Rocket’s New Guard Aims for AI-Fueled Rebound After Bumpy Era

Paige Smith
7 min read
0
In this article:

(Bloomberg) -- The past year has been a tumultuous one for Rocket Cos., one of the nation’s largest mortgage lenders: the firm reported its first annual loss as a public company, navigated a historic drop-off in mortgage originations and replaced its chief executive officer.

Most Read from Bloomberg

But for new CEO Varun Krishna, the downturn has turned into a chance to reshape how Rocket does home lending. His bet, an expensive one, is that artificial intelligence can fix a process that makes half of buyers cry and turn his company into the dominant force in a market that has long seen cutthroat competition between hundreds of firms.

Plenty stands in the way of that ambition. The plunge in refinancings last year dropped Rocket to third place in the closely watched mortgage rankings, and rivals are also pouring money into technology in a bid to win over customers. Many factors are out of the firm’s control, as stubbornly high rates and home prices threaten an extended slowdown in the mortgage market.

Rocket, which was among the vanguard of nonbank firms to grab share from major banks after the financial crisis, is laying out lofty visions in an effort to revive its stock. The Detroit-based company is pushing further into real estate agency and title insurance businesses to grab more slices of the $5 trillion US home-buying economy. And it thinks it can fundamentally change an experience that drives many borrowers to despair.

“It’s just a very difficult, very complex process that is not particularly innovative when you think of the impact technology can have,” Krishna, 42, said in an interview, pointing to a 2022 Zillow survey that found that 50% of homebuyers — and more than 60% of millennial and Gen Z buyers — cry at least once while purchasing a home. “A transaction that’s as important as this, that’s as sacred as this, you should feel happy.”

Shares are less than half of their 2021 peak and earnings have been volatile. Net income was more than $6 billion in 2021, only to plunge almost 90% in 2022, and then swung to a $390 million loss last year. Part of that is due to Rocket’s historical focus on refinancing, which made it more rate-sensitive than rivals that skewed more toward home purchases.

To fix that, Rocket is adopting “a more balanced playbook,” Krishna said. That includes building out offerings to gain share in the purchase market and push further into other financial services like credit cards and personal loans — a bid to smooth out earnings so the firm’s profits won’t be as tied to low interest rates.

‘Moving Rapidly’

It’s also spending heavily on artificial intelligence — already more than $500 million over the last five years — and deploying homegrown tools for the most mundane and time-consuming tasks involved in getting a home loan. That frees up more employee time to sort out the thornier issues that may crop up along the way.

Krishna and Dan Gilbert, the firm’s founder, chairman and majority owner, are also adding tech-savvy executives to Rocket’s nearly 15,000-strong workforce. They recruited Shawn Malhotra as Rocket’s first chief technology officer earlier this year. They also installed Andreessen Horowitz general partner Alex Rampell — who Krishna described earlier this year as an “AI thought leader” — on the board of directors.

“The world is clearly moving rapidly toward AI,” Gilbert said. “Processing a mortgage is collecting, moving and reviewing data – and AI can interpret data in seconds.”

Shareholders have bought into the strategy so far, sending the stock up 36% this year. But at $19.74 as of Thursday’s close, shares are only 9.7% above the 2020 initial public offering price, while the S&P 500 Index has jumped 67% in the same period.

The timing and extent of a mortgage comeback is largely in the hands of the Federal Reserve. Investors expect the central bank to start cutting rates next month. But the average rate for a 30-year fixed mortgage is hovering around 6.5%, while a majority of borrowers are locked in at rates under 5%, according to the Mortgage Bankers Association. That means the Fed would need to cut quite a bit before most borrowers would be in a position to refinance.

Economists at MBA, a trade group representing both bank and nonbank mortgage lenders, wrote in a report earlier this month that they expect originations to increase 20% to $1.76 trillion this year and then another 18% next year. That would still leave annual volume at less than half of the 2021 record.

Competitors, Regulators

Competition is stiff: United Wholesale Mortgage and PennyMac Financial Services Inc. claimed the top two spots in mortgage origination volume last year, pushing Rocket into third place for the first time since 2018, according to data from Inside Mortgage Finance. In a sign of how the industry has changed, the top two spots that year went to traditional banks Wells Fargo & Co. and JPMorgan Chase & Co.

UWM — also based in the Detroit area — has been gaining market share for years, growing to become Rocket’s biggest rival. The two firms have tussled publicly over the years, and it’s even become personal for their billionaire chairmen: when UWM’s Mat Ishbia sought to buy the Phoenix Suns last year, Gilbert, who owns the Cleveland Cavaliers, was the only member of the NBA board of governors to abstain from approving the deal, ESPN reported earlier this year.

Beyond the competitive landscape, Rocket’s top brass will also have new issues to navigate if they achieve their goals. For starters, regulators have been ramping up scrutiny of nonbanks. The Financial Stability Oversight Council, led by Treasury Secretary Janet Yellen, found in a report earlier this year that nonbank mortgage lenders pose unique risks and vulnerabilities that can weaken financial stability.

That amplified earlier warnings from President Joe Biden’s regulators that oversight of nonbanks hasn’t kept up with their growing footprint. FSOC laid out a pathway last year for labeling nonbanks as systemically important financial institutions, a move that could result in significantly more oversight — and costs — for the likes of Rocket.

Krishna, for his part, isn’t fazed by the report nor the closer scrutiny. “The operative word is really liquidity,” he said. “If you’re going to be a lender, you need to be well-capitalized, you need to have a fortress balance sheet.”

The history of companies dominating the mortgage industry is littered with cautionary tales. Take Wells Fargo: unlike most of its peers, the firm doubled down on the mortgage business after the 2008 financial crisis, growing to churn out one of every three US home loans. Then, a series of scandals erupted, and the firm was fined repeatedly over costumer abuses including in its mortgage business. By 2022, executives were drafting plans for a retreat.

More than a decade before that, Bank of America Corp. bought Countrywide, then the largest US home lender, at the height of the financial crisis. The $2.5 billion purchase ultimately cost Bank of America over $50 billion more to resolve regulatory probes and litigation. By 2018, its mortgage fee revenue line — which once regularly topped $1 billion a quarter — was so small that the firm stopped breaking it out.

Amid all the change for Rocket and the mortgage industry as a whole, Gilbert, who founded the company in 1985 and still owns more than 71%, has stayed closely involved. He’s become a Detroit staple, investing billions in the city where he grew up because, as Detroit Mayor Mike Duggan said an interview, “he wants the Detroiters growing up today to have the same chance he did.”

Detroit filed the then-largest municipal bankruptcy in US history in 2013. A decade later, the city grew in population for the first time in over six decades. Among the area’s latest residents: Rocket CEO Krishna, who Gilbert lured to Motown from San Diego for the job. Krishna said the tipping point for him to take the job occurred during a visit after several virtual interviews: “There’s a huge movement that’s happening here,” he said. “I wanted to be a part of that.”

Krishna has already been touting the city’s comeback ahead of Rocket’s first investor day, scheduled for September. “I hope that everyone in this room will come visit us in Detroit,” the CEO said at an industry conference in June. “You’re going to get to experience this incredible city in a major, major phase of revitalization.”

Most Read from Bloomberg Businessweek

?2024 Bloomberg L.P.

Advertisement