Rocket Companies, Inc. Q3 FY2024 Earnings Call

Thank you for joining us, and welcome to the Rocket Companies Third Quarter 2024 Earnings Conference Call. All lines are muted to minimize background noise. After the speakers' presentations, we will have a question-and-answer session. I will now hand the call over to Sharon Ng, Head of Investor Relations. Please proceed.

Good afternoon, everyone, and thank you for joining us for Rocket Companies' earnings call covering the third quarter 2024. With us this afternoon are Rocket Companies' CEO, Varun Krishna; and our CFO, Brian Brown. Earlier today, we issued our third 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 Varun, let me quickly go over our disclaimer. On today's call, we provide you with information regarding our third quarter 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 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 Varun Krishna to get us started. Varun?

Thanks, Sharon. Good afternoon, everyone, and welcome to the Rocket Companies third quarter 2024 earnings call. Two months ago, at our first ever Investor Day, we unveiled our vision for Rocket's future. Today, I want to kick off our call by emphasizing and extending one key theme, optimism. Optimism is the ability to see the glass as half full. Over the past few months, the market has thrown our industry almost every curveball imaginable, with inflation easing. The Fed cut rates for the first time in four years, but in an interesting twist, while the Fed lowered rates, mortgage rates did not follow suit. Instead, both the 10-year treasury yield and the 30-year fixed mortgage rate actually increased. In my experience, it's always important to take the long view and put things in perspective. Despite the housing market being challenging, we are seeing signs of rejuvenation. The 30-year fixed mortgage rate has declined from nearly 8% a year ago. This is helping improve purchase affordability and opening up refinancing opportunities to lower monthly payments. Plus, housing inventory has increased from 3.4 months to 4.3 months, showing a 26% improvement. We're still below the five-month to six-month range that's considered a balanced, healthy market, but inventory is moving in the right direction. While affordability and inventory are certainly still challenges, the market is showing signs of improvement compared to last year, and we're right there with consumers navigating their needs together and in service of our mission to help everyone home. Our mindset reflects the importance of optimism in a world that continues to be riddled with uncertainty. That is because home ownership is and always will be the cornerstone of the American dream. Every day, we make 30-year bets on clients who are betting on themselves. Our role in opening the door to that dream is what makes us proud to be Rocket. Let me take a minute to reflect on the results of the quarter. At Investor Day, we announced our bold 2027 market share goals to double our purchase market share from 4% to 8% and increase our refinance market share from 12% to 20%. This quarter was a solid step toward these goals. I am so pleased to share that we expanded both our purchase and refinance market share year-over-year in the third quarter. We delivered $1.323 billion in adjusted revenue, surpassing the high end of our guidance and accelerating growth compared to Q2. Net rate lock volume surged 43% year-over-year, driven by significant refinance activity alongside growth in purchase volume. Our adjusted EBITDA margins came in at 22%, three times higher than Q3 of 2023. We also reported adjusted earnings per diluted share of $0.08. These numbers are a direct result of one basic thing: execution. Our team members continuously refine every aspect of our sales and operational processes, marketing, and product technology to fight for every inch of progress. That execution excellence is built on decades of investment toward a durable competitive advantage, which we call the Rocket Superstack. This is the key to the strong short-term results we're seeing today and is also the foundation for long-term value creation and growth. Our Superstack is comprised of four layers: a robust end-to-end ecosystem, multi-channel experiences we create for clients, team members and partners, proprietary AI-driven technology, and lastly, our iconic brand. The integration of these four layers serves as the engine that drives growth, scale, and efficiency. Let's dive into each layer and unpack a few highlights from the quarter. First up is the power of our unique ecosystem, a system that connects each step of the journey from finding and financing a home to servicing to title and closing and the journey beyond. At the very heart of our ecosystem lies our origination servicing flywheel. Once a client enters the flywheel, we provide them with outstanding origination and servicing experiences, and we earn the privilege of becoming their lender for life. Last month, we announced a strategic sub-servicing partnership with Annaly. This partnership allows us to expand our servicing portfolio in a capital-efficient manner. We're excited to onboard these clients into the Rocket ecosystem this December and provide them with an amazing origination and servicing experience that sets Rocket apart. Our industry-leading 85% recapture rate speaks to the client experience that people love that keeps them coming back to Rocket, establishing a long-term relationship. There's no additional acquisition costs for clients in our ecosystem, creating even more operating leverage. This very same ecosystem brings innovative mortgage products tailored to today's market to our clients, with home affordability top of mind; our affordable product suite is helping clients get a leg up or bringing the dream of homeownership closer. These products have struck a chord, making up a quarter of our purchase volume since the beginning of this year. Our recently launched Welcome Home Rate Break is a great example. We reduced rates by 2 points in the first year and 1 point in the second, providing meaningful affordability relief for homebuyers. Since its launch in late August, we've seen our ONE+ and Welcome Home Rate Break product groups grow by more than 20%. Now, on top of our ecosystem sits our experience layer, where we're breaking new ground and delivering delight to our clients. We have made tremendous strides this quarter in expanding our GenAI-powered chat functionality. Our generative and live chat is now fully integrated across all our digital platforms, handling everything from purchase, refinancing and servicing 24/7 whether clients are logged in or not. This round-the-clock access is key, with 20% of our clients contacting us outside of regular business hours. We're seeing significant growth here as chat interactions with our bankers have more than doubled quarter-over-quarter. Beyond just the growth in the number of interactions, chat is driving real results. Every chat is a chance to deliver personalized insightful experiences that deepen client engagement, which in turn leads to higher conversion. Clients who use chat are converting three times higher compared to those who don't from the first interaction to credit poll. We often talk about letting technology do what it does best, freeing our team members to focus on what they do best: helping our clients, responding with urgency when our clients need us most is the key to play. I can't think of a better example where this was put to the test than most recently during the hurricanes that hit the Southeast. While dealing with a devastating situation, I couldn't be prouder of our team's quick technology-enabled response to support and be there for our clients. We tracked the storm paths in real-time. We activated our emergency playbook. We customized our digital tools before landfall. Self-service options like our website, AI-powered chat and IVR allowed nearly 70% of affected servicing clients to get immediate answers on credit suppression, late fee waivers, and forbearance, seamlessly connecting them to our team when they needed personal support. We also saw a significant three-fold increase in disaster inspection reports for affected counties compared to the weekly average in the months before. This process can often be delayed at the collateral underwriter review stage where workloads are already substantial. Quickly reviewing these reports is critical to getting our clients' loans back on track. Thanks to automation efforts we put in place months ago, we cut review times by 71%, allowing us to push through this bottleneck and quickly provide next steps to help our clients move toward closing. Let's move to the third layer that powers our ecosystem: technology. The ability to leverage technology is crucial to scale, drive profitable growth, and adapt to market shifts. Let me share just two quick examples. In our business, we're constantly asking and answering complex questions like which loans are in the money in Wayne County, Michigan? Or is this loan compliant with regulations in Nevada? For many lenders, answering these questions takes intense research. It can take many hours or even days, involving multiple data analysts or engineers pulling data from various sources. This is just the industry norm, but not at Rocket. Rocket is changing the game with a new technology called Navigator, our internal AI-driven knowledge and workflow platform that puts answers to questions within reach in seconds. Navigator empowers our team members to create no-code apps, experiment with AI securely, summarize documents, analyze sentiment, and even role-play scenarios. Navigator's AI automates complex queries, empowering more people to drive innovation on their own without involving support from a data analyst or engineer. With Navigator’s conversational AI interface, our team now has the answers they need at their fingertips. In just a few months, over 2,000 team members have logged more than 52,000 LLM interactions, and they love it. Daily active users have been climbing steadily since launch, nearly doubling from August to October. By automating complex queries, Navigator is multiplying the number of innovators at Rocket by an order of magnitude. That is the power of AI in a nutshell. We've also continued to build out our proprietary AI-powered loan origination system, Rocket Logic. We recently expanded Synopsis to handle all inbound calls, and the results have skyrocketed. In early November, we reached a major milestone, processing nearly 1 million calls in a single week. The power of processing these calls through AI results in transformative insights to our business. Each call provides semantic data that lets us extract names, sentiment, call purpose, pain points, and more. These tags create metadata that helps us strategically allocate resources, equip our bankers with valuable real-time insights, and address specific needs, ultimately driving higher conversion rates. With Synopsis, we have insight into a client's purchase journey, whether they have a home in mind, have submitted an offer, or had it accepted. This allows us to connect high-intent clients with the right bankers, creating more meaningful interactions and driving purchase conversion. The last layer of the stack is the icing on the cake: our iconic brand. The Rocket brand is one of our greatest superpowers. While Rocket is already an admired brand, this coming year, we will significantly amplify its identity, purpose, and impact in homeownership. Over the past few months, we've zeroed in on the growth audiences that are set to reshape the home buying landscape: female heads of households, Hispanics, and aging first-time buyers, just to name a few. By 2030, over half of first-time homebuyers will be Hispanic. Meanwhile, the economic influence of women will continue to surge. With women managing two-thirds of household wealth, our brand will evolve to meet these clients exactly where they are. In February of 2025, we will unveil the new Rocket brand identity. The transformation began with our recent acquisition of rocket.com, a site that will unify the homeownership experience across home search and mortgage. In the coming months, we will share a greater ambition with the country and establish a brand that represents the ability for our clients to own the elusive American dream once more. Let me quickly summarize: each layer of our Superstack accelerates our execution and propels us forward. The stack is a durable advantage that empowers us to set bold goals and establishes clarity on how we will achieve them. Each layer is unique to Rocket and combines to create a whole that is greater than the sum of its parts. What truly excites me isn't just the what of our strategy, but the how and most importantly, the who. We've built a world-class leadership team, bringing in key executives with deep expertise in AI and technology to work hand in hand with the best homeownership, mortgage, and finance leadership team in the industry. Together, we are poised to drive needed change and modernization in the industry, and I am so proud to work alongside them every single day. I'm going to close where I started. Our mission is to help everyone home, a mission that reflects the optimism we have toward our future growth. Our forecast for the mortgage origination market indicates a 20% to 30% year-over-year growth in 2025 that gets us excited and creates an opportunity to capture share. No matter how the market evolves in the coming years, our $5 trillion market opportunity reflects our potential and our ambition. We firmly believe Rocket is well-positioned to drive disruption and transform the industry to benefit millions of homeowners. Thank you. And with that, I'll turn it over to Brian.

Thank you, Varun, and good afternoon, everyone. I'd like to start by setting the stage and framing how we're responding to market realities and seizing opportunities as they come and why we are uniquely positioned to capture a bigger slice of the homeownership market. It's been an interesting couple of months for the industry. For most of the third quarter, 30-year fixed mortgage rates have trended lower from nearly 7% in July to touching 6% during a two-week window mid-September. However, stronger than expected economic indicators caused the 10-year yield in 30-year fixed mortgage rates to quickly jump back to 7%. In short, the market's been anything but predictable. Since interest rates are impossible to predict with any certainty, the key is scaling up quickly to capture the market opportunity when it presents itself. The third quarter was a perfect example of this. When rates briefly dipped to near 6%, clients who had financed homes in the past two years jumped at the chance to lower their payments. We also saw a lift in our purchase pipeline as affordability improved, reaching our highest daily production volumes in the past 24 months during that brief window. It was a game-on moment, and we scaled up quickly to capture this volume surge. Every layer of our Rocket Superstack, our ecosystem experience, technology, and brand played a role in powering execution across the board. We captured more top-of-funnel leads through all of our channels, including direct-to-consumer, broker, partnerships, and of course, our service clients. We launched innovative mortgage products like our Welcome Home Rate Break promotion to meet the moment, supercharged our bankers with tools to serve more clients, and boosted conversion throughout the funnel. Altogether, this meant we captured and converted more leads with speed and scale. Without adding headcount or increasing fixed costs, we flexed up our capacity seamlessly through our technology platform. That's the power of what we're building at Rocket. When these windows of opportunity open, we're ready to act. This lightning-fast execution is unique to us and hard for others in the industry to replicate. To take advantage of the brief 6% rate opportunity in the quarter, most mortgage companies would have needed to hire and train licensed loan officers and underwriters months in advance. Relying on human capital to drive capacity likely means missing the opportunity entirely. Equally important to seizing the market opportunity is staying resilient when the market contracts. Thanks to our tech platform, we can flex our capacity up or down without the whiplash of hiring and layoffs typical in traditional mortgage models. No matter what the market throws at us, we stay focused on our goal to capture profitable market share in any environment. When we zoom out, as Varun shared, we see reasons for optimism. Compared to a year ago, the 30-year fixed rate has trended lower. Housing inventory measured in months of supply has increased by nearly 30%. Active home listings have grown for 12 consecutive months, and the share of homes sold above the listing price is down 10% year-over-year, signaling a cooling in the competitive bidding for homes. While there are still affordability challenges, these are promising signs, and we anticipate even more momentum as we head into the New Year. Now with that backdrop, I'll take you through our strong Q3 financial performance, talk more about how AI is unlocking value for our business, and the critical role that our origination servicing flywheel plays in fueling our financial success. I'll also touch on our new investment-grade credit rating, and I'll wrap up with our outlook for the fourth quarter. Let's jump in. If I had to sum up this quarter in one phrase, it's lights-out execution. We grew purchase and refinance market share, revenue, and profitability on a year-over-year basis. Adjusted revenue came in at $1.323 billion above the high end of our guidance range. This represents a 32% increase from the third quarter of last year and our fifth consecutive quarter of year-over-year revenue growth. We generated $30 billion in net rate lock volume, marking a 43% increase year-over-year in our highest volume since the first quarter of 2022. This year-over-year growth included double-digit increases in both purchase and refinance. Our home equity product posted another record high. Gain on sale margin held steady at 278 basis points, roughly flat with the same period last year. From a channel perspective, our direct-to-consumer sold loan gain on sale margins have climbed to over 400 basis points, while our partner network margins have increased to roughly 150 basis points. Our continued focus on driving top-line growth, operational leverage, and efficiency combined to make the third quarter our most profitable quarter in two years. Adjusted EBITDA was $286 million, representing a margin of 22%. We reported adjusted net income of $166 million and adjusted diluted EPS of $0.08. When we talk about profitability, it's driven not only by our top-line growth, but also by creating operating leverage powered by our investment in technology. Our scalable tech platform is what empowers us to navigate dynamic markets with agility. From my perspective, the most powerful benefit of AI is the boost it gives to operational efficiency and productivity. Simply put, it's about achieving more with the same resources. The increase we're seeing in team member productivity translates directly into greater capacity. We unlock this capacity through technology while others in the industry try to grow it by adding headcount, which is inefficient and has a long runway. And when the market contracts, you're left with excess capacity and inflated costs. Today, we have the capacity to support $150 billion in origination volume without adding a single dollar of fixed costs. We proved that this quarter. Not only did we handle more volume, net rate lock volume was up 43%, but we did so with 7% fewer production team members year-over-year. Our AI tools are driving these gains from automating income verification and collateral review to enabling multiple client chats and insights that boost conversion. Rocket Logic, our proprietary loan origination system, is driving massive efficiency improvements. With recent updates, we're saving over 800,000 team member hours annually, a 14% increase from just two months ago, resulting in more than $30 million in annual savings. But it's more than just cost savings. AI is giving us greater speed, accuracy, and personalization, boosting conversion rates and fueling growth. Operational efficiency is a top priority for us, and we're constantly evolving to keep ourselves lean, agile, and competitive. Another key part of our business model is our origination servicing flywheel. As we've discussed on previous calls and at Investor Day, MSRs are an attractive way to acquire future origination clients. Together, our origination and servicing businesses form a powerful homeownership flywheel that allows us to source new clients and organically create new MSRs while positioning us to help clients with future transactions, be it their next purchase, refinance, or even home equity loan. Earning repeat business is what we refer to as our recapture rate. Our goal is to provide a client experience that is so exceptional that we become the client's go-to for all future home financing needs. Our industry-leading 85% recapture rate is a testament to the client experience. When you excel at something, you earn the opportunity to extend that value beyond your own ecosystem and offer it to your partners; our high recapture rate is a win-win for both Rocket and our partners. It is a powerful advantage for MSR owners without in-house origination capabilities as it offsets the prepayment risk inherent to owning MSRs. This also makes cash flows more predictable for our partners, reducing the need for complex, costly hedging strategies. In October, we proudly announced a partnership to sub-service a portion of Annaly's MSR portfolio. This strategic subservicing partnership complements our strategy of growing servicing through organic new originations as well as bulk acquisitions. Across bulk acquisitions and subservicing, year-to-date, we've acquired or committed to add over $70 billion of unpaid principal balance to our service portfolio. That's a 15% increase compared to the 2023 year-end balance. This growth represents 220,000 new clients who represent prime candidates for future purchases, home equity loans, and rate and term refinances. As of September 30, our mortgage servicing portfolio included 2.6 million loans with $546 billion of unpaid principal balance. In the quarter, we generated $374 million of cash revenue from our servicing book, which represents approximately $1.5 billion on an annualized basis. We ended the third quarter with $3 billion of available cash and $6.8 billion of mortgage servicing rights. Together, these assets represent a total of $9.8 billion of value on the balance sheet. Our $3 billion of available cash consisted of $1.2 billion of cash on the balance sheet and an additional $1.8 billion of corporate cash used to self-fund loan originations. As of September 30, total liquidity stood at approximately $8.3 billion, including available cash plus undrawn lines of credit. As a testament to our sustained financial strength, I'm proud to share that Fitch recently upgraded Rocket Mortgage to investment grade. This makes Rocket Mortgage the first non-bank mortgage company to receive investment grade status from one of the three big rating agencies in almost two decades. This achievement highlights our strong balance sheet and financial profile and paves the way to access a wider range of funding sources at a much more favorable cost of funds. This added flexibility positions us to continue to allocate capital in service of our growth strategy. Turning to our fourth quarter outlook. Based on typical seasonality, we anticipate the mortgage market in the fourth quarter to be smaller than the third quarter. We expect adjusted revenue to be in the range of $1.50 billion to $1.200 billion. The midpoint of this range represents 27% year-over-year growth and reflects continued market share gains. We expect expenses in the fourth quarter to be in line with the third quarter. The fourth quarter includes marketing spend related to our brand restage and the annual renewal of banker licenses. As always, our forward-looking guidance is based on our current outlook and visibility. As we look ahead, we're excited and optimistic about what's to come. Over the years, I've seen us navigate a wide range of markets, consistently proving our ability to thrive through both highs and lows. What excites me most is that Rocket is now better positioned than ever before. This optimism isn't just mine; it's shared across our entire organization. Rocket has what it takes to disrupt, capture, and grow at scale in an industry where only the strongest thrive. We're making bold investments, setting ambitious goals, and accelerating execution, all with a clear focus on creating long-term value for our shareholders. With that, we're ready to turn it back over to the operator for questions.

Thank you. We will now begin the question-and-answer session. Your first question comes from the line of Jeff Adelson from Morgan Stanley. Your line is open.

Hi, good evening. Thanks for taking my questions. Maybe Brian, you could start with the drivers behind the revenue outlook for the fourth quarter. It looks like you're looking for roughly a 10% to 20% decline in the range there sequentially. Can you just break out maybe what you're seeing on volume versus gain on sale margin there or what other assumptions are sort of embedded in that guide? Thanks.

Jeff, thanks for your question. Let me start and then I'll ask Brian to chime in on the gain on sale margins. And I'd start by just saying that we feel very good about our guide and there's a few things that I think are important to just keep in mind when it comes to Q4. You typically expect the fourth quarter to be a little bit smaller than Q3. And when you really think about why that is, primarily it's due to just home buying slowing down a little bit post Labor Day. You've got kids going back to school, you've got the holiday season. So mortgage financing is just not typically as top of mind. The second thing that I would share is you've seen interest rates tick up a little bit, and that has obviously an impact on mortgage applications. So these two factors can compound and just have an effect on the quarter. But at the end of the day, the market size is going to be whatever it is; it's still a big market. Our big focus is really just on growing our share with great execution. And when you just put that together, we definitely believe we have a strong and confident guide. And I'll also just call out that the guide is 27% higher year-over-year for this quarter. And that guide reflects obviously our continued focus on market share gains and just our resilience to be able to grow in any market. And then let me ask Brian to comment further.

Sure. Thanks, Varun. Yes, I'll touch on the gain on sale margin piece. We do expect a slight expansion in gain on sale margin in Q4 compared to the third quarter. There's a little bit of conservatism built in there, and that's just typically because we see some competitors do some pricing plays around the holidays. If you think about it, and you're in their shoes, they have about the same amount of capacity. Either way, and when this volume ticks down, to Varun's point, every once in a while, we see some pricing pressure there. So we've considered that in the guide. And if you kind of just zoom out, we've said for a long time now that we expect gain on sale margins to expand. That doesn't happen in an exactly linear basis, but we are getting back to levels, particularly on a channel. If I look at direct-to-consumer and partner individually that are really close to the historical healthy levels that we've seen pre-pandemic.

And just on the volume assumption for the quarter, are you maybe just sort of embedding that the level of refi or just the current level of interest rates holds for the rest of the quarter? I know the app index for refi is down about 50% and total is down about 35% since quarter end last quarter. So just curious, are you assuming things maybe get a little bit better or just hold where they are right now?

Yes. I mean, Jeff, if we think about what we do when we set the guide, we obviously take into consideration all the information we have up to this point in the quarter. There's no question about that. It has been a volatile start to the quarter. To Varun's comments, rates have sort of moved in the opposite direction. So all of that is baked in the MBA applications, and we look at that; we look at optimal blue. But the most important thing, if I were to leave you with a takeaway is we truly believe this guide is taking share in the fourth quarter.

Your next question comes from the line of Ryan Nash from Goldman Sachs. Your line is open.

Hey, good afternoon, everyone. So maybe as we look ahead, industry forecasts are obviously calling for a nice pickup next year in originations, call it up to 30%. I wanted to drill in a little bit on your expectations into 2025, obviously, I'm sure things are fluid given how rates are moving around, but maybe just curious how you think about the size of the market, how much progress you can make on your market share goals? And then, just given your comments about the $150 billion and not needing to add any fixed cost, how do you think about the relationship between revenue and cost growth in an improving mortgage market? Thanks.

Thanks for the question, Ryan. I'd start by saying that the mortgage market obviously is not easy to predict. But in general, when you look at multiple factors, our outlook is optimistic. A few factors that I'll just comment on, then I'll ask Brian to jump in as well. First, the rate environment: there are multiple factors, like unemployment, CPI, consumer confidence, and in general, those things signal economic health. But the reality is inflation is still a part of the system. Until it's clear that it's working its way out of the system, you can expect that there's going to be a little bit of pressure on the 10-year treasury and then correspondingly the 30-year fixed rate mortgage. Next, we look at the housing market. Obviously, the housing market is a big part of the GDP. The good thing there is that we're seeing definitely some signs of rejuvenation. You've got more inventory. You've got more homes that are selling at or below list. You've got equity at an all-time high. When you look at housing inventory, we went from 3.4 months to 4.3 months. The number of homes listed for sale is up 29%. Affordability is up 5%. So some really good things happening there that give us confidence in 2025. We also look at the size of the market. To your point, good things are happening there. The forecasts are expecting that the market will be up over $2 trillion, that's up 28% compared to this past year. And that's a huge market. Regardless of conditions, there's plenty of share up for grabs. Most importantly, we really look at our execution and our ability to execute in any market. That's something that we feel tremendously confident in. A big part of that is our Superstack and what we believe is a tailwind to be able to execute against our Superstack relative to competitors. Putting all that together gives us a lot of optimism for 2025, being better than 2024. We know that 2024 was certainly better than 2023. That's how we think about our outlook. On the expense side, I’ll ask Brian to jump in.

Yes, sure. Thanks, Ryan, for the question. When it comes to operating leverage, the first starting point is to think about what we've done this year. To Varun's point, I do think 2024 will be a bit better than 2023. If you look back, I still think it's going to be viewed as a down market in the big scheme of things. We'll see how the fourth quarter shakes out. In every single quarter this year, we printed double-digit EBITDA margins. If I take the kind of year-to-date, three quarters in margin, that’s about 20%. We've done great work on the cost side over the past couple of years. What I'm most proud of is the expansion in EBITDA margins is driven by our top-line growth. If you look ahead to 2025, if you believe it's going to be healthier than 2024, which we do by 20% to 30%, a $2 trillion market is a healthy market. If you believe in some expansion there, of course, our share gain goals are what we're seeking to achieve. The third quarter is another example of that. The guide in the fourth quarter keeps us right on track to achieving those share gains.

Got it. Maybe as a follow-up, just thinking about opportunities, Brian, you talked about $70 billion of bulk MSR and flow year-to-date. Maybe just talk as you look ahead to 2025: what do you think the bulk purchase market for MSRs looks like? And maybe just talk about how much more capacity you have and what is the appetite to continue to add in this area of the business? Thank you.

Yes. Thanks, Ryan. So I'll start here. Varun, you may want to add in, but it's definitely an area that we're very excited about. When we talked about our capital waterfall and we said we were interested in deploying capital, MSRs still remain at the top. You mentioned the $70 billion. One of the things I'm most excited about, and you guys have all seen the news, is our recent partnership with Annaly. Annaly is a world-class asset manager. In our business, the flywheel effect we've been driving for decades now is impressive. With an industry-leading 85% recapture rate, we're collecting servicing cash flows very efficiently. When you think about the revenue opportunity of the next loan compared to the cash flows you're collecting, it's 20x that. So I expect us to continue to double down on those opportunities, both in the bulk acquisition market. The subservicing aspect is also very interesting. If you were in a seat where you didn't have an in-house origination capability but were a really good asset manager, protecting those cash flows has to be your number one priority. If you're thinking about choosing between subservicers, you have one sitting here that has a J.D. Power multi-year winning experience and does it well, and you also have something that others can't offer, which is this recapture rate. The recapture rate is the thing that allows an asset manager to protect against CPR or prepayment risk. I expect it to be a big part of our strategy going into 2025.

I would just add that this example with MSRs and extensibility showcases the power of the platform. It illustrates how we scale beyond our four walls because we've earned the right to take these capabilities to benefit others like Annaly. You'll also see us doing the same thing with integrating our technology as a platform to serve as the mortgage platform for banks. The same platform is being extended to create value for brokers via TPO. Each of the parties that we extend the capabilities to become beneficiaries of that innovation. As we invest in our platform, the investments in technology, AI, insights, notifications, CRM capabilities, mobile, data-driven personalization will only enhance our recapture capabilities such that the power of the platform lies in its extensibility.

Thanks for the color, guys.

Your next question comes from the line of Mark DeVries from Deutsche Bank. Your line is open.

Yes. Thanks. Brian touched on this at a high level, but was hoping to get a little more detail on how your rate locks moved during the period in the quarter when mortgage rates were down closer to 6%, both purchase and refi? And how they moved as rates headed back up? And also, any context around how gain on sale margins compared in the busier period versus slower periods.

Yes. Thanks, Mark. I appreciate the question. There was a two-week window in September—mortgage rates came down to the low-6s. So, when rates get down to the low-6s, it proved that we're off to the races. You have about two years of mortgage production north of that. So there's definitely a bunch of consumers who can benefit. That's the first thing to note; that's sort of your Mendoza line. But the second is if you think about how to capture that opportunity, it gives us proof points into what we're building and how impactful it is. You had a very short window with very high intent consumers and a lot of consumer demand. The ability to scale up very quickly and capture that is exactly what differentiates us from our competitors. It's about being able to handle processing, underwriting, and closing perspectives. The client coming in with high demand and a client coming in with low demand expects the same level of service. That is important but also about taking that demand and effectively allocating it to your bankers to keep them efficient and productive. That is crucial.

The only thing I'd add is that the reason we're so obsessed with AI and our investments in Rocket Logic is that it's driving big efficiency gains. We're on track to save our team members 800,000 hours annually, and we think there are gains to be had in the future as well. Our focus is also automating client interactions, automating underwriting, applying models to capital market infrastructure, and automating document processing. This investment will ultimately transform our response to market opportunities.

Got it. Thank you.

Thanks, Mark.

Your next question comes from a line of Derek Sommers from Jefferies. Your line is open.

Hi, good afternoon, everyone. I was wondering if you could share any incremental detail on the Annaly partnership, maybe portfolio characteristics or how the recapture economic share is going to work.

Yes. Thanks for the question, Derek. We don't disclose the economics of our partnerships, but it’s safe to say when you look at the things that Annaly is good at being a world-class asset manager, protecting against prepayments is very important to us. That’s where we come in. We clearly have a sub-servicing agreement, as expected. We hope to do that very efficiently if you just look at our own servicing. The more interesting part about this deal is really the recapture opportunities. We think that's a superpower we can offer. So we're happy to do that for Annaly. It truly makes a win-win with the partnerships.

Got it. Thank you. And then just to change gears for a second, on second lien products, what kind of behavior are you seeing with the consumer there? Are you viewing this product as potentially interest rate agnostic?

I'll start, and then Varun, you can add too. Yes, I think there's a lot of room to run in that product. There's no question about it. If you just study the note rates of all the mortgages outstanding, there's definitely a chunk that's north of 6% and potentially available for rate and term refinance. A large chunk is at 3%, 3.5%, and likely will remain there unless the homeowner is planning on moving. Therefore, for them, the home equity product is a great offering and can last. We saw during the window when rate and term refinances became more favorable that cash-out can make more sense as rates start touching 6%. We’re happy to do that product for a client where it makes sense. Layering on that second lien makes a lot of sense for the client.

I would just add that our approach is to innovate and meet our clients where they are. If we see a market opportunity, we will build products and services to meet that. There's room to grow there. We also build products not just for our existing client base but also for our new clients. What we've seen is that these types of products attract clients to the Rocket brand, and we can then offer them additional products and services. That allows us to become their lender for life.

Got it. Thank you for taking my question.

Your final question comes from a line of Doug Harter from UBS. Your line is open.

Thanks. Just hoping we could talk about expenses and just take it from a different angle. Given the capacity you said of about $150 billion, is there an opportunity given the outlook for volumes to take out fixed costs, even if that means that capacity comes down somewhat?

Hey, thanks for the question, Doug. The way I'd answer that is our primary focus is capturing share and growing into the market. We just talked about our views on 2025, and admittedly Q4 has been more volatile than anyone would like, but we’re still bullish on the 2025 outlook being higher. Our focus is to capture share, grow into a larger market and do it with a relatively flat fixed cost base. That increases our operating leverage. If I look at the numbers from Q2 to Q3, I think Q3 expenses were up mid-3% from Q2. But if I look at that on a rate lock basis, volume was up 20%. You can see us doing exactly what we said in terms of building that operating leverage.

Appreciate that, Brian. I guess, how do you think about recognizing the importance of having capacity to take advantage of those pockets like you saw in 3Q? How do you think about what is the right level of kind of spare capacity versus having too much capacity for the market opportunity, even factoring in the growth ambitions?

I would just say, Doug, that I think what we have right now is the perfect capacity. We're not looking to sort of expand or detract. At the end of the day, it's a huge market. Our team members provide incredible value, and they’re going to scale through the investments we're making in technology. So we feel good about our capacity. That allows us to take share and grow, especially as technology continues to optimize our team members' efficiency. It’s a big market, and we're very ambitious about our growth aspirations.

Great. I appreciate the answers. Thank you.

Thanks.

That concludes our question-and-answer session. I will now turn the call back over to Varun Krishna for closing remarks.

Well, thank you, everyone for listening to our call. We're excited and look forward to speaking with you again next quarter. Thank you.

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