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Detroit-based Rocket Companies, the parent of Rocket Mortgage, generated a whopping $1 billion profit in the first quarter, up from $865 million the previous quarter. 

Compared to its main competitors, the lender seems to be in a comfortable place.  United Wholesale Mortgage  (UWM) reported a much lower profit of $453.2 million from January to March, buoyed by adjustments in the fair value of mortgage servicing rights (MSRs). Meanwhile,  LoanDepot  had a $91.3 million loss in the same period. 

But Rocket has its own challenges. Loan origination is dropping, as purchase volumes need to increase fast to replace refis lost due to surging mortgage rates. Analysts have started to question whether the company will deliver profits in the coming quarters. Meanwhile, top executives say they will protect margins.  

“The rapid increase 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 more than a decade,” Jay Farner, vice chairman and CEO of Rocket Companies, said during a call with analysts. “Rocket has always navigated successfully through turbulent times by protecting margin and profitability.” 

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

The gain-on-sale margin grew 21 basis points to 3.01% in the first quarter. “Margins included one-time benefits due to the rapid move in bond markets, which increased gain on sale margin by 15 basis points,” said Julie Booth, CFO at Rocket Companies. 

Executives see more declines in origination and margins in the second quarter as the market experiences unprecedented rate increases. Closed loan volume is expected to be between $35 billion and $40 billion, and gain on sale margins between 2.60% and 2.90%. 

Executives said they are disciplined with expenses to deliver profits. “In the second quarter, we’ve taken significant cost reduction measures that included implementing a voluntary career transition program to certain team members; reducing our production costs including renegotiating large vendor contracts; and shifting our marketing spending,” Farner said. 

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

The company expects second-quarter expenses to be down approximately $200 million to roughly $1.4 billion due to lower production expenses and savings from a partial quarter of the buyout program.  

Besides cost reductions, Rocket is also considering strategic acquisitions to increase origination volumes, mainly in purchase loans. The company’s purchase volume grew 43% year over year, but it represented only 16.7% of the lender’s total mix last year. 

“I’ve been very confident about our ability to grow purchases organically,” Farner said, answering an analyst about the possibility of making strategic investments. “That said, there are opportunities that may allow us to lean into the purchase market.” 

Regarding the servicing book, the unpaid principal balance increased 17% year-over-year to $546 billion as of March 31. Rocket has 2.6 million clients in the servicing portfolio and generates an annual $1.4 billion in recurring servicing fee income. 

Rocket Companies shares closed on Tuesday at $7.81, down 7.02% from the previous day. The stocks were down 3.33% in the aftermarket following the earnings report.