, rate lock volume is a leading indicator of closed loan volume. Accelerating momentum throughout the second quarter drove elevated rate lock volume relative to closings. As Jay referenced earlier, Rocket Mortgage achieved historically strong gain on sale margins in the second quarter, with overall margins increasing to 5.19% from 3.25% in the first quarter of 2020. Gain on sale margins were strong across both channels, coming in at 5.09% in the direct-to-consumer channel and 2.1% in the Partner Network. As a reminder, overall margins are measured on a rate lock basis, while segment level margins are reported on a funded loan basis. The difference in down sale margins by channel reflects the partial sharing of economics with our partners in the Partner Network. Lower client acquisition costs in the Partner Network lead to strong contribution margins across both channels. Our mortgage servicing business was an important driver of overall loan volume during the second quarter, contributing 46% of total loan volume. These repeat transactions with existing clients come with little to no client acquisition costs, leading to substantial incremental profitability. As we look to the lingering impacts of the COVID-19 pandemic, approximately 5.1% of our servicing portfolio was on a forbearance plan related to COVID as of June 30th. The positive news is that we continue to see improvement in forbearance trends into the third quarter. Outside of our Rocket Mortgage business, growth in other revenue was driven by Amarok, our title insurance and settlement services business. Our investments in technology and process at Amarok paid off in the second quarter as the business was able to scale up and meet the increased demand for mortgages and the related title insurance and settlement services. Also during the second quarter, we extended our industry leading position in eClosings by deploying our remote online notarization platform, which further enables the eClosing experience. Amarok processed more than 240,000 settlement transactions during the second quarter of 2020, up 45% as compared to the first quarter of 2020, and up 171% from the second quarter of 2019. Total expenses of $1.6 billion increased 24% compared to the first quarter of 2020. The increase was primarily attributable to higher variable compensation in production costs as a result of increased origination volume. Marketing expenses declined 7% and 11% compared to the prior quarter and prior year periods, respectively. Turning to cash and liquidity, after June 30th, and prior to the IPO, Rocket Companies distributed $2.26 billion to its parent company Rock Holdings. We remain in a strong liquidity position following our IPO with total liquidity of $3.7 billion, including $1 billion of cash on hand, plus $2.7 billion of undrawn lines of credit and corporate cash used to self-fund mortgage loans, which couldn't be transferred to warehouse lines at our option. Overall, we're extremely proud of our record performance in the second quarter, demonstrating our ability to deliver profitable growth at scale. Now, I'd like to take a moment to discuss our current outlook and our approach to the investment community as a public company. The guidance philosophy we're sharing today reflects the way we think about and manage our business. As we shared with many of you during the IPO process, our long-term strategic objective is to achieve a 25% share of the mortgage market. We manage the business for long-term growth and aim to continue investing in our brand and technology to all market environments. While our focus remains on the long-term, we are committed to providing transparency to our analysts and investors about the trends we are seeing in our business. Today, we are providing our current outlook for loan volume in the third quarter. Given the unique dynamics around gain on sale margins in the current environment, we are also providing our current outlook for third quarter gain on sale margins. Entering the second half of 2020, we continue to see strong consumer demand. As you've heard from Jay, we currently expect third quarter closed loan volume of $82 billion to $85 billion and net rate lock volume of $93 billion to $98 billion. Regarding gain on sale margins, we expect third quarter margins to moderate from the historically elevated levels experienced in Q2, but remain elevated relative to longer term historical averages. We currently expect third quarter gain on sale margins of 4.05% to 4.3%. Finally, for those of you thinking about updating your models, I did want to remind everyone of the normal seasonality we experienced at Rocket Mortgage, our typical pattern follows the seasonality of the U.S. real estate market, with lower sequential volumes in the fourth quarter compared to the third quarter. We are proud to deliver you these second quarter results and even more excited about the investments we continue to make in our platform that will guide us to our goal of 25% market share by 2030. With that, we are ready to turn it back to the operator for Q&A.

Your first question comes from James Faucette with Morgan Stanley. Please go ahead.

Great, thank you very much. I wanted to just quickly ask you the first question was around the seasonality. You talked about the fourth quarter being a little bit lower. I'm wondering how we should think about that from a normal percentage basis? And are you seeing the moves in at least treasury rates, et cetera, having any impact on how you're thinking about that seasonality for the time being?

Thanks James. And just to open up as our first call, just to get folks familiar with voices, this is Jay Farner, the CEO. I'll be joined by Julie Booth, our CFO, and Bob Walters, our COO. And good afternoon, everyone. Thanks for being here on our first call. Now, heading to your question, I know Julie touched on some of our guidance around Q3 and also referenced that typically we see some seasonality as we enter the fourth quarter, December in particular. And Julie was referencing kind of the traditional seasonality that you might experience in housing, in particular purchase; obviously, we're in a different market right now. And I'll let Julie comment, but when it comes to kind of current expectations around interest rates or treasuries. I would say that what we're experiencing today, we anticipate we'll continue forward here through the rest of the year. Julie?

Yes, I agree Jay and certainly while we're happy to provide some guidance for Q3 really, we typically do see that decrease in the fourth quarter and really wanted to just remind those thinking about our results, but that is kind of the typical seasonality in the business. So, I don't think we're expecting necessarily anything unusual this year, other than what we typically see. But, of course, that could always change.

That's great. And then my other question is on we talked and Julie highlighted the long-term target of 25% market share, can you help sketch out for us or how you're thinking about what that progression should look like? I mean are there going to be fits and starts or is there continuity? And are there some medium term milestones you could share with us on your market ambitions? Thanks a lot.

Yes, thanks, James. And I'll start out here and then Julie or Bob, feel free to chime in. I think it's important we take a step back and think about strategically how we at Rocket Companies go about our planning. We obviously don't control interest rates and so for us, it's critical that we think about long-term growth over an extended period of time and then make all the right moves to ensure that we're growing and gaining market share. And so we really look at the mortgage market as roughly a $2 trillion market. There'll be years like this year where the market is much larger than that and based on our tech platform and our ability to scale, we will take advantage of that and grab far more growth in volume than maybe we had prepared for. But year-in year-out, we look more towards a normalized market. And then we set our strategy to ensure that we're growing market share. We're growing clients throughout any interest rate market. And as you followed maybe our last 15 or 20 years that we've shared, especially over the course of the roadshow, certainly it's not a straight line for growth. There are moments in time where production may be flatter, but we're growing market share. But please understand behind the scenes, strategically, as we think about our model, direct-to-consumer, our Partner model, and now the ecosystem that we're building, that's just targeted to continue to strengthen the platform, grow the capabilities of the platform, and continually be able to grow that market share over time. And you'll see things happen like they've occurred this year where, due to interest rates, we're able to see a significant increase and where we really leverage the platform and exceed what our expectations have been. We set the strategy back in the fall of 2019. Julie, feel free to add or make comment.

No, I guess the thing that I would maybe add to that is while we do expect to see growth over the next 10 years; it really is not something that we are going to be watching on a quarterly basis. So, we may see some ups and downs when we look quarter-to-quarter. But really, we're focused on kind of that, more annualized look at market share. So, I just would encourage folks to kind of think about that when you're looking at market share quarter-after-quarter here and really thinking about how that's going to come out through the year.

Yes, I think that's a critical component as we take a long-term view. There will be times when growing market share or acquiring clients becomes our top priority, with less focus on EBITDA and more on client growth. Bob Walters can likely provide additional insights, especially since Julie noted that a significant percentage of this year's loan volume has originated from our servicing book and our retention rates, which are vital to our business. When others withdraw from the market, we tend to strengthen our position because we can expand that client servicing book. Bob, would you like to elaborate on this to help inform everyone?

Yes, we have discussed this extensively during the roadshows as a key differentiator for us. We have a very large servicing platform and we approach servicing differently than many publicly-traded services that focus on return on capital. We view servicing as a retention strategy, and our retention rate on refinanced loans is currently at 80%. Our capacity to monetize these loans, even as they pay off for everyone, outstrips most of our competitors. This is a crucial differentiator and is reflected in many of our results. We are continuously expanding the platform that Jay mentioned, which allows us to drive new business without losing the loans that pay off, unlike many of our competitors. We are able to retain those loans while also acquiring new clients, aiming for a 25% growth. As Julie noted, this will come in waves. Over the last decade, we have consistently captured a significant amount and then held it. Maintaining this retention is essential, and it is a major aspect of our strategy.

Your next question comes from Ryan Nash with Goldman Sachs. Please go ahead.

Hey good evening everyone.

Hey Ryan.

Jay, maybe we could start with gain on sale margins in 2Q, they were really wide of the industry phase, you know, capacity constraints, we're obviously trying to see a little bit of that coming back on you for 3Q, I think you're talking about 405 to 430. Just given your mixes still elevated relative to history. Can you maybe just talk about what you're seeing competitively in the marketplace for mortgage originations? And your views on the ability to continue to sustain elevated margins in the coming quarters?

Certainly, I'll begin and Julie can add her thoughts. Defending our margin mentality is essential for our business. Over the last 35 years, we have shown that client service and technology drive our growth. Our margins continue to be strong year after year. Currently, there is a bit more capacity in the system compared to March or April, but we remain confident about consumer demand. As Julie mentioned in her guidance on margins, we consider our current position, the demand we’re experiencing, and our capacity to maintain our margins, which informs that guidance. Julie, do you have any additional insights?

Yes, I would say that as we kind of look at the runway here, I think there is quite a long runway of working through the demand that is in the market, given the constraints that we are seeing. So, I think that with where rates are kind of anticipated to be here, I think we'll continue to see strong demand for some time. Primary, secondary spreads are wide right now. So, you may see an opportunity for those to come back in here, but I think, the 405 to 430 that we're looking at here, in Q3, certainly still very strong. We will continue as we did talk about on the roadshow defending our margin, and that is something that that won't change, and I think over time we'll probably see those margin come back to more normalized levels. But I think we have some runway here, given the demand that we think is still coming yet over the coming quarters.

Got it. And if I can maybe ask another question just on the size of the market. So, originations Jay, you alluded to, they're likely to pass $3 trillion this year, given how low interest rates are. I think most of the market is eligible for a refinance, which means activity should be elevated again next year. So just talk about your expectations for the market. Obviously, we see the industry forecast, which tend to be a little bit of lagging indicators. And I'm just curious, based on what you see your portfolios, what do you think about expectations for the size of the market? And then to follow up on the question from earlier, how do you think about the ability over a one to two year timeframe to continue to drive market share? Thanks.

Yes, so as we've already alluded to in the past anchoring to a forecast, whether it's NBA or Fannie or others is very, very challenging. It's not as if they're off by a 5% or 10% margin, they're off, usually considerably. So, I'll go back first the statement I made, which is for our planning purposes for, for thinking strategically, we really don't look at the forecast, we look at a more normalized market and we structure our growth around that. If the market is larger, of course, then we benefit from it. And as we've talked about, by the end of the year, our goal is to have a platform that can close $40 billion a month. And so we will continue to grow that platform, the tech, the client experience, the brand, and the people required. And if the market shrinks, we'll be able to grow market share and if the market is larger than the forecast may state well, our capacity will be there to take advantage of it. I think Bob can probably speak to who's in the market today, as you pointed out, a significant portion of mortgages here in the United States are in the money and we expect them to be in the money for quite some time.

The total size of the market is estimated to be between $11 trillion and $12 trillion, with around $9 trillion to $10 trillion potentially benefiting significantly from a refinance. Given the current 10-year rates between 60 and 70 basis points from the Fed, we are taking a strong long-term view on this. At these levels, it may take two to three years to fully realize the benefits, making it a matter of capacity. As Jay mentioned, we are working to build up to $0.5 trillion in annual capacity, which will enable us to gain market share in this environment. The market presents plenty of opportunities, and unless there are unexpected changes in long-term interest rates, we are focused on increasing access and capitalizing on high-margin opportunities.

Yes, I want to jump into that. I know I've mentioned this in the call, but I couldn't be more proud of our group and a lot of feature seeing some growth, which is expected in a market like this. For us to go from $15 billion to $30 billion over the course of the first six months of the year, I think speaks to the true scale that our platform allows for. And I just can't say enough about the team members here that allowed that to happen, our tech team and others.

Our next question comes from Timothy Chiodo with Credit Suisse. Please go ahead.

Thank you. Good afternoon, everyone. Thank you for taking my question.

You bet.

Thank you. I would like to inquire about the Partner opportunity and how it might relate to our share in the purchase market. You mentioned there are around 18,000 existing influencers, which is quite small compared to the potential of over 2 million financial professionals. I understand you have contracts with nearly 200,000 of that 2 million. Could you discuss your strategy for engaging with the remaining 1.8 million?

Thank you for your question. It's a very relevant topic. To clarify our perspective on our platform's growth, we have moved past traditional methods of assessing loans and often receive inquiries about this. Understanding our organization and how we operate is crucial. Our focus is on capacity, brand, and client experience. We can always add more loans to our platform, and we consider the next loan we add to be the most profitable one. This could be either a refinance or a purchase loan, but we don’t categorize them strictly that way. Our platform is designed to efficiently handle a growing number of loans. In markets with more refinance opportunities, we expect to see higher refinance volumes from us, while in markets favoring purchases, we'll see purchase volumes increase. Our primary goal is to excel in operations and maximize profitability. In relation to our Rocket Pro channel, which we've expanded over the last few years, we've experienced substantial growth. This channel helps us reach potential clients who might not respond to direct-to-consumer advertising, especially in strong purchase markets. By connecting with financial planners and insurance agents—those who are at the point of sale—we gain access to purchase loans that may not be captured through other methods. We have a dedicated sales team, and our marketing group is also focused on this strategy. They thoughtfully identify potential partners, manage many inbound requests, and determine the best way to onboard them. One of the unique challenges in our industry has been navigating the licensing requirements, but we've developed proprietary technology to help with this process, allowing us to onboard and license partners legally across all 50 states. Our approach remains methodical and strategic as we expand this channel and foster growth within Rocket Pro. We anticipate continuing the growth trajectory we've seen over the past few years. Julie, would you like to add anything?

Yes, one of the things that we think about when we consider this channel is really the brand that we have built and these partners that we are approaching, also has very strong brands and really, we want to partner with them and they want to partner with us. So I think that's important to think about as we're considering who those right partners are for us. And the technology that we are building and the effort that we have been putting into that platform, which allowed us to launch and grow as we have over the last couple of years here. We'll continue to invest in that heavy source of where we've been investing here as of late and trying to really continue to hone that process that we've got, so that we can continue to bring on new partners that want to know we partner brands for technology.

Yeah. I think that also kind of those partners we're talking about, I think I referenced this in the call, but our Q3 while refinances are at the record levels, and Q3 will be one of, if not the best purchase quarter we've ever had. So we're seeing strong demand and a lot of that's coming through that partner channel, which is great.

Your next question comes from Rich Shane with JPMorgan. Please go ahead.

Thank you for taking my questions this afternoon. One of the topics we've discussed is the scaling of your peers. You've mentioned the impact on gain on sale margin in the intermediate term and the importance of defending that. Additionally, you've talked about market share in the long term. I'm interested in knowing if the changing supply and demand dynamics or capacities could potentially create some short-term pressure on market share.

We evaluate our market share annually and over a three-year span, considering various moments in time. As mentioned earlier, determining the right denominator can be challenging due to constant revisions. Thus, we don't focus solely on monthly or quarterly figures for market share. However, when looking at the long term, we see three key components to scaling. First is our technology platform and operational processes. Many competitors may grow from 5,000 loans to 10,000 or even from 10,000 to 15,000 loans. Yet scaling from 50,000 or 60,000 to over 100,000 is a significant challenge. We find that many competitors get stuck along this journey, which benefits us and allows us to keep scaling. Second, the necessary financing plays an essential role. Even if you have the technology or processes in place, having the substantial financing that we possess is something many struggle with. Lastly, our brand also contributes significantly to our operational speed and client experience. Together, these factors create a strong barrier against price competition. We recognize the need to remain competitive with pricing in a fluctuating mortgage market, which can exert some pressure. As Julie pointed out, margins can fluctuate, but our strong client service, quick closing times, and robust brand give us a competitive edge that attracts consumers to our services, making price less of a central factor. For over 25 years, this strategy has supported our ability to protect our margins and maintain the strong performance you're seeing today. Bob, would you like to add anything about the capacity aspect, which is often a bottleneck for many of our competitors?

I appreciate the question about market share and how we approach it. We typically seize opportunities as they arise, and what we've observed is that we tend to grow faster than our competitors. It's like we're sprinting ahead while they gradually increase their capacity. At some point, we'll maintain our position. There are two major long-term factors that enable us to keep gaining interest. First, the environment is different now compared to the pre-financial crash when it was easy for anyone to enter the market. Back then, many rushed in, but today, licensing creates a significant barrier. While smaller companies can enter the market, larger ones, as Jay mentioned, might increase their capacity, but it's not a straightforward process. It becomes increasingly challenging to add that capacity, leading to limitations. We are currently in a phase where we will see who can genuinely expand their capacity and capitalize on this persistent market, and I believe we are very well positioned for that.

Got it. Okay. That's great, very helpful. Thank you. Just one housekeeping question. What is the UPB now on servicing portfolio? Did I miss that?

About 400 billion.

400 billion. Okay. Terrific. Thank you guys.

Your next question comes from Dennis McGill with Zelman. Please go ahead.

Hi. Thank you guys. First question just has to do with headcount. And you've talked about and we’ve seen obviously an unprecedented environment for the industry and a lot of competitive dynamics in play loan officers being bid away, people trying to build their own capacity, but you're set up differently. I was just hoping you could maybe explain a bit about how you handled headcount during the quarter? And then, what you've seen from a turnover standpoint?

I believe Bob has mentioned this before. Our business model is designed in a way that allows us to adjust and increase capacity without needing to hire as many people. Even though we are growing, we are still bringing on new team members. However, we have been able to extend capacity for our existing team by utilizing technology and improving efficiencies. Regarding turnover, our employees are quite satisfied, as we previously noted, and they are all working towards becoming shareholders, experiencing significant success in doing so. Our culture remains strong, even during challenging times like COVID-19, with 98% of our team successfully working from home. Therefore, our retention levels are excellent. Bob, if you would like to elaborate, we are not hiring the same types of individuals as our competitors, because we don't need people with 20 years of experience for our team to grow.

They keep focusing on the capacity issue we've been discussing regarding our ability to scale. It's crucial that we can add one individual and get more loans than before. We've noticed a significant increase in the number of closings per team. We talked extensively during the roadshow about what we refer to as "rocket logic" and the algorithms powering our operations, which enable us to integrate new team members effectively. With the current market dynamics, there are only so many highly experienced individuals available, which poses a challenge for many competitors looking to expand. By leveraging technology to assist our team and structuring roles differently, we can effectively onboard new hires who may not have extensive experience. This allows us to train and guide them through the process, minimizing bottlenecks. This approach has proven to be very successful for us.

Very helpful. And then second question, just there were a couple stats you mentioned. I didn't catch them. I think one was 46% of closed volume came from the servicing book. And I think you've talked about the 80% retention rate. As you've grown in service and add more clients to the portfolio. Can you just give us any historical perspective on ratios like that? Have you been able to improve those ratios over time as you've gotten larger?

I think you can address this, Bob, but things are continuing to improve. The latest numbers may indicate we're at a higher level than before, so please go ahead.

We're always industry leading, but usually in that 60, 65 range than we the last couple of years, it's been in that 70s and pushing into there. So I think it's really a continuation of a number of things. A, we continue to get better at it. I mean, we really focus on the data, the analytics to drive that and just continue to refine because speed to the client is everything. But also this is where the brand continues to kick in plus people, we talked about barrier to exit as it pertains to servicing. We want to provide an experience that because servicing doesn't have the greatest reputation in our industry of high client service. Jay mentioned our 7th J.D. Power award in a row and every year that we've been eligible to win that, people want to come back to that experience, a lot of people have had experiences that weren't so great elsewhere. And so that leads to higher and higher retention. So it's not a surprise that that number continues to go north.

I believe that when considering our technology investments, we also prioritize servicing, similar to our approach in origination. Many companies are attempting to reduce costs in servicing to enhance profits. However, for us, providing a positive client experience is crucial. This includes granting access to property data, market conditions, and quick responses to payment inquiries rather than making clients wait on hold. Our focus on lifetime value makes retaining clients essential for our business success. Moreover, our ability to competitively spend on client acquisition increases since there is no cost to acquire returning clients who have had a good experience with us. Therefore, we view servicing as a strategic advantage to enhance our origination platform.

Very good. Appreciate it. Good luck guys.

Thank you.

Your next question comes from Dan Perlin with RBC. Please go ahead.

Thanks. Good evening and congratulations on your first quarter out. Obviously, a great setup for you guys. I had a question, if I could revisit the gain on sale margin just for one second. And it really is trying to understand the dynamic around price sensitivity embedded in that when some of that is so much focused on the servicing portfolio, I'm trying to understand the difference between price sensitive clients versus maybe non-price sensitive clients that you have to go out and be a little bit more aggressive to acquire?

Good question. I don't think there's a significant difference in price sensitivity. It's important to note that while we operate differently, there is a baseline price that is influenced by the costs involved in underwriting and closing mortgages. We benefit here because, although margins can fluctuate—Julie mentioned the strong margins in Q2 and our positive outlook for Q3—the costs our competitors incur to acquire, process, underwrite, and close ultimately restrict their ability to lower margins. We need to stay competitive, as I mentioned, and operate within an 8.25 interest rate. However, our profitability compared to our competitors is aided by our efficiency in underwriting, giving us strong margins even in challenging or favorable market conditions, thanks to the advantages we've maintained over the years.

We discussed a lot during the roadshow about the challenge of losing control of the business. In many traditional mortgage lenders, loan officers have control, becoming the brand that attracts clients. This means they drive the margins, and since their pay remains the same regardless of whether the margins are high or low, they tend to push for lower margins. This creates a significant downward pressure that isn't a factor for us. As mentioned, mortgage pricing is complicated due to varying interest rates, points, and unique selling propositions. The difference in pricing can often be subtle on a day-to-day basis due to constant market fluctuations, yet a small change can represent a considerable amount when applied to a large loan. Coupled with our ability to maximize execution size, we can maintain stronger margins than many of our competitors over the long term.

That's super helpful. The follow-up I had is, clearly you've outperform plan, the guidance suggests that that's likely to continue. And now you got a public currency. And I know that a big part of the strategy long-term is to continue to expand into some new verticals, as well as geographies. And so I'm just wondering, two things, what is your kind of near term appetite for this excess capital is flowing through the model? And then secondly, now you have the public currency as well what are your thoughts around M&A to accelerate some of that expansion plan? Thank you very much.

Yes, I'll take that and then Julie chime in as well here. We've always been, I think opportunistic when it comes to leveraging capital to grow and usually organic is the first place that we look. We've touched on our drive to $40 billion a month, investing in technology growth at the origination and servicing level. So that's the first place that we will go. As a private company, we've historically done special dividends over the course of time. We have lots of cash coming in right now. So, something like that is certainly a possibility for us as we think about the future. And we feel good about our ability to continue to grow the business, doesn't mean that we're not always out looking for opportunities. So, an acquisition is something that we think about as a use for the currency as well, and of course repurchase, if we think that that makes sense. I mean, Julie, am I missing any of our kind of?

No, actually, you said it great, Jay. I think that's right. In terms of kind of the waterfall of how we think about using our capital investing in the business, we found is generally the best way to deploy that capital. And we're certainly looking very hard at all the opportunities that we have to continue to use that capital to invest in technology, invest in our processes, think about things that might be strategic to add to the platform from an M&A standpoint. So, I think we'll keep looking at that, just like we always have here. And as Jay said, if it gets to the point where we say, you know what, there's not something that we want to invest in beyond what we're doing already. And we have opportunity to consider that it is something that we may consider down the road.

Your next question comes from Arren Cyganovich with Citi. Please go ahead.

Thanks. If you think about maybe where you started this year in the real massive amount of customer acquisition that you've created through this environment, how does that change your view, has this accelerated your kind of growth expectations for the business in some of the other businesses you have within the ecosystem?

I'll go back to the comment around kind of strategic thinking, certainly, this is some wind at our back. But the long-term strategies, that marketing technology to allow us to grow in markets, whether it's real estate, auto mortgage, I think we're still on track with all of those things. We certainly benefit from having a larger book of clients that have had a great experience on the mortgage side. It offers up opportunity for us to reach out to them, not only for mortgages down the road, but of course, some of the other businesses that are growing in our ecosystem. So I think it's helpful, but nothing that would deviate is from the strategy that we've set out to see growth in all of the businesses here in our ecosystem.

Okay. And then just last the GSE adverse market fee, maybe you just talk a little bit about how that might impact your gain on sale volumes, or just general mortgage market volumes overall, once that's implemented?

Yes, we know, Julie can speak to this, there's been a change, I'm sure everyone's aware of where it was pushed back. But Julie can kind of elaborate on what's happening, and how we think about it?

Yes, so the fee was pushed back to December 1 now, and that's going to be effective for us. So that was good news to hear that and I think that, what we'll see really depends kind of on how others we react to. I think everybody's going to be subject to the same fee. So the thing is that is consistent across everybody that's originating mortgages. So what sort of impact that has on pricing? I think we'll have yet to see. There's certainly other factors that I can let Bob chime in on this as well, that we consider in thinking about that, Bob, do you want.

We have real-life experience regarding how it will work because it was implemented for us for two weeks. The FHFA announced that the fee took effect earlier last month. During those two weeks, we didn’t observe any significant change. Since the industry is currently at capacity and will remain so for some time, the primary and secondary spreads absorbed much of that fee. We can discuss whether it was fully absorbed, but we didn't experience a fundamental change in our volumes or margins during that time. The pricing set to go live on December 1 will primarily be reflected in the rate sheets of mortgage companies in early October, and I anticipate that the experience will be similar.

Thank you.

Your next question comes from Jason Kupferberg with Bank of America. Please go ahead.

Hi. Good evening. Thanks for taking our questions. This is Mihir on for Jason. I wanted to just quickly start with a cost structure, maybe if you could just talk about that a little bit. How much of it is related? How much of your costs are related, specifically tied to origination volume? So we'll move in lockstep as we go quarter-over-quarter if the seasonality, if you will. And then just any comments overall and just how much is variable versus fixed would be great?

Yes. I'll let Julie to fill most of this question. But I think that's another really important concept to understand about our platform. And Bob talked about it from the mortgage banker loan officer perspective, from the operational perspective. But the next loan that we load to our platform, the vast majority drops to the bottom line. And I think that makes us much different than others who grow capacity. They're growing expense right along with capacity. We're not so. Julie can kind of give you some more specifics.

Yes. The things that tend to vary more directly with production are the banker commissions and compensation that we pay, our operations folks as well. Production costs that we have also increased. And it's about 25% of our costs that will vary. So we're adding new loan production to our platform, about 75% of that tends to default to the bottom line. So it is pretty substantial amount as we continue to add on production to our platforms in terms of the profitability of that.

Thank you. I have a quick question regarding the other income line item. You experienced strong growth this quarter, and I believe a portion of that, around 248 million, is attributed to the Small Business Administration loans. Can you discuss the growth expectations for that for the remainder of the year? Are there any other items worth mentioning in addition to Amrock, which is tied to direct origination? Thank you.

Right. Yes. I think Julie can speak to this. I think, as you go through the document, you'll see growth in a lot of those businesses. In particular, we touched on this on the road show, our Rocket loans business is really designed as a flex lending tech platform. And so the relationship that was established, in particular here with the SBA allowed that group to do somewhere near or over 9 million loans or grants that is reflected in that other income that Julie can speak to. So that's over a limited period of time, but the underlying ability for that technology to be adjusted, I think, is something we're very excited about. But Julie, do you want to talk to this.

Yes. That's right. And you got that right. The other income increasing from 244 million to 562 million quarter-over-quarter. There are two significant things and you mentioned both of them. So that opportunity that Jay just mentioned and also Amrock increasing really kind of alongside the Rocket Mortgage business as well those two things do have the majority of the impact on that increase in other income for the quarter. As we look ahead, there may be some additional income that comes in through the rest of the year from that, but we do not expect that. As you'll see when you look at our 10-Q to be necessarily a recurring source of revenue. But I think it's a great point, Jay, that the platform is built to do things like this and from time-to-time, there may be further opportunities.

Your next question comes from Mark DeVries with Barclays. Please go ahead.

You mentioned potentially investing in servicing. Would you consider bulk servicing acquisitions or correspondent lending? Seems like it could be a good use of capital with such an unusually high recapture rate?

I’ll let Bob take this on, as he is the expert with capital markets as we've talked about that. Certainly, we think a lot about MSRs and understanding the value of MSRs on our platform, and in some cases, you may see us sell MSRs, if that's the right move. And other cases, we may acquire them. Bob, you can elaborate.

There are essentially two perspectives to consider when it comes to acquiring MSRs from a profitability angle. First, there's the straightforward return on capital and the potential for leveraging that. Secondly, as I mentioned earlier, is the aspect of retention. When we evaluate the acquisition of MSRs, we not only consider the immediate cash flow but also the potential to gain clients and the expected future cash inflows when they refinance or purchase another home. This approach has proven extremely valuable for us in the past. However, much of it depends on the current market conditions and our capacity to navigate those conditions. We are continuously active in exploring opportunities, although I can't specify what we can currently achieve regarding deploying capital for either leveraged or unleveraged returns. From a retention perspective, we are very engaged in that market in various ways.

The last point I want to highlight is crucial. When considering others who service loans, we are primarily originators, and we utilize the servicing of our clients to enhance our origination efforts and expand our ecosystem going forward. We can strategically approach how we acquire mortgage servicing rights because we also have the capability to produce them in-house. Our competitors need to purchase servicing, which is their only means of scaling their business. This gives us a more strategic advantage in deciding how to acquire servicing, as we have the unique ability to generate these rights ourselves.

Okay. Got it. Could you help us size how meaningful the Ginnie EBO opportunity is for you guys and kind of timing as to when that that could flow through the earnings?

Sure. Go ahead, Julie.

Yes, we are exploring an opportunity based on our balance sheet. Currently, we have approximately $3.5 billion in loans that are 90 days overdue, which allows us the option to buy those loans out of the portfolio. The analysis involves the pass-through rate we maintain compared to the financing costs for those loans. We are actively considering this. We have already bought out some loans, totaling about $241 million by the end of the year, and we are evaluating whether it makes sense to proceed with more buyouts at this time. It’s a possibility we are contemplating, but we will see how it develops.

Okay. Any color you can provide on what percentage of those loans that are in delinquency or in forbearance are Ginnie Mae loans?

Yes. Yes. I don't know that for quite the Ginnie Mae mix up. And maybe Bob knows.

There are approximately 90,000 loans, with a significant portion being Ginnie Mae loans. I'll have the exact figures shortly.

Yes. But that the trend has been decreasing, it's a good news compared to where we thought at June 30. And we are seeing a decrease in the number of loans in forbearance. So it's been a good trend to see.

Yes. I would say that trend along with just the strong market that we're experiencing right now, the strong growth that we're experiencing right now all incredibly exciting for where we're headed here for the second half of this year.

Now we do have time for one more question from Don Fandetti with Wells Fargo. Please go ahead.

Hi. Good evening. I just want to ask a follow-up question on the Q3 gain on sale margin guidance. Is there a mix component in there? Or should we sort of view that as just normal capacity coming into the market? And also, in Q2, it seemed like the Partner Network gain on sale margin went up a lot quarter-over-quarter. I didn't know if you could provide a little more color on that.

From a mix perspective, regarding direct-to-consumer versus Partner, I expect that mix to stay consistent as we consider the Q3 guidance for margin. Julie, would you like to discuss the Partner margin in general, as I believe that was the second part of the question.

Yes. Yes. You have seen the Partner margin come up here as I think we’ve explained the Partner margin is recorded on a funded loan basis. So there's a bit of a lag on that. But we had made some investments in the Partner Network in 2019, and you're really seeing that margin and that channel come up here into 2020 consistent with what we're seeing in the direct-to-consumer channel. So I think in both channels you're seeing the impact of the current market environment on those margins.

You bet. Well, go ahead.

That concludes today's conference call. Thank you for joining. You may now disconnect.