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Despite rising rates, Rocket makes $1 billion in Q1 profit

Based in Detroit Rocket companiesthe parent of rocket mortgagegenerated a whopping $1 billion profit in the first quarter, up from $865 million in the prior quarter.

Compared to its main competitors, the lender seems to be in a comfortable position. United Wholesale Mortgage (UWM) posted a much lower profit of $453.2 million from January to March, supported by adjustments to the fair value of mortgage servicing rights (MSR). Meanwhile, LoanDeposit suffered a loss of $91.3 million during the same period.

But Rocket has its own challenges. Loan origination is declining as purchase volumes need to increase rapidly to replace funds lost due to soaring mortgage rates. Analysts have started to wonder if the company will turn a profit in the next few quarters. Meanwhile, senior executives say they will protect margins.

“The rapid rise in interest rates this year has been the largest in over 40 years, with the 30-year fixed mortgage rate now north of 6% for the first time in over a decade,” he said. said Jay Farner, vice president and CEO of Rocket Companies, said in a call with analysts. “Rocket has always successfully weathered turbulent times by protecting margin and profitability.”

The Detroit-based company reached $54 billion in closed loans from January to March, up from $75.8 billion in the previous quarter and $103.5 billion in 2021.

The sales margin increased by 21 basis points to 3.01% in the first quarter. “Margins included one-time benefits from rapidly moving bond markets, which increased the gain-on-sell margin by 15 basis points,” said Julie Booth, chief financial officer of Rocket Companies.

Executives are seeing more origination and margin declines in the second quarter as the market sees unprecedented rate increases. The volume of closed loans is expected to be between $35 billion and $40 billion and the profit margins on sale between 2.60% and 2.90%.

Executives said they are disciplined with spending to generate profits. “In the second quarter, we took significant cost reduction measures, including the establishment of a voluntary career transition program for certain team members; reduce our production costs, in particular by renegotiating contracts with major suppliers; and shifting our marketing spend,” Farner said.

In late April, Rocket offered buyouts to 8% of its staff in its mortgage operations and securities teams, bringing in a one-time charge between $50 million and $60 million but saving $40 million per quarter.

The company expects second-quarter spending to decline by about $200 million to about $1.4 billion due to lower production spending and savings on a partial quarter of the buyout program .

In addition to cost reductions, Rocket is also considering strategic acquisitions to increase assembly volumes, primarily in purchase loans. The company’s purchase volume was up 43% year-over-year, but it only accounted for 16.7% of the lender’s total mix last year.

“I’ve been very confident in our ability to grow buying organically,” Farner said, responding to an analyst about the possibility of making strategic investments. “That said, there are opportunities that could allow us to look into the buy market.”

In the services portfolio, the outstanding principal balance increased 17% year-over-year to $546 billion as of March 31. Rocket has 2.6 million customers in the service portfolio and generates $1.4 billion in annual revenue in recurring service fee revenue.

Rocket companies actions closed Tuesday at $7.81, down 7.02% from the previous day. The shares fell 3.33% in the secondary market after the earnings report.