Rocket has a plan to drastically cut costs. Does it go far enough?

Executives at Rocket Companies are engaged in a very tricky balancing act: they must drastically reduce expenses to return the company to profitability. And at the same time they must continue to invest in their business to avoid losing further ground in a mortgage market that doesn’t play to Rocket’s natural strengths.

The lender has made several big reductions in force in recent months. The question is whether it goes far enough.

“If we look at the fourth quarter of 2022 compared to that quarter of 2021 on an annualized basis, we have reduced our expense base by almost $3 billion, or more than 40% of total costs,” Brian Brown, Rocket’s CFO, told analysts on the Tuesday night fourth quarter earnings call.

“We committed to a further reduction in total expenses from the third quarter to the fourth quarter of $50 million to $100 million. And we far exceeded that estimate, reducing expenses by $202 million during the quarter,” Brown added.

In all, Rocket reduced its expenses from $6.7 billion in 2021 to $5 billion in 2022, when origination volume and revenues were in free fall.

So far, the cost-cutting initiatives have not been enough to push the company back to profitability. Rocket lost $137 million in 2022 compared to the $4.5 billion profit realized in 2021.

But how far did the lender go in right-sizing its structure in 2022? What do analysts expect for the coming quarters as the company seeks to break even? 

Here are some takeaways from the company’s 2022 annual 10K report, released on Wednesday.

Rocket’s shrinking workforce 

Rocket ended 2021 with approximately 26,000 employees based in the United States and Canada. (In 2018, the company invested in the Canadian mortgage tech firm Lendesk, and in 2020, it acquired the mortgage business Edison Financial, which it renamed Rocket Mortgage Canada in 2022.) 

News of Rocket Companies’ headcount reductions first became public in April 2022, when the lender offered buyouts to 8% of its staff at Rocket Mortgage and Amrock Title. At that time, the company did not specify whether it would institute layoffs should the 2,000 or so workers selected for buyouts not agree to the packages. 

Ultimately, it offered additional buyouts when market conditions deteriorated in August,  without disclosing further details on how many buyouts were taken. Employees who left the company received a package with several months of salary, a portion of their banked time off, benefits coverage through 2022 and career transition services. 

Rocket ended 2022 with 18,500 employees, a 7,500 or 28.8% reduction compared to 2021, SEC filings show. It’s unclear the share of voluntary buyouts, potential layoffs and regular attrition on the headcount reduction. Rocket declined to specify a breakdown.

In a statement issued to HousingWire, a spokesperson said that 2022 was challenging for the housing and mortgage industry.

“Having experienced many market cycles in our 37-year history, we recognized this tough market would limit career growth options in certain areas of the business,” Rocket spokesperson John Perich said. “With a focus on our responsibility to provide pathways to career success, we offered select team members the option to participate in a voluntary career transition program. Those who chose this option received significant cash incentives, extended healthcare and more. Additionally, the company selectively backfilled critical positions as team members exited the company to better align headcount with market demand.”

Top wholesale lender United Wholesale Mortgage (UWM), which overtook Rocket to become the largest originator in America in the third quarter, ended 2022 with 6,000 employees, down from 8,000 employees in 2021. 

“In response to significant increases in interest rates, our loan origination volume in 2022 decreased by 44% and our number of team members decreased by 25% as compared to the prior year end. However, during 2021, our loan origination volume increased by 24% while our number of team members increased by 7%, as compared to the prior year-end,” UWM wrote in its 10k report. 

Meanwhile, according to SEC filings, top correspondent lender Pennymac finished 2022 with 4,000 domestic employees, 42% down from 6,900 in 2021. 

Billions cut out in nine months 

“It’s easy to sit on these calls and talk about expense reductions. The real work is the hundreds and hundreds of leaders inside the organization that have to go through that process. When Brian [Brown, Rocket’s CFO] talks about taking billions and billions of expenses out, we’ve accomplished that in nine months,” Jay Farner, Rocket’s CEO, who departs the company in June, told analysts. 

Cutting the workforce, however, typically results in more short-term costs. The SEC filings show Rocket incurred $81 million in costs associated with a career transition program last year, which included compensation packages, healthcare coverage, career transition services, and accelerated vesting of specific equity awards.

Last year, the company’s primary cost reduction was related to its workforce. Salaries, commissions, and benefits declined $600 million (-16.7%). Meanwhile, the company reported a $277 million reduction (-23.4%) in general and administrative expenses and $303.9 million (-24.3%) in market and advertising costs.

In the U.S. and Canada, Rocket increased the number of total corporate offices to 16 in 2022, up from 14 in 2021. The company also opened two additional client support locations in 2022 for a total of 11, but reduced the number of call centers to four, down from five in 2021. 

Reduced borrowing capacity

When refinancing business was plentiful in 2021, Rocket originated $351 billion in loans overall. But without refi winds at the sails and a smaller overall market, production fell to $133 billion in 2022. That’s why the lender is trimming its borrowing capacity. 

As of December 31, 2021, Rocket had 13 funding loan facilities providing an aggregate maximum principal amount of $24.5 billion in loan origination availability, SEC filings show. As of December 31, 2022, the company’s funding facilities were cut to 10, with a maximum capacity of $17.5 billion. 

Rocket is borrowing under these financing facilities at a variable rate, according to the 10K document. This exposes the lender.

As interest rates increase, the company’s debt service obligations on certain variable-rate indebtedness will also increase. However, “in the future, we may enter into interest rate swaps, which involve the exchange of floating for fixed-rate interest payments, to reduce interest rate volatility,” SEC filings state.

What’s next for Rocket? 

According to Rocket executives, the company expects its financial position to improve in 2023. But slowly. Adjusted revenue is expected to come between $700 million and $850 million in the first quarter of 2023. It came in at $683 million in the fourth quarter of 2022, a massive decline from the $2.4 billion recorded during the same time in 2021.

Brown told analysts that operational expenditure is expected to be “slightly higher” from January to March than the previous quarter due to increased production and seasonal factors. HousingWire reported that the company had imposed two layoff rounds this year. 

“We expect Q1 to be relatively consistent with Q4, with a slight increase on an absolute basis primarily as a result of seasonal items such as payroll taxes, 401k resetting, and higher variable expenses associated with increased production in revenue,” Brown told analysts.

“It is worth noting that the expense total for Q1 2023 is expected to be roughly 30% less than the Q1 2022 figure. Looking ahead, we will continue to be diligent in managing expenses as we continue to monitor the macro environment with an eye towards profitability.”

Analysts at Jefferies wrote in a report that they see the company emerging stronger from this challenging cycle, but there will be pressure on most originators in the near term. 

“Rocket continues to make progress on rotating towards purchase [loans] and expanding new business lines/partnerships, which should diversify the business over time,” the analysts wrote. “We see near-term pressures on earnings per share but consider Rocket’s strategy of expense reductions ultimately returning the company to profitability after the originations market troughs.”