Jay Farner likes to tell a story about his early days at Rock Financial, which would become Quicken Loans and eventually Rocket Mortgage. It was 1996 and Dan Gilbert, the founder and CEO, announced that the company’s mortgage bankers weren’t going to meet with applicants face to face. Instead, Farner recounted in an interview with tech outlet Protocol, they would do mortgages by telephone.
“We’re going to send our clients the applications, they’re going to sign it and they’re going to mail it back to us. That was new back then. Dan was really focused on the marketing component. How do we get clients directly to reach out to us? One of the funny things I recall is I structured a deal to buy fax machines and we told every client that we’d send them a free fax machine to make it easier to send the information back to us. I probably bought maybe 500 or 600. That didn’t work because setting up the fax machine proved more complicated than putting the documents in the UPS envelope.
“I share the story because that’s the culture we worked on creating, which is: Try something. Learn quickly. Adjust.”
With the Feb. 13 announcement of his resignation, Farner, known as the marketing whiz behind groundbreaking “Push Button. Get Mortgage,” campaign, has forced Rocket Companies, the parent of Rocket Mortgage, to show the same adaptability in finding a new leader.
One caveat: Farner’s successor will be tasked with getting the company on the right track amid one of the most challenging mortgage markets in decades. And the new leader will have to do so as the company attempts to transition from a refi-reliant mortgage lender into a multi disciplined fintech.
“A change at the CEO level prior to a pending earnings announcement presents some consternation, particularly within a very challenging mortgage origination market and taking into account Mr. Farner bought 5M+ shares of stock over the past year,” analysts at Piper Sandler wrote in a report published last week. “That being said, we believe Rocket remains in capable hands with a deep management team.”
HousingWire interviewed several of the lender’s analysts to better understand the challenges and opportunities ahead for Rocket’s new CEO. A Rocket spokesperson declined to comment on the topic, as the company is in a quiet period leading to the Feb. 28 earnings call.
C-Suite changes
News of Farner’s resignation came as a surprise to analysts and investors, and for good reason. Farner is a Rocket lifer, having spent his entire 27 year professional career at the Detroit company. Notably, the 49-year-old also relinquished his seat on the board this month, an unusual move at a company that typically keeps its senior leadership in the Rocket orbit.
Bill Emerson, Farner’s predecessor as CEO at Rocket Companies, will be moving over from Gilbert’s holding company Rock Holdings to again run Rocket Companies. Emerson has also taken Farner’s board seat.
In Emerson, Rocket has a seasoned leader who knows the mortgage playbook. Rocket says it will look both internally and externally for Farner’s permanent replacement.
Farner’s resignation also follows a broader series of changes in the lender’s C-Suite over the last six months. In November, CFO Julie Booth and general counsel Angelo Vitale retired after over two decades at the company. Brian Brown and Tina John, respectively, replaced them. In January, Austin Niemiec, the head of its wholesale division Rocket TPO, was promoted to chief revenue officer, with Mike Fawaz tapped to lead wholesale. (Bob Walters, who was promoted to CEO of Rocket Mortgage in January 2022, remains in place.)
Despite much of the talk out there, buyers are not coming back until home values come down dramatically – you probably won’t see a tremendous pickup. It seems that we’re going to be at a higher rate environment for a while.
Kevin Heal, Argus Research
The changes are happening as Rocket looks to adapt its staffing levels and its overall strategy in a depressed mortgage market. It has offered voluntary buyouts to workers, made at least two rounds of layoffs, and, according to a recent Wall Street Journal story, been stung by declining employee morale and missed financial targets. Rocket Companies lost money in the third quarter of 2022 and could be looking at multiple quarters of consecutive losses.
Looming large still is the transition from mortgage lender to fintech, a strategy Farner set in motion following the acquisition of Truebill – now called Rocket Money. The company paid $1.275 billion in cash for the app in December 2021.
The path to breakeven
Declining mortgage rates were the cause of optimism across the mortgage industry in January. But data indicating the economy has been resilient to the Federal Reserve’s tightening monetary policy brought mortgage rates closer to the 7% mark again in February. The message? Volatility will be the norm in 2023. At least for several more quarters.
“It’s a tough time for any mortgage company. Rates are ticking back up recently,” Kevin Heal, chief compliance officer and senior analyst for financial services at Argus Research, said in an interview.
“But honestly, despite much of the talk out there, buyers are not coming back until home values come down dramatically – you probably won’t see a tremendous pickup. It seems that we’re going to be at a higher rate environment for a while,” Heal added.
Demand in the mortgage market has declined roughly 60% to 65% due to higher interest rates, affecting both refinancing and purchase markets, according to Kevin Barker, a managing director and senior research analyst at Piper Sandler, who covers mortgage companies.
“This massive decline in demand has forced Rocket to reduce their capacity by shrinking their business,” Barker said in an interview. “But when you have a revenue stream that is shrinking, it is also often very difficult to reduce your expense base as quickly as your revenues are dropping.”
That happened in the third quarter of 2022 when Rocket posted its first unprofitable quarter since going public two years ago. Rocket’s revenue dropped 58% from a year ago, while its expenses declined 30%. Ultimately, the lender reported an adjusted net loss of $166 million from July to September.
We model for Rocket to return to profitability in the third quarter of 2023.
Kyle Joseph, a specialty finance equity research analyst at Jefferies
According to Barker, who has given a “neutral” recommendation on Rocket’s stock, the company is close to breakeven. However, Barker estimates it is “probably losing money in the fourth quarter of 2022 and could lose money in the first quarter of 2023 as well.”
Barker projects that the first half of 2023 will be tough for Rocket, with the lender having to cut the operating expenses significantly to generate a profit. Regarding the second half of the year, the analyst said demand and margins should improve over time as capacity is coming out of the system.
Kyle Joseph, a specialty finance equity research analyst at Jefferies, estimates Rocket may take longer to turn a profit.
“We model for Rocket to return to profitability in the third quarter of 2023,” he said. Joseph said Rocket is facing similar pressures as its competitors, but he has “no doubts about the company’s ability to emerge on the other side due to its size and scale.”
Despite the challenges ahead, the next Rocket CEO will inherit a company with three main competitive advantages compared to its peers, according to analysts. Rocket has a well-known brand. Its operating margins have been superior to the industry over the last five to seven years. And the company tends to be the best at recapturing loans in its servicing portfolio.
Will Rocket become a fintech company?
During Farner’s leadership, Rocket accelerated the plan to diversify its revenues from mortgage loans with other businesses. It reached 24 million Rocket user accounts in the third quarter of 2022 through Rocket Homes, Rocket Auto, Rocket Solar and Rocket Money.
Additional products and services will be easier than the work we did for mortgages. But mortgages feed everything. We’ve done a great job, I believe, of strengthening our brand. But the cost to market without a way to engage clients over the lifetime is too great. That’s not sustainable unless you have all the components. We focus on the lifetime value of the client when we make a marketing dollar investment.
Jay Farner, CEO Of Rocket Companies
However, the fruits of this strategy’s success have yet to come despite billions in dollars in investments. Mortgages still represent about 85% of Rocket’s revenues (including gain-on-sale of loans and loan servicing income), according to the third quarter earnings filings with the Securities and Exchange Commission (SEC).
Rocket’s strategy is to bring members of these other business lines to maintain a relationship before they are ready to buy a home.
“To offer real value to the customer, you need to have multiple products and services,” Farner said in the February 2022 interview with Protocol. “The mortgage, which is incredibly challenging and difficult, is where we started. I like the fact that we’re able to figure that out because the additional challenges we take on typically require less of everything compared to what a mortgage requires. So additional products and services will be easier than the work we did for mortgages. But mortgages feed everything. We’ve done a great job, I believe, of strengthening our brand. But the cost to market without a way to engage clients over the lifetime is too great. That’s not sustainable unless you have all the components. We focus on the lifetime value of the client when we make a marketing dollar investment.”
Farner added: “We’ve got to know that our platform will monetize that at some point in time, whether it’s through a Truebill subscription, a purchase of an automobile or the purchase or the refinance of a home, a debt consolidation loan or putting solar panels on somebody’s home. We have to have that certainty that we’ll be able to capture that lifetime value.”
There’s a lot of technology involved in what Rocket makes. But a lot of it is also related to lending and being able to sell the loans they create. They are extremely early in the process (of becoming a fintech). We haven’t seen meaningful earnings, contributions from those various businesses.
Kevin Barker, a managing director and senior research analyst at Piper Sandler
Heal, of Argus Research, said there’s at minimum a short-term risk in that strategy.
“Rocket is acquiring a customer base that, down the road, will want to purchase a home and get a mortgage through Rocket. The problem is the affordability may not be there for the next couple of years. Will the next generation be loyal when it comes to getting a mortgage?”
Barker added that, as the company’s CEO, Farner had a critical role in transforming Rocket into what would be considered a fintech company – companies receiving a fee for services they’re providing as financial institutions.
“There’s a lot of technology involved in what Rocket makes. But a lot of it is also related to lending and being able to sell the loans they create,” Barker said. “They are extremely early in the process (of becoming a fintech). We haven’t seen meaningful earnings, contributions from those various businesses.”
Another challenge, according to Joseph, is that the new CEO of Rocket will also have to face a new reality for fintech companies on Wall Street.
“Fintechs have lost a lot of luster,” he said. “They were the belle of the ball, trading at crazy prices to revenue multiples. But things have come back to Earth.”
Farner’s leaving the company raises questions about how fast Rocket will pursue the fintech strategy. A clear sign will be given when the company announces Farner’s successor.
According to Heal, Rocket has two paths in choosing the next CEO: Rocket will stick to the company’s bread-and-butter business and hire a mortgage professional. Or the company will accelerate its strategy by hiring a CEO with a fintech background, and for the first time moving beyond its own stable of mortgage talent.
“It remains to be seen,” Heal said.
James Kleimann contributed reporting to this article.
