Rocket Companies, Inc. Q2 FY2023 Earnings Call

Hello, my name is Chris and I'll be your conference operator today. At this time, I'd like to welcome everyone to the Rocket Companies, Inc. Second Quarter 2023 Earnings Call. Thank you. Sharon Ng, Vice President of Investor Relations; you may begin.

Good afternoon, everyone, and thank you for joining us for Rocket Company's earnings call covering the second quarter of 2023. With this afternoon, our Rocket Company Director and Interim CEO, Bill Emerson; our President and COO, Bob Walters; and our Chief Financial Officer, Brian Brown. Earlier today, we issued our second quarter earnings release which is available on our website at rocketcompanies.com under Investor Info. Also available on our website is an investor presentation. Before I turn things over to Bill, let me quickly go over our disclaimers. On today's call, we provide you with information regarding our second quarter 2023 performance as well as our financial outlook. This conference call includes forward-looking statements. These statements are subject to risks and uncertainties that could cause actual results to differ materially from the expectations and the assumptions we mentioned today. We encourage you to consider the risk factors contained in our SEC filings for a detailed discussion of these risks and uncertainties. We undertake no obligation to update these statements as a result of new information or further events, except as required by law. This call is being broadcast online and is accessible on our Investor Relations website. A recording of the call will be posted later today. Our commentary today will also include non-GAAP financial measures. Reconciliations between GAAP and non-GAAP metrics for our reported results can also be found in our earnings release issued earlier today as well as in our filings with the SEC. And with that, I'll turn things over to Bill Emerson to get us started.

Thanks, Sharon. Good afternoon and welcome to the Rocket Companies Earnings Call for the second quarter of 2023. At Rocket, we are dedicated to serving our clients through innovation and we're focused on delivering the best experience to them at every step of their homeownership journey. On behalf of the Board, I'm excited to announce the appointment of Varun Krishna as Rocket Company's new CEO. Varun, who is currently the Executive Vice President and General Manager of Intuit's Consumer Group working on products like TurboTax and TurboTax Live, brings a wealth of Fintech leadership experience that will be instrumental in driving Rocket's future success. I look forward to working with Varun in the months ahead to ensure a smooth transition. Before we go any further, I'd like to pause and take a moment to thank our team members for their passion and commitment that drives our achievements. This hasn't been an easy time in our industry, and we have made crucial but difficult decisions to better align resources with the needs of our business in today's mortgage market. As part of our ongoing company-wide focus on efficiency, we recently implemented a voluntary career transition program in July, along with other prioritization and cost reduction measures. Brian will share more details on that in a bit. Now, turning to our Q2 results. We reported strong results in the second quarter. Adjusted revenue came in at $1 billion, above the high point of our guidance range, reflecting continued momentum over the past three quarters. We also achieved positive adjusted EBITDA of $18 million and GAAP net income of $139 million and GAAP diluted EPS of $0.05, reflecting both our strong execution and ongoing focus on operating an efficient company. We are also very pleased to see our purchase market share grow on both a year-over-year and quarter-over-quarter basis. Our focus on servicing clients through innovation in this challenging market is working. Now I'd like to share some thoughts on the current market. We remain encouraged by the fact that consumer demand for homes continues to be robust and we're seeing a healthy purchase pipeline. People just want to buy homes. That said, at the macro level, the inventory and affordability challenges consumers experienced in the first quarter persist. According to the National Association of Realtors, May 2023 home inventory is roughly one-fourth that of May of 2007. Let that sink in for a second. While there are no quick fixes to low inventory and affordability issues in the industry, we see these market challenges as an opportunity to offer innovative solutions to help our clients during this time. For example, our Buy Plus and One Plus initiatives, which we'll talk more about in a few minutes, help increase access to homeownership and address home affordability challenges. These unique products, along with our focus on delivering a great client experience, have driven the growth we've seen in purchase approval letters, which are up nearly 20% in the second quarter of 2023 compared to the first quarter, far outpacing historical trends. We believe the increases we're seeing in this important metric are the result of the investments we've made in the purchase experience for both our clients and real estate agents that work with them. In the four months since launch, our Buy Plus initiative has resonated strongly with first-time homebuyers, home sellers, and real estate agents. This unique Rocket exclusive collaboration between Rocket Mortgage, the largest retail mortgage company in the United States, and Rocket Homes, our 50-state home search platform and real estate agent referral network, has far surpassed our initial expectations on lead generation. With Buy Plus, purchase clients can save thousands of dollars in upfront costs if they work with a Rocket Homes partner real estate agent and obtain financing with Rocket Mortgage. The homeowner can further increase their savings by buying, selling, and financing through Rocket. Real estate agents are excited about working with Rocket and with high intent clients, and these initiatives have proven that out as we've seen agent referrals continue to trend higher. In May, we also introduced One Plus, a new 1% down home loan program that aims to increase access to homeownership for millions of low to moderate-income Americans. One Plus is available to homebuyers purchasing single-family homes, including manufactured homes, whose income is equal to or less than 80% of their area median income. Open clients with financial wellness and home buying readiness is just as important as providing an excellent experience for those who are ready to purchase now. This is why we laid the groundwork for our client engagement program in 2022, which includes Rocket Money, Rocket Rewards, Rocket Visa Signature Card, and the home buying plan. Solutions such as the home buying plan, our guided digital experience that keeps our clients on track as they prepare for purchase, and Rocket Rewards, our loyalty program which gives our clients tangible value for staying engaged with Rocket, are crucial, particularly as clients in today's environment are confronted with a much longer home-buying cycle compared to historical periods. And as we have shared previously, our client engagement program can meaningfully change our business model, broadening Rocket's acquisition channels, lowering client acquisition costs, and lifting conversion through the data insights we gain. Rocket Visa Signature Cardholders began accruing Rocket reward points in the second quarter on purchases. Rocket Rewards also expanded the activities eligible for banking points to home search, including adding a home to a favorites list and saving a home search alert on Rocket Homes. We are already observing a significantly higher conversion rate from lead to close among mortgage clients who are rewards members compared to those who are not. As we expand the activities for clients to accrue points across the Rocket ecosystem, we believe we have an opportunity to gain valuable insights, personalize our offering, and further lift our conversion. We are further encouraged by this progress when we consider the large and growing number of Rocket accounts. As of June 30, the number of Rocket accounts grew to 29.3 million, an increase of nearly 2 million from the prior quarter, with Rocket Money continuing to lead the way. Rocket accounts give us valuable signals of home buying readiness and intent, and we believe Rocket account holders are more open to transacting with Rocket now and in the future. Finally, I'd like to acknowledge a recent achievement that symbolizes our enduring commitment to the client experience. Just last week, Rocket Mortgage was named number one in the nation in J.D. Power's 2023 study for client satisfaction and mortgage servicing. This marks the ninth year Rocket Mortgage has earned the accolade. Rocket is among a short list of companies with a comprehensive home-buying ecosystem who can offer a breadth of products and services from financial wellness, personal loans, and home search to first lien mortgages, home equity loans, servicing, and title and closing. In the two months since I've been back at the company, one thing is abundantly clear: Rocket has a tremendous opportunity in the large and fractured mortgage market, and we're changing the game. We're upending the traditional mortgage business model by diversifying client acquisition channels, lowering client acquisition costs, and engaging our clients throughout their lifetime, thereby lifting conversion from lead to close. We are dedicated to growing the business by significantly elevating the client experience through our comprehensive ecosystem. With that, I'll turn it over to Brian.

Thank you, Bill, and good afternoon, everyone. On today's call, I'll cover our financial results for the second quarter and our outlook for the third quarter. I will also discuss our innovative offerings and how we help our clients in this challenging market, and I'll provide an update on our ongoing efficiency efforts. In the second quarter, we were profitable on an adjusted EBITDA and GAAP net income basis. And once again, we exceeded the top end of our guidance range. We are pleased to see that our purchase focus initiatives are working. Rocket gained purchase market share in the quarter, both year-over-year and quarter-over-quarter. Our client-first approach and the efforts we have taken to run a leaner business are paying off. Rocket reported strong second quarter results, reflecting sequential growth in volume, revenue, and profitability. In Q2, we generated adjusted revenue just north of $1 billion, surpassing the high-end of our guidance range. Adjusted revenue is now up in consecutive quarters since Q4 of last year, with Q2 up 14% from Q1 and up 47% from Q4. Turning to profitability, we have made significant strides over the last year to improve our profitability profile even in what has been a historically depressed market. In the second quarter, we returned to positive adjusted EBITDA. Q2 adjusted EBITDA of $18 million improved considerably relative to losses of $79 million and $204 million in Q1 and Q4, respectively. We reported GAAP diluted EPS of $0.05 and an adjusted diluted EPS loss of $0.02 per share. We're encouraged by the improving trend in our results, and we're excited to be back in a position of growth and profitability. We have been diligent in prioritizing our resources, focusing on operational efficiency, and trimming our cost structure. Our efforts to streamline our costs have been ongoing and span across expense categories, including our recently executed voluntary career transition plan, in addition to other third-party related cost reduction efforts. As I've shared before, we invest with discipline and track our progress closely. We are constantly evaluating and making capital allocation and prioritization decisions and we take action to pivot or sunset projects that are not meeting our expectations. For example, most recently, we pivoted from investing in a sales platform for solar to only offering solar financing through the Rocket Loans platform. We also recently wound down Rocket Auto operations. As a result of these actions, we anticipate cost savings in the range of $150 million to $200 million on an annualized basis, with the full quarter of cost savings set to begin in the fourth quarter. In addition, we expect to incur a one-time charge of approximately $50 million to $60 million related to the voluntary career transition program, primarily in the third quarter. Looking at current market conditions, we continue to see healthy client purchase demand. People want to buy homes. That said, inventory and affordability challenges are resulting in a much longer home-buying process than we've seen historically. For example, one of the things we monitor internally is the amount of time between when a client shows intent to transact and when they actually find and purchase a home. A measure that we refer to as approval letter to application; this metric has been steadily increasing since February of this year and has recently hit a record high. This is not surprising when you consider that in May, inventory was at its lowest level in 2 decades according to the National Association of Realtors. We're helping our clients stay on track while navigating the longer home buying lifecycle in an inventory-constrained market with products like our home buying plan, which provides a guided digital experience to help prepare for home purchase. For those even earlier in their journey, Rocket Money helps clients improve their credit score, budget, and reach their savings goals. We're giving our clients tangible benefits to stay with Rocket throughout the process with programs such as Rocket Rewards, our loyalty program, whereby clients can grow rewards through engagement across the Rocket ecosystem. We're addressing affordability concerns and expanding accessibility to homeownership through recent initiatives such as Buy Plus. With Buy Plus, purchase clients can save thousands of dollars in upfront costs if they work with the Rocket Homes partner real estate agent and obtain financing with Rocket Mortgage. This is something that only Rocket can offer at scale through our integrated real estate and mortgage experience. In addition, because of our ability to capture the economics from both the real estate side and the mortgage side of the transaction, Rocket is uniquely positioned to provide consumers with meaningful savings on their closing costs. With this increased engagement, we're gathering valuable signals and insights, enabling us to personalize our offerings across financial wellness, home search, personal loans, first lien mortgages, home equity loans, and more, regardless of where the client is in their home-buying journey or when they are ready to transact. Our scale and unique approach to client acquisition, engagement, and lead conversion continues to distinguish us from other mortgage lenders, particularly in this challenging fragmented market. From a capital allocation perspective, we have always prioritized maintaining a well-capitalized balance sheet with substantial liquidity capable of navigating different market cycles, while remaining opportunistic. Rocket's financial strength continues to be an important strategic advantage for us, especially in today's market. We closed the second quarter with $3.8 billion of available cash and $6.4 billion of mortgage servicing rights. Together, these assets represent a total of $10.2 billion of value on our balance sheet. Our $3.8 billion of available cash consists of $883 million of cash on the balance sheet and an additional $2.9 billion of corporate cash used to self-fund loan origination. Total liquidity stood at approximately $8.6 billion as of June 30, including available cash plus undrawn lines of credit and our undrawn MSR lines. As of June 30, our mortgage servicing portfolio included more than 2.4 million loans serviced with approximately $500 billion in unpaid principal balance. Q2 unpaid principal balance was lower compared to Q1 due to the sale of MSRs in the quarter. We also drive considerable recurring revenue from mortgage servicing. During the second quarter, we generated $343 million of cash revenue from our servicing book, which represents approximately $1.4 billion on an annualized basis. Net client retention remained over 90% in the second quarter, well above the industry average. Moving on to our outlook for the third quarter. We expect adjusted revenue to be in the range of $850 million to $1 billion. This guidance takes into account current market conditions, including challenges presented by the historically low housing inventory levels. We expect Q3 expenses to be roughly flat compared to Q2, excluding the $50 million to $60 million in one-time charges. As we have consistently demonstrated over the last 18 months, we are committed to operating an efficient business with continued focus on profitability. As always, our forward-looking guidance is based on our current outlook and visibility. Despite the continued uncertainty at the macro level, we are very well positioned in the current environment. We remain focused on serving our clients and investing with the discipline to drive long-term growth and shareholder value. Before we turn the call over to the operator, I'd like to share with you that our 2022 ESG report can be found on the social impact tab of our Investor Relations website. Our second ESG report highlights Rocket's for more than profit philosophy and approach and the positive impact Rocket has made on our community and our environment. With that, we're ready to turn it back over to the operator for questions.

The first question is from Kevin Barker with Piper Sandler.

First of all, I'd like to thank and congratulate Bob Walters for his retirement. I also want to explore what happened during the CEO search process and understand the background on it, specifically why Varun was selected as the next CEO starting in September.

Sure, Kevin. Thanks for the question. So obviously, we went through an extensive search that started back in February as soon as we announced that I was the interim CEO because we were diligent about wanting to ensure that we could find someone. We employed a national search firm, and as you can imagine, with a job like this, we've got quite a bit of response and a number of great candidates that we had the opportunity to evaluate as a Board. In going through that process, we were looking for somebody who had great business acumen, someone who had consumer product skill sets, and somebody who was really good with people. As we had the chance to evaluate Varun and all of the other candidates that we looked at, he clearly rose to the top as someone who would be able to come in here and paint a great strategic vision for the organization. Someone who had alignment with us in the Fintech space and the abilities that we have and the things that we're looking to do as it relates to expanding our business and our platform and our ecosystem. So as we went through that process, it was not surprising to see that the Board was unanimous in making the decision to bring Varun on Board.

Great. Shifting gears, you've clearly focused on attracting new originations, especially in the purchase market. Can you provide more details about the progress made with these initiatives, particularly Rocket Rewards, the inflation buster, and the new programs announced in May?

Yes, of course. I'm sure Brian will have some insights on this too. You're referring to Buy Plus and One Plus, two programs we introduced in the second quarter. The inflation buster was from last year. Considering the current market challenges, including significant inventory issues, it's worth noting that inventory levels are at a quarter of what they were in 2007 during the last major recession. While people want to make purchases, it's quite difficult. Our Buy Plus program allows customers to save money on transactions, especially if they work with us for their mortgage needs. Additionally, if they're collaborating with both Rocket Homes and Rocket Mortgage, they can save real money during the transaction. This program helped us generate lead flow that we hadn't experienced in the second quarter and enabled us to increase our market share year-over-year and quarter-over-quarter, which are crucial metrics we monitor. We're enthusiastic about how well this has worked and anticipate continued success as we move forward.

Yes. The only other thing I'd add, Bill, is exactly what you said. These products are designed for this market. The two challenges are affordability and inventory, and Buy Plus is a good example of an innovative product. Just to dive a little deeper into the metrics, it's exceeded our expectations on driving traffic to our sites. Consumer engagement with the product is beating all of our internal metrics. The real challenge is just getting people into homes with the inventory levels that Bill just discussed.

Yes. It's obviously a challenging environment, and a lot of these programs are relatively new. Are you able to provide just some metrics behind some of the incremental market share that you've taken, particularly around the purchase market?

Yes. The way I'd comment on that, Kevin, is I think we've talked about this before, but it's a challenge to report market share just if you use the industry forecast. And when I say the industry forecast, I mean the forecast numbers, and we know that because, one, it's like any other forecast. It's usually not correct, but the actuals change frequently and get updated. So this is how we look at it. We look at securitization data which is, of course, publicly available and you can get your hands on that. And that shows us taking purchase market share quarter-over-quarter and year-over-year. Now that's about 70% of the overall mortgage market, but it's a great sample size and a good indication. We also look at other sources like Optimal Blue and CoreLogic data, and that helps us get more real-time information and up-to-date insights, again, maybe not capturing the entire market. But when you look at every source, and even if you do the math on the forecast estimates, they all point in one direction: that we're taking share in the purchase market.

The next question is from Ryan Nash with Goldman Sachs.

Maybe I'll start off looking at the current quarter's results and digging into a little bit on the third quarter guide. So results came in just above the high end of expectations. Can you maybe just talk about what you saw throughout the quarter on the competitive side that led to the better results? And then when you think about the 3Q guide, maybe just talk a little bit about what's driving the sequential decline at the midpoint of the range. Obviously, there's some seasonality with the spring selling in the second quarter. But maybe just flesh out some of the moving pieces in terms of volumes and margins? And is there some conservatism similar to what we saw in the second quarter? And I have a follow-up.

Thank you, Ryan. I'll begin by discussing our Q2 performance. We're excited about our revenue, but more importantly, we're pleased with our execution in the second quarter. We achieved profitability on both an adjusted EBITDA and GAAP basis, despite a market that contracted over 60% almost overnight. This quarter reflects strong execution from our leadership team and all our employees, and we take pride in that. The positive news is that our profitability stemmed from a revenue increase in Q2, marking three consecutive quarters of growth in both revenue and sales margins. The outperformance can be attributed primarily to purchases. We highlighted some metrics from our Buy Plus initiative that strongly resonate with consumers, and our margins also provided a boost. The margin results were robust, contributing to our overall performance. As we look toward Q3, we're one-third of the way through the quarter and are seeing trends consistent with what we experienced in Q2, particularly in purchases. However, we do face challenges with inventory levels. For Q3 to be a strong purchase quarter, we need to see homes selling and inventory levels increasing. Our guidance remains consistent with Q2, projected between $850 million to $1 billion. While we are confident in our execution and internal performance, the inventory levels give us some concern as we move into the third quarter.

Got it. And then maybe as a follow-up, you talked about expenses being flat next quarter, but then you also talked about the $150 million to $200 million cost savings that you're bringing on. Can you maybe just talk about how much of that is going to be in the run rate for the second quarter and over what time frame you see it making it in? Does this lead to absolute expenses declining over time? And Brian, you talked about the progress you made on revenues and improving, getting to positive adjusted EBITDA, does this cost-saving initiative that you're putting in allow you to move back to sustained profitability?

Yes. I want to be clear that the cost savings that we're talking about, the $150 million to $200 million, we'll really start seeing the effects of those in the fourth quarter. They will be executed in the third quarter. They'll work their way through the system. There might be a small benefit in the third quarter, but they'll sort of be a full quarter of realization in that fourth quarter which, again, just to touch on the profitability metric, again, this is the $18 million in EBITDA and the $140 million in positive GAAP income, before any of these cost savings take effect. But if you think about what we've done, we're committed to running an efficient business, and looking over the cost structure has to be a part of that. Just as a quick reminder for the group, last year, we took out $3 billion of cost, over 40% of the cost structure came out. This round was really about focusing on efficiency and prioritization. Those two things we've committed to, and we know how important they are and they can make or break a business. So these $150 million to $200 million in cost savings should start being a full effect in the fourth quarter and, of course, if you just pro forma that and layer that onto the Q2 profitability results, they would have been even better had these cost savings been in place.

The next question is from Kyle Joseph with Jefferies.

Sorry for one more on the expenses. On the $150 million to $200 million of savings, does that factor in the changes you guys made in solar and auto that you addressed on the call?

Yes, that was part of it, for sure. That's what I was alluding to on the prioritization front. There are certain things that, like Bill mentioned, Buy Plus and Rocket Rewards, things that are working that we'll continue to double down on and invest in. Then there are some other things such as the solar sales arm in the Rocket Auto business which were good things at the time and showed some success but aren't meeting our return threshold. So part of that is inclusive of winding down those businesses.

Got it. Just one quick follow-up regarding margins by channel. Can you provide insight on whether Q2 is a good benchmark right now, indicating that we've seen enough supply from the industry to approach an equilibrium between supply and demand? Additionally, what is your outlook on margins by channel?

Yes. The way I'd answer it is both channels performed well. Gain on sale margins are now up for three quarters in a row. There's no question that that's a component of capacity coming out and competition easing. But I would go on to just say that they're still well below historical norms. So there's still room to grow there for sure. Capacity has come out of the system, and competition has eased a bit, but we're not all the way through that, in our view. Some of that will depend on where mortgage volumes fall out, of course. But if you just look at the amount of mortgages being produced in the second quarter, there's still more capacity that can come out, and gain on sale margins are an indication of that, still below historical norms. But yes, the sequential improvement is definitely a positive sign.

The next question is from Ryan McKeveny with Zelman & Associates.

Nice job on the quarter. So you've hit on the purchase dynamics which is helpful and good to see. I guess, looking forward, the midpoint of the adjusted revenue was referenced previously, down a bit from the 2Q results. I guess maybe help us think about the guidance in relation to the comments you made about purchase. I believe you said pre-approvals were much stronger than historical in Q2, maybe up 20%. I guess that sounded to me like that was an indication, kind of a leading indicator of what's happening in Q2 that may lead into Q3. So, maybe if you could just square that dynamic with the guidance would be helpful.

Yes, I'm happy to take that. The guidance, if you look forward to the third quarter, I mean, similar guidance in the second quarter, and the third quarter typically is not going to be as heavy in the purchase season just normally compared to the second quarter. We actually think that's a pretty good guide. What Brian talked about is the length of time it's taking now to make it all the way through the process. So the fact that our approval letters are up is a great indicator, and we look forward to that making its way through our pipeline in the next three to six months. But it's taking much longer for a client to be able to think about getting a home, going through the process, finding a home, finding a mortgage, negotiating the deal, everything associated with that is just extended. So I think that bodes well for what the third and fourth quarters can look like. We still have to deal with the fact that the third quarter is typically and historically a little bit less robust when it comes to the purchase market.

That's helpful. That makes sense. And then second question on Buy Plus and Sell Plus. You've called out the strong consumer engagement there. I guess can you dig in a bit on the reception from real estate agents? It seems like it's a very compelling offering not just to consumers, but also to your partner agents with Rocket Homes. So yes, any thoughts there just high level on the reception of agents? And is that program helping drive interest maybe more generally from real estate agents out there to partner with you either on the mortgage side or with Rocket Homes?

Yes, that's a great question. We believe it is. We believe we're seeing referral numbers to Rocket Homes up significantly. So that indicates to us that realtors are interested in what we have to offer and passing that on to their clients, right? At the end of the day, you know that realtors care deeply about what happens for their clients and how well they can be understood through the process. So, we have been excited to see that increase. I know Rocket Homes has been happy to see it. So it seems to us that the real estate community is reacting positively to this particular program.

The next question is from Doug Harter with Credit Suisse.

You mentioned that the servicing portfolio was down. I was just wondering how you're currently looking at the servicing portfolio and the split between lower coupon borrowers that have less incentive to refinance and newer production, higher coupon mortgages that you could see an easier path toward refinancing?

Yes. Thanks, Doug. Our views on the MSR asset haven't changed. Our superpower there is the retention rates. And that's really where we exceed anyone else in this space. The asset is a great cash flow asset, and obviously brings a little bit of volatility to the balance sheet. But overall, for us, it's a lifetime value equation. What I think you might be referring to, we did have some sales of servicing assets in the third quarter, and the one I'll touch on which is probably more unique for us is the sale of the Excess Strip. We did sell some excess strip off. If you think about our business, we take enough interest rate risk every single day by originating mortgages and servicing mortgages. So where we have an opportunity to unload a bit of that excess at a really nice exit multiple, that can make all the sense in the world for us. We'll trade that for cash. But the most important part is we'll retain the client and that client relationship through the primary servicing asset. So that's probably what you saw come through in the third quarter, but no change in the overall strategies. We're a buyer of servicing assets every day by the loans that we originate. We do a lot of looking, the client demographics fit our profile, and we can make an LTV argument, we'll acquire that portfolio. In terms of clients or portfolios that we sell, again, it's really through that LTV lens. If there's an inability to remarket to them or if there's another reason that we don't have the confidence in the recapture, those are the ones we'd look to trade.

Can you provide a breakdown by coupon? Specifically, what portion of your servicing portfolio has a coupon above 5% or 6%? This would help to understand where refinance demand could increase if rates were to decrease slightly.

Yes, the financial disclosures always include a weighted average coupon. So you'll see that when we file the Q here. But it's not a surprise that we've been servicing now for a long time. In 2020 and 2021 with big origination years, that's going to be a big percentage of your book and that's going to be lower coupon. But I think you bring up a good question because something I feel like folks do underestimate is, this year, there will be $1.5 trillion or $1.7 trillion of mortgages produced, and all those mortgages will be at a higher coupon. At some point, all those mortgages will be back in the money. People underestimate how much rates have to move to make that beneficial for the clients. So when you look at the weighted average coupon, of course, that's going to be low in the book but we're originating mortgages every day at these prevailing rates and higher coupons, and it only takes a few basis point move to be back in the money and make it beneficial for those clients.

The next question is from James Faucette with Morgan Stanley.

Just a quick question on your prepared remarks. Inventories of existing homes are obviously down significantly compared to 2007, which was particularly striking. And from the lock-in effects - but it seems like new home builders have been filling in the gap in many markets. What are you doing to capture in that market? I didn't know you touched on it a little bit, but are there opportunities for Rocket to lean into the space and develop more expansive partnership with homebuilders?

That's a great question. We work with homebuilders regularly. We are constantly interacting with them. But again, as you know, that's a very long life cycle, right? When you start from scratch, signing a purchase agreement to building a home and the gestation period associated with that, I mean I remember what I used to do a year ago, it was about nine months, and these days, it's probably closer to 15 to 18 months, right? While we are always encouraged by a little bit of increase in new construction, it's still relatively small in the grand scheme of life and where it's been historically. So we're constantly working with builders on that, but that's not going to show any short-term positive impact for us from a closed loan perspective along the line.

I think that's right, Bill. I mean we've been looking at those stats very closely, James, and it's a good question. But just keep in mind, the vast majority of homes that will be sold are still existing homes. So that's still where the biggest total addressable market is. And also, keep in mind, eventually, the market will be efficient. The homebuilders are doing great and they're striking while the iron is hot, which is great for them. But existing home sales in every market still are going to be the lion's share of all home sales.

The next question is from Mihir Bhatia with Bank of America.

Let me also extend my congratulations to Bob. I have a two-part question that I will ask together since they are related. You've mentioned product innovation and the introduction of new programs that are driving purchase volume. Could you elaborate on where the market share gains are coming from, specifically in which channels, between the partner or the direct business? Additionally, there have been reports about your company hiring local offices. Could you discuss that? Looking at the broader picture, given the challenging rate environment and the shift to a purchase-driven origination market, how is Rocket evolving? What aspects remain consistent with what Rocket has represented in the mortgage industry, and what has changed? How have you adapted, and what should we anticipate in the next year or two?

That's a mouthful right there. What I would tell you is I think we've seen growth in both channels. So it's not specific or exclusive to one or the other, and we're actually happy about the growth in both. As it relates to your question on local loan officers, we've had remote local loan officers for a long time in our organization. We've always tried to leverage talent where the talent exists. We probably saw more of that during COVID, which opened up our eyes to a little bit of the fact that some folks can work from home and do a good job in a local market, which would add value to the organization. So our strategy going forward is the same. We're going to continue to push our direct-to-consumer business, and we've got our third-party origination channel. I think as we look at our direct-to-consumer business, there's a way to get more local and more regional with that out of a centralized location that I think is beneficial to the interactions that we would have with realtors and builders. What you're seeing is an organization that's committed to a direct-to-consumer model, the digitization of the process. I think the hiring of our new CEO indicates that in a big, big way because of his experience and where he's been. We still look at this marketplace as a massive opportunity. It's still very fragmented, and there's still a lot to be accomplished by our organization even in a purchase-heavy market.

The next question is from Donald Fandetti with Wells Fargo.

There have been a lot of changes to bank regulation. I didn't know if there were any potential benefits to your business, even if it's around the edges?

Well, I think there's a lot of talk about what's going on with banks regarding the SBB regional bank situation that took place. I know there's some discussions about increased capital rules and things of that nature. But at this point, that stuff is still a proposed rule-making state. It's really kind of hard to determine what that's going to look like in the marketplace. On one hand, if you see capital requirements go up, you've already started to see some regional banks that have pulled away from the warehouse lending space, and that could bode poorly for a lot of our brethren in the industry. For us, I mean we work with the largest financial institutions, so we don't see an impact there. But I think the devil is in the details, and we have to see where the new regulations and the new rules come out and how that might affect things. On one hand, you could argue that by doing that, it might help the non-depository mortgage lender. On the other hand, until we really know the reality of life and what those rules are going to do, it's hard to say. It could ultimately have an impact on some of the non-depository space for folks who don't quite have the balance sheet that we have.

That will conclude our question-and-answer session. I'll turn it over to Bill Emerson for any closing comments.

First of all, thank you all for joining us. I just want to make sure that I state this for the record, how much we appreciate Bob Walters and all the work he's done for this organization over the last 26 years of his leadership. I've known Bob that entire time, and while I am very happy for him and the next steps that he's going to take, he will be missed at this organization greatly. Thank you, sir. I appreciate you, and thank you all for being here, listening, asking questions, and until next time.

This concludes today's conference call. Thank you for participating. You may now disconnect.