Rocket Companies(RKT) - 2020 Q4 - Annual Report

Risk Factor Summary The company faces material risks from the COVID-19 pandemic, technological changes, cybersecurity threats, product development, servicing advance recoveries, loan repurchase obligations, fraud, third-party vendor reliance, negative public opinion, intense competition, interest rate fluctuations, and secondary home loan market disruptions Summary of Key Risks The company faces material risks from the COVID-19 pandemic, technological changes, cybersecurity threats, product development, servicing advance recoveries, loan repurchase obligations, fraud, third-party vendor reliance, negative public opinion, intense competition, interest rate fluctuations, and secondary home loan market disruptions - Key risks include the COVID-19 pandemic's impact on mortgage origination, servicing, and liquidity; the need to adapt to technological changes; and the threat of cyberattacks and data breaches[11] - Operational risks involve challenges in developing new products, managing servicing advances, potential loan repurchase requirements, and fraud[11] - Market risks are driven by intense competition, interest rate changes, and potential disruptions in the secondary home loan market, including the MBS market[11] Part I Item 1. Business Rocket Companies is a Detroit-based tech-driven holding company simplifying real estate, mortgage, and eCommerce transactions through its 'Rocket' brand and platform, operating via Direct to Consumer and Partner Network segments - Rocket Companies is a tech-driven holding company in real estate, mortgage, and eCommerce, aiming to simplify complex transactions with technology and an industry-leading client experience[13] - The company's core principles, or 'ISMs,', emphasize 'Love our team members. Love our clients,' fostering an empowered and passionate team[14] - Since 1985, Rocket Mortgage, the flagship business, has provided over $1 trillion in home loans and expanded into real estate services, personal lending, and auto sales[15] Overview Rocket Companies is a Detroit-based holding company specializing in tech-driven real estate, mortgage, and eCommerce, committed to simplifying complex transactions and providing an industry-leading client experience through its 'Rocket' brand - Rocket Companies is a Detroit-based holding company with tech-driven real estate, mortgage, and eCommerce businesses[13] - The company's mission is to simplify complex and stressful transactions using technology, aiming for an industry-leading client experience[13] - The 'Rocket' brand is recognized for providing simple, fast, and trusted digital solutions[13] Rocket Platform The Rocket Platform connects various businesses to deliver innovative solutions, including Rocket Mortgage (largest mortgage lender), Amrock (title, valuation, settlement services), Rocket Homes (home search and agent referral), and Rocket Auto (automotive retail marketplace) - Rocket Mortgage is the nation's largest mortgage lender, offering a digital solution for fast, tailored mortgages[18] - Amrock provides title insurance, property valuation, and settlement services, integrated digitally into the Rocket platform[18] - Rocket Homes offers a home search platform and real estate agent referral network[18] - Rocket Auto is an automotive retail marketplace providing centralized car sales support[18] Segments The business is organized into two segments: Direct to Consumer, which engages clients directly through the Rocket Mortgage app and performance marketing, and Partner Network, which leverages partnerships with consumer-focused organizations, brokers, and mortgage professionals - Direct to Consumer segment engages clients via the Rocket Mortgage app and Rocket Cloud Force, using performance marketing channels[21] - Partner Network segment utilizes the Rocket Professional platform for marketing and influencer relationships, and mortgage broker partnerships (Rocket Pro TPO)[22] - Direct to Consumer revenue comes from originating, closing, selling, and servicing agency-conforming loans, including title and settlement services[21] - Partner Network revenue is primarily from gain on sale of loans, including origination fees, secondary market sales, fair value of MSRs, and hedging gains/losses, with no performance marketing costs[23] Technology The company's technology platform drives continuous innovation, focusing on advanced algorithms for client interface, automation for operational efficiency, and external partner integration, earning it 1 recognition for Mortgage Origination by J.D. Power for 11 consecutive years - The technology platform enables profitable scaling and supports complex transactions through continuous innovation in digital products and infrastructure[24] - Technology efforts focus on three axes: exceptional client interface via advanced algorithms, automation for operational productivity, and seamless integration for external partners[25] - The core platform uses a data-intensive engine for complex loan processes, with modular development allowing agile enhancements and automation to reduce human error[26] Marketing Rocket Companies leverages its national 'Rocket' brand, a significant digital-first brand recognition, with over $6 billion in marketing investment since inception, using its in-house agency and data analytics to optimize targeted strategies and increase lead-to-loan conversion - The national 'Rocket' brand provides a competitive advantage with significant digital-first recognition, backed by over $6 billion in marketing investment[27] - In-house marketing agency creates bold, nationally recognized campaigns, such as the 2021 Super Bowl ads ranked 1 and 2 by USA Today's Ad Meter[27] - Data analytics and proprietary technologies enhance marketing efficiency, optimizing digital performance to reach the right clients and increase lead-to-loan conversion[28] Servicing The company is an award-winning mortgage servicer with over 90% net client retention, building long-term relationships through a client-centric culture and technology, using recurring client touchpoints and financial data to identify opportunities for additional solutions and generate ongoing fee revenue - Award-winning mortgage servicer with a net client retention rate of over 90% annually, superior to industry peers and rivaling subscription models[29] - Servicing activities build long-term client relationships, leveraging client-centric culture and technology for a seamless digital experience[29][31] - Regular client touchpoints and financial data are used to identify opportunities for additional solutions, generating ongoing fee revenue and leads for other platform products[30] Competition The company faces intense competition from large financial institutions, independent mortgage banks, and fintech companies across various financial solutions, competing through constant innovation, an established digital-first brand, and a high-velocity, capital-light, cash-generating business model - Competition is intense from large financial institutions, independent mortgage banks, and fintech companies, across loan programs, interest rates, fees, and client service[32] - The company competes through constant innovation, an established digital-first brand, and a high-velocity, capital-light, cash-generating business model[32] - Technology is a significant differentiator, creating opportunities for platforms that combine superior client experience with faster closing speeds[33] Strong Economic Performance The company's strong economic performance is driven by mortgage origination fees and profitability, mortgage servicing fees, and other fee income from its diverse platform, benefiting from lower client acquisition and operating costs due to proprietary technology and marketing, leading to significant operating leverage - Revenue and cash flow are primarily generated from gain on sale of loans, net, which includes premiums, origination fees, investor reserves, fair value changes of IRLCs and loans held for sale, hedging gains/losses, and fair value of originated MSRs[34] - Mortgage servicing fees provide significant recurring income, with MSR value fluctuating counter-cyclically to interest rates, creating a natural hedge against market changes[39][40] - Other income streams include title, property valuation, and settlement services (Amrock), real estate agent referrals (Rocket Homes), auto sales (Rocket Auto), personal loans (Rocket Loans), and lead generation (Core Digital Media)[41] Mortgage Origination Fees and Profitability Mortgage origination revenue is primarily from gain on sale of loans, net, encompassing premiums, origination fees, investor reserves, fair value changes of IRLCs and loans held for sale, hedging, and originated MSRs, with the company aiming for profitability on the first transaction and leveraging segment-specific margins for operating leverage - Gain on sale of loans, net, includes net gain on sale of loans, loan origination fees, investor reserves, changes in fair value of IRLCs and loans held for sale, hedging gains/losses, and fair value of originated MSRs[34] - The company prices to be profitable on the first transaction, with subsequent product sales designed for higher marginal profit[36] - Direct to Consumer segment provides higher gain on sale margins, while Partner Network offers lower margins but with much lower client acquisition costs, contributing significant operating leverage[37] Mortgage Servicing Fees Significant income is generated from servicing loans through contractual recurring cash flows and ancillary revenues, with MSR value fluctuating with interest rates, creating a natural hedge where rising rates increase MSR value (offsetting origination decline) and declining rates decrease MSR value (offset by increased origination) - Significant income is generated from servicing loans through contractual recurring cash flows and ancillary revenues (e.g., late fees, modification incentives)[39] - MSR fee income fluctuates with the servicing portfolio size and model inputs; loan prepayments decrease servicing fee income[40] - Mortgage originations and servicing create a natural hedge against interest rate changes: MSR value increases with rising rates (offsetting origination decline) and decreases with declining rates (offset by increased origination)[40] Title, Services and Other Fee Income Other income is derived from various platform services, including Amrock's title insurance and settlement services, Rocket Homes' real estate agent referrals, Rocket Auto's car sales, Rocket Loans' personal loan origination and servicing, and Core Digital Media's lead generation and marketing insights - Amrock generates title revenue from title insurance, property valuations, and settlement services, complementing the mortgage platform[41] - Rocket Homes earns fees from real estate agent referrals, matching clients with agents and improving closing certainty[41] - Rocket Auto generates fee revenue from car sales volume and ancillary products, facilitating over $750 million in Gross Merchandise Value in 2020[41] - Rocket Loans generates fees from personal loan origination, investor fees, and ongoing servicing, with same-day funding through proprietary technology[41] - Core Digital Media receives fees from generating and selling client leads in mortgage and other industries, providing marketing insights[41] Lower Acquisition and Operating Costs The company's platform and technology provide a significant financial advantage by lowering client acquisition and operating costs, with proprietary technologies, specialized marketing, and growth in the servicing portfolio and partner network increasing lead-to-loan conversion and automated operations reducing processing costs - Proprietary technologies, specialized marketing, and growth in servicing/partner networks increase lead-to-loan conversion, minimizing client acquisition costs[42][43] - Automated operations reduce loan processing costs, improve conversion rates, and mitigate the impact of rate changes and competition[44] Operating Leverage Automation and efficiency create significant operating leverage, allowing the company to scale quickly and grow both volume and per-unit profitability during market expansion, while also helping control profitability during market downturns due to lower fixed and marginal costs per unit - Automation and efficiency provide significant operating leverage, enabling quick scaling and growth in volume and per-unit profitability during market expansion[45] - Lower fixed and marginal costs per unit help maintain profitability even when market volumes are lower, as demonstrated by profitability in 2018 when many competitors faced losses[45] Government Regulations The company operates in a heavily regulated industry focused on consumer protection, subject to extensive U.S. federal, state, local, and Canadian laws and agencies, incurring significant costs to comply with licensing requirements and supervised by various regulatory bodies, including the CFPB, which actively amends rules impacting mortgage lenders and servicers - Operates in a heavily regulated industry focused on consumer protection, subject to U.S. federal, state, local, and Canadian laws and agencies[46] - Requires state licensing in all 50 U.S. states and D.C. for residential mortgage operations, and additional licenses in 47 states for loan servicing, brokerage, lead generation, and personal loan platforms[46] - Supervised by regulatory agencies, GSEs, FHFA, Ginnie Mae, FTC, HUD, and investors, with ongoing reviews and audits[46] - The CFPB, established under the Dodd-Frank Act, significantly influences mortgage loan origination and servicing regulations, actively amending rules and increasing compliance complexity[47] Intellectual Property The company protects its competitive position through proprietary and third-party intellectual property, including patents, trademarks, copyrights, and trade secrets, holding an exclusive, royalty-bearing trademark license for 'Quicken Loans' until 2022, when it will gain full ownership, subject to conditions, and safeguarding IP with confidentiality and non-competition agreements - Utilizes a combination of proprietary and third-party intellectual property, including patents, trademarks, copyrights, and trade secrets, to maintain competitive position[48] - Rocket Mortgage has an exclusive, royalty-bearing, perpetual trademark license for 'Quicken Loans' from Intuit, with annual royalty payments of $7.5 million (maximum amount) for 2018, 2019, and 2020[49][50] - An agreement with Intuit grants Rocket Mortgage full ownership of the 'Quicken Loans' brand in 2022, subject to certain conditions[50] - Confidentiality, intellectual property invention assignment, and non-competition/non-solicitation agreements are in place with employees and partners[51] Cyclicality and Seasonality Demand for financial transactions, particularly home loans, is influenced by the national economy, regional trends, property valuations, interest rates, socio-economic factors, and government regulations, introducing cyclicality and seasonality to the business - Demand for financial transactions, especially home loans, is affected by national economy, regional trends, property valuations, interest rates, socio-economic trends, and government regulations[52] Human Capital Rocket Companies prioritizes its 24,000 team members, guided by 'ISMs' like 'Love our team members. Love our clients,' investing in talent management through training, mentorship, leadership programs, and internal mobility, maintaining high team member support and pride during the COVID-19 pandemic, and committed to diversity, equity, and inclusion - As of December 31, 2020, the company had approximately 24,000 team members in the U.S. and Canada[53] - The 'ISMs' culture, particularly 'Love our team members. Love our clients,' guides decision-making and fosters an empowered team[53] - Talent management includes training, mentorship, leadership programs (ROCK Academy), and internal mobility (THRIVE program), with ~2,000 team members transferring roles in 2020[54] - During COVID-19, over 98% of team members worked remotely; 90% felt supported, and 95% were proud to work for the company, reflecting strong well-being and safety focus[55][56] Item 1A. Risk Factors The company faces a broad spectrum of risks, including those exacerbated by the COVID-19 pandemic affecting operations and liquidity, and significant challenges related to technology, cybersecurity, and data privacy, with business operations vulnerable to market share decline, servicing advance recoveries, loan repurchases, fraud, and the evolving nature of new ventures, while macroeconomic conditions, interest rate volatility, and dependence on GSEs pose financial risks, and extensive and changing regulations, litigation, and corporate structure issues add further complexity and potential liabilities - The COVID-19 pandemic poses risks to mortgage origination, servicing operations (e.g., forbearance advances), liquidity, and team member productivity[58][59][60][61][62] - Technology and cybersecurity risks include the need to adapt to rapid technological changes, potential disruptions or failures in IT systems, reliance on internet search engines/app marketplaces, and the threat of cyberattacks and data breaches[68][73][75][78] - Business and operational risks encompass challenges in developing new products, managing loan origination growth, recovering servicing advances, potential termination of servicing rights, market share decline, loan repurchase obligations, fraud, and specific risks related to subsidiaries like Amrock, Rocket Loans, Rocket Homes, and Rocket Auto[90][92][95][98][101][105][113][116][117][119][122][123][124] - Financial and macroeconomic risks include dependence on loan funding facilities, interest rate sensitivity, reliance on U.S. residential real estate market conditions, margin call exposure, and volatility in transitioning from LIBOR[143][151][156][163][174] - Regulatory compliance and litigation risks stem from operating in a heavily regulated industry (U.S. and Canada), CFPB oversight, TRID rules, reverse mortgage program changes, state licensing requirements, telemarketing laws (TCPA), tax law changes, and various legal actions and class action lawsuits[192][209][216][218][219][223][225][226][235] - Corporate structure risks involve being a holding company dependent on distributions from Holdings, control by RHI (Dan Gilbert) whose interests may conflict, and substantial future payments under the Tax Receivable Agreement[249][252][255] Risks Related to the COVID-19 Pandemic The COVID-19 pandemic has introduced significant risks, adversely affecting mortgage origination, servicing operations (due to forbearance plans and advance obligations), and liquidity, impacting team member productivity and cohesiveness due to remote work, while creating new and evolving compliance obligations under acts like the CARES Act, leading to potential legal and regulatory challenges - COVID-19 has significantly impacted the national economy, potentially decreasing mortgage origination volume due to prolonged economic downturns and high unemployment[58][59] - Servicing operations are affected by mandatory mortgage forbearances under the CARES Act, requiring servicers to advance payments to investors despite non-payment by borrowers, potentially straining liquidity[60] - Liquidity may be constrained by reduced ability to borrow under loan funding facilities and decreased investor demand for mortgage loans in the secondary market, alongside higher repurchase risk[61] - Remote work for over 98% of team members may decrease team cohesiveness, hinder new business projects, and impact hiring/retention[62][63] - New and evolving compliance obligations from the CARES Act and state measures create complexity and litigation risk for mortgage servicing and origination activities[64][65][66][67] Risks Relating to Technology and Cybersecurity The company's success hinges on its ability to adapt to and implement technological changes, as the origination process is increasingly tech-dependent, with disruptions, failures, or security breaches in its IT infrastructure or third-party systems potentially harming its reputation and operations, while reliance on internet search engines and app marketplaces for client acquisition, and the use of third-party and open-source software, also pose risks - Success depends on adapting to and implementing technological changes; failure to innovate or deliver a superior client experience could decrease demand and harm growth[68] - Technology disruptions or failures (e.g., system errors, cyberattacks, natural disasters) could interrupt services, cause legal/reputational harm, and adversely impact financial results[73][74] - Reliance on internet search engines and app marketplaces for client acquisition means adverse changes in these platforms could negatively affect business[75][77] - Cyberattacks and data breaches pose serious risks to reputation and business, despite significant resources invested in security, as techniques are constantly evolving[78][79][80][81][82][83][84] - Use of third-party and open-source software introduces risks of difficult replacement, errors, failures, and non-compliance with license terms, potentially requiring costly changes or litigation[86][87][88][89] Risks Related to Our Business and Operations The company faces risks in developing new products, managing loan origination growth, and recovering servicing advances, with potential termination of servicing rights, market share decline, and loan repurchase obligations significantly impacting profitability, while fraud, reliance on third-party vendors, and the limited operating history of subsidiaries present additional challenges, and acquisitions, international expansion, negative public opinion, catastrophic events, ineffective risk management, and intense competition further compound these operational challenges - Failure to accurately predict demand or growth for new products and services could lead to increased costs, decreased operating margins, or reputational damage[90][91] - Inability to grow loan origination business or effectively manage significant increases in volume could negatively affect reputation and financial results[92][93] - Servicing advances are subject to delays or non-recovery, especially with delinquent loans or forbearances (e.g., CARES Act), impacting liquidity and business[95][96][97] - Counterparties (GSEs) can terminate servicing rights or subservicing contracts, adversely affecting revenue from servicing activity and MSR value[98][99] - Decline in market share, repeat clients, or inability to recapture refinanced loans could lead to MSR portfolio run-off and increased costs to purchase MSRs[101][102] - Dependence on selling loans in the secondary market to limited investors and GSEs means impaired ability to sell or securitize could prevent loan origination[103][104] - Obligations to repurchase or substitute mortgage loans/MSRs, or indemnify purchasers due to representation and warranty breaches, could result in significant financial losses[105][106] - Fraud by clients, team members, or third parties could lead to significant financial losses, reputational harm, and increased regulatory scrutiny[113][114][115] - Subsidiaries like Amrock (third-party title vendors), Rocket Loans (limited operating history, reliance on third parties, unsecured loans), Rocket Homes (challenges vs. traditional brokerages), and Rocket Auto (evolving model, competition) face unique and increased risks[116][117][118][119][120][121][122][124] - Acquisitions and strategic alliances, especially international expansion (Canada), could distract management and expose the company to financial, execution, and operational risks[125][126][127][128][129][130] - Negative public opinion, terrorist attacks, natural disasters, and ineffective risk management efforts could damage reputation, operations, and financial condition[133][136][138][139][140] - Intense competition in the mortgage and consumer lending space, with competitors having greater resources or operational flexibility, could adversely affect the company[141][142] Risks Relating to the Financial and Macroeconomic Environment The company's financial health is highly sensitive to interest rate changes, impacting origination volume and MSR valuations, and depends heavily on the U.S. residential real estate market and broader macroeconomic conditions, with dependence on loan funding facilities, which are largely uncommitted and subject to covenants and margin calls, posing liquidity risks, while the transition from LIBOR to alternative interest rate indices introduces volatility, and reliance on Fannie Mae, Freddie Mac, and other U.S. government agencies, along with inaccurate internal models for risk management and fair value determinations, could lead to unexpected losses - Reliance on loan funding facilities (e.g., $25.40 billion aggregate availability as of Dec 31, 2020, with $18.21 billion uncommitted) to fund mortgage loans; termination or non-renewal could be detrimental[143][146][147] - Loan funding facilities contain covenants (e.g., minimum tangible net worth, liquidity, debt-to-net worth ratio) whose breach could lead to default and termination of all facilities[150] - Business is significantly impacted by interest rates; rising rates reduce refinance demand and increase homeownership costs, while sustained low rates lead to declining refinance transactions[151][152] - MSR values are highly sensitive to interest rate changes, increasing with rising rates (decreased prepayments) and decreasing with declining rates (increased prepayments)[153] - Loan origination and servicing revenues are highly dependent on macroeconomic and U.S. residential real estate market conditions, which are seasonal, cyclical, and affected by factors like interest rates, economic growth, and unemployment[156][157][158][159][160][161][162] - A disruption in the secondary home loan market, including the MBS market, could directly affect liquidity and ability to sell loans at favorable prices[164] - Highly dependent on Fannie Mae, Freddie Mac, and U.S. government agencies (FHA, VA, USDA); changes in their guidelines, roles, or conservatorship status could adversely affect business[165][166][167][168][169][170] - MSRs are highly volatile assets; changes in value or inaccuracies in valuation estimates (e.g., prepayment speeds, discount rates) could adversely affect business and financial condition[171][172][173] - Exposure to volatility in transitioning from LIBOR as an interest rate index, with uncertainty regarding successor rates (e.g., SOFR), could impact financial instruments and operations[174][175][176] - Hedging strategies may not successfully mitigate interest rate risks, potentially exposing the company to counterparty risk and liquidity issues from margin calls[177][178][179][180][181][182] - Reliance on internal models for risk management and business decisions means unreliable or invalid results could lead to unexpected losses[183][184][185][186] - Substantial portion of assets measured at fair value (e.g., mortgage loans held for sale, derivatives, MSRs); incorrect estimates could require write-downs and adversely affect earnings[187][188][189][190][191] Risks Relating to Regulatory Compliance and Litigation Operating in a heavily regulated industry, the company faces significant risks from non-compliance with complex and evolving laws across U.S. federal, state, local, and Canadian jurisdictions, including consumer protection and data privacy laws, with CFPB's active monitoring and new rules increasing compliance burdens and costs, and failure to maintain appropriate state licenses or comply with telemarketing laws potentially disrupting operations and incurring substantial penalties, while changes in tax laws, aggressive claims of disparate impact, and evolving internet regulations further complicate the regulatory landscape, and ongoing legal actions and employment litigation pose financial and reputational threats - Heavily regulated industry with risks of non-compliance with increasing and inconsistent laws (U.S. federal, state, local, Canada) governing loan origination, servicing, fees, and personal information processing[192][193][194][195][196][197][198][199][200][201][202][203][204][205][206][207][208] - CFPB's active monitoring and new rules (e.g., mortgage servicing practices, QM Patch) increase regulatory compliance burden and associated costs, with potential for enforcement actions and litigation[209][210][211][212][213] - State regulatory agencies actively supervise loan origination and servicing, with potential for enforcement actions, administrative fines, and penalties for non-compliance[215] - Failure to comply with TRID rules could prevent loan sales, require selling at a discount, or lead to repurchase/indemnification claims[216][217] - Material changes to FHA/HUD reverse mortgage programs could adversely affect the reverse mortgage business[218] - Failure to obtain and maintain appropriate state licenses could prevent loan origination/servicing in certain states, leading to suspension of operations or fines[219][220][221][222] - Non-compliance with telemarketing laws, including the TCPA, could increase operating costs and lead to substantial monetary damages from class action lawsuits[223][224] - Changes in tax laws (e.g., TCJA, CARES Act) or disagreements with the IRS on tax positions could adversely affect financial condition[225] - Regulatory agencies and consumer advocacy groups increasingly assert 'disparate impact' claims under anti-discrimination statutes, potentially leading to significant administrative burdens and liabilities[227][228][229][230][231] - Evolving government regulation of the internet and e-commerce could require changes in business practices, raise compliance costs, and adversely affect digital marketing efforts[232] - Subject to various legal actions (e.g., improper lending, servicing, marketing, class actions) that could result in significant financial losses, reputational harm, and diversion of management attention[235][236][237] Risks Relating to Privacy and Intellectual Property The company faces liabilities from the collection, processing, storage, use, and disclosure of personal data due to evolving governmental regulations and conflicting privacy rights, with failure to comply with privacy policies or laws, or breaches by third-party vendors, potentially damaging reputation, deterring users, and resulting in fines or legal proceedings, while inadequately obtaining, maintaining, protecting, and enforcing intellectual property rights, or disputes over third-party IP, could lead to significant resources spent on litigation, loss of competitive advantages, or substantial financial penalties - Collection, processing, storage, use, and disclosure of personal data are governed by privacy laws (e.g., CCPA) and policies; non-compliance or breaches could lead to liabilities, reputational damage, and fines[238][239][240] - Failure to adequately obtain, maintain, protect, and enforce intellectual property (trademarks, patents, trade secrets) could lead to misappropriation, infringement, and loss of competitive advantages[241][242] - Disputes over intellectual property rights of third parties, including competitors, could result in adverse judgments, unfavorable settlements, significant legal expenses, or restrictions on business operations[243][244] - The license agreement for the 'Quicken Loans' name and trademark is terminable under certain conditions (e.g., material breach, change of control, wrongdoing), which would necessitate a costly and time-consuming brand transition[245] Risks Relating to our Human Capital The company's growth and success depend on its ability to hire, train, and retain qualified personnel, especially given intense competition for talent and significant investment in employee training, with failure to maintain its corporate culture, which fosters innovation and teamwork, potentially negatively impacting future success, and the loss of key senior management, including the CEO, President, and CFO, possibly disrupting operations and having a detrimental effect on the business - Inability to hire, train, and retain qualified personnel could reduce operating efficiency, increase costs, and harm financial condition, especially with intense competition for talent[246] - Failure to maintain corporate culture, which fosters innovation, collaboration, and mission focus, could negatively impact success and ability to attract/retain team members[247] - Loss of key senior management (CEO, President, CFO) could disrupt and detrimentally affect the business, as the company does not maintain 'key person' insurance or employment contracts[248] Risks Relating to our Corporate Structure As a holding company, Rocket Companies relies on distributions from Holdings to cover taxes and expenses, which can be restricted by laws and regulations, with RHI, controlled by Dan Gilbert, maintaining significant voting power, potentially leading to conflicts of interest and control over corporate actions, while overlapping executive roles and board memberships with RHI Affiliated Entities also create potential conflicts, and the Tax Receivable Agreement obligates substantial future payments to RHI and Dan Gilbert for tax benefits, which could exceed actual cash savings and impact liquidity, and organizational documents may impede takeovers and discourage certain lawsuits - As a holding company, dependent on distributions from Holdings to pay taxes and expenses; restrictions on distributions could adversely affect liquidity and financial condition[249][250] - RHI, controlled by Dan Gilbert, holds 79% of combined voting power, enabling control over stockholder actions (e.g., board election, charter amendments), potentially conflicting with other stockholders' interests[252] - Shared CEO and directors with RHI, along with RHI equity ownership, may create conflicts of interest regarding business opportunities and commercial arrangements[253] - Certificate of incorporation renounces interest in certain corporate opportunities, allowing RHI Affiliated Entities to pursue them, potentially benefiting RHI over the company[254] - Obligated to pay RHI and Dan Gilbert 90% of realized cash tax savings under the Tax Receivable Agreement, with estimated future payments of approximately $549.3 million over 20 years[255][257] - Payments under the Tax Receivable Agreement could be substantial, potentially exceeding actual cash tax savings, and may be accelerated upon change of control or material breach, impacting liquidity and deterring mergers[259][260][261] - Organizational documents (dual-class stock, classified board, director removal rules, advance notice requirements, blank check preferred stock) may impede or discourage takeovers, depriving investors of a premium[262][263][264] - Exclusive forum provisions in the certificate of incorporation may discourage lawsuits against directors and officers in certain courts[265] - As a 'controlled company,' it qualifies for exemptions from certain corporate governance requirements of the Exchange, potentially offering fewer protections to stockholders[266] - Transformation into a public company has increased costs (legal, accounting, reporting) and may disrupt regular operations by diverting management attention[267][268][269] Risks Related to Ownership of Our Class A Common Stock The company faces risks related to its Class A common stock, including potential volatility in its stock price due to market factors, operational performance, and external events, with future sales of common stock, or the perception thereof, potentially depressing the stock price, and the dual-class stock structure possibly adversely affecting the trading market by making the company ineligible for certain stock indices, thereby reducing investor attractiveness - Inability to effectively implement or maintain internal control over financial reporting could lead to inaccurate or untimely financial results, adversely affecting stock price[270] - Future sales of common stock (e.g., from restricted securities, incentive plans, registration rights) or the perception of such sales could depress the Class A common stock price[271][272][273] - The market price of Class A common stock has been and may remain volatile due to intense competition, financial results, public announcements, litigation, and broader market trends[274] - The dual-class common stock structure makes the company ineligible for inclusion in certain stock indices (e.g., S&P 500, Russell 2000), potentially making Class A common stock less attractive to investors[275] Item 1B. Unresolved Staff Comments There are no unresolved staff comments to report - No unresolved staff comments[276] Item 2. Properties The company operates through fourteen corporate offices, six client support locations, and four call centers across the United States and Canada, all of which are leased, with its headquarters in Detroit, Michigan, under a lease expiring on December 31, 2028, and believes its current facilities are adequate with future expansion space available - Operates through 14 corporate offices, 6 client support locations, and 4 call centers in the U.S. and Canada, all leased[277] - Headquarters are at 1050 Woodward Avenue, Detroit, Michigan, with approximately 455,000 rentable square feet leased from an affiliate, expiring December 31, 2028[277] - Facilities are considered in good operating condition and adequate for current needs, with future expansion space expected to be available on reasonable commercial terms[277] Item 3. Legal Proceedings Information regarding legal proceedings is incorporated by reference from Note 13, Commitments, Contingencies, and Guarantees, in the notes to the audited consolidated financial statements - Legal proceedings are discussed in Note 13 Commitments, Contingencies, and Guarantees of the consolidated financial statements[278] Item 4. Mine Safety Disclosures This item is not applicable to the company - Not applicable[279] Part II Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities This section details the company's initial public offering (IPO) in August 2020, including the sale of Class A common stock and the use of proceeds to purchase Holdings units from RHI, covering subsequent issuances of Class A and Class D common stock, the acquisition of Amrock Title Insurance Company, the approval of a $1.0 billion share repurchase program in November 2020 (with no repurchases by year-end), and the declaration of a $1.11 per share special cash dividend in February 2021 - Completed IPO on August 10, 2020, selling 100,000,000 shares of Class A common stock at $18.00 per share, raising $1.8 billion[281] - Net IPO proceeds of approximately $1.760 billion were used to purchase 100,000,000 Holdings units and corresponding Class D common stock from RHI[282] - An additional 15,000,000 Class A common shares were sold on September 9, 2020, via over-allotment option, generating $263.9 million, also used to purchase Holdings units from RHI[284] - Acquired Amrock Title Insurance Company on August 14, 2020, for $14.4 million, consisting of 800,000 Holdings Units and Class D common stock[287] - Board approved a $1.0 billion share repurchase program for Class A and Class D common stock on November 10, 2020, effective for two years; no shares repurchased by December 31, 2020[288][289] - Declared a special cash dividend of $1.11 per share for Class A common stock on February 25, 2021, funded by $2.2 billion in cash distributions from RKT Holdings, LLC[290] Item 6. Selected Financial Data This section provides a summary of selected historical financial data, including condensed statements of income and balance sheets for the years ended December 31, 2016 through 2020, with key highlights for 2020 showing significant increases in total revenue, net income, and total assets, alongside corresponding increases in expenses and liabilities, reflecting substantial growth Condensed Statement of Income (Unaudited) ($ in thousands) | Indicator | 2020 | 2019 | 2018 | | :------------------------------------- | :----------- | :----------- | :----------- | | Revenue | | | | | Gain on sale of loans, net | $15,070,703 | $4,911,307 | $2,927,888 | | Servicing fee income | $1,074,255 | $950,221 | $820,370 | | Change in fair value of MSRs | $(2,294,240) | $(1,596,631) | $(228,723) | | Interest income, net | $84,070 | $115,834 | $101,601 | | Other income | $1,800,394 | $736,589 | $588,428 | | Total revenue, net | $15,735,182 | $5,117,320 | $4,209,564 | | Expenses | | | | | Salaries, commissions and team member benefits | $3,238,301 | $2,082,797 | $1,703,460 | | General and administrative expenses | $1,053,080 | $685,028 | $592,504 | | Marketing and advertising expenses | $949,933 | $905,000 | $878,027 | | Depreciation and amortization | $74,316 | $74,952 | $76,917 | | Interest and amortization expense on non-funding debt | $186,301 | $136,853 | $130,022 | | Other expenses | $701,594 | $328,250 | $210,530 | | Total expenses | $6,203,525 | $4,212,880 | $3,591,460 | | Income before income taxes | $9,531,657 | $904,440 | $618,104 | | Provision for income taxes | $(132,381) | $(7,310) | $(3,244) | | Net income | $9,399,276 | $897,130 | $614,860 | | Net income attributable to non-controlling interest | $(9,201,325) | $(897,130) | $(614,860) | | Net income attributable to Rocket Companies | $197,951 | $— | $— | | Earnings per share of Class A common stock: | | | | | Basic | $1.77 | N/A | N/A | | Diluted | $1.76 | N/A | N/A | Condensed Balance Sheet (Unaudited) ($ in thousands) | Indicator | As of December 31, 2020 | As of December 31, 2019 | As of December 31, 2018 | | :------------------------------------- | :---------------------- | :---------------------- | :---------------------- | | Assets | | | | | Cash and cash equivalents | $1,971,085 | $1,394,571 | $1,089,039 | | Mortgage loans held for sale, at fair value | $22,865,106 | $13,275,735 | $5,784,812 | | Interest rate lock commitments ("IRLCs"), at fair value | $1,897,194 | $508,135 | $245,663 | | Mortgage servicing rights ("MSRs"), at fair value | $2,862,685 | $2,874,972 | $3,180,530 | | Other assets | $7,938,532 | $2,069,433 | $1,290,558 | | Total assets | $37,534,602 | $20,122,846 | $11,590,602 | | Liabilities and equity | | | | | Funding facilities | $17,742,573 | $12,041,878 | $5,076,603 | | Other financing facilities and debt | $3,678,312 | $2,595,038 | $2,483,254 | | Other liabilities | $8,231,561 | $1,970,375 | $1,241,959 | | Total liabilities | $29,652,446 | $16,607,291 | $8,801,816 | | Total equity | $7,882,156 | $3,515,555 | $2,788,786 | Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides a comprehensive analysis of the company's financial condition and results of operations, highlighting significant growth in 2020 driven by increased mortgage origination volume and expanded gain on sale margins, detailing the impact of the COVID-19 pandemic, presenting key performance indicators, and explaining revenue and expense components, while also covering segment performance, liquidity and capital resources, contractual obligations, and critical accounting policies, emphasizing the fair value measurement of key financial instruments - Net income for 2020 was $9.4 billion, a significant increase from $897.1 million in 2019, driven by a 120.6% increase in residential mortgage loan originations to $320.2 billion[301] - Adjusted EBITDA for 2020 reached $11.1 billion, up 472.1% from $1.9 billion in 2019[301] - Gain on sale of loans, net, increased by $10.2 billion (206.9%) in 2020, primarily due to higher origination volume and an expanded gain on sale margin[302] - Total serviced UPB (including subserviced loans) grew to $409.6 billion across 2.1 million client loans by December 31, 2020[304] - As of December 31, 2020, 3.9% of serviced loans were in forbearance due to COVID-19, decreasing to 3.4% by February 28, 2021[300][304] Special Note Regarding Forward-Looking Statements This section clarifies that the Form 10-K contains forward-looking statements, which involve inherent risks and uncertainties that could cause actual results to differ materially from expectations, cautioning readers that these statements are not guarantees of performance and are based on assumptions that may not materialize, with no obligation to update them - The Form 10-K contains forward-looking statements identified by terms like 'anticipate,' 'believe,' 'expect,' and 'will,' which involve risks and uncertainties[297] - These statements are not guarantees of performance and actual results may differ materially due to factors described in the 'Risk Factors' section[297] - The company disclaims any obligation to update or revise forward-looking statements[298] Executive Summary Rocket Companies is a Detroit-based holding company with tech-driven real estate, mortgage, and eCommerce businesses, aiming to provide an industry-leading client experience through its platform, including Rocket Mortgage (the largest mortgage lender) and other complementary services like real estate, personal lending, and auto sales - Rocket Companies is a Detroit-based holding company focused on tech-driven real estate, mortgage, and eCommerce[299] - The company's mission is to deliver innovative client solutions leveraging its Rocket platform, providing an industry-leading client experience[299] - Beyond Rocket Mortgage, the largest mortgage lender, it has expanded into complementary industries such as real estate services, personal lending, and auto sales[299] Recent Developments As of December 31, 2020, 3.9% of the company's serviced portfolio (80,000 clients) were in COVID-19 related forbearance plans, which decreased to 3.4% (74,000 clients) by February 28, 2021, indicating positive developments in forbearance trends - As of December 31, 2020, 80,000 clients (3.9% of total serviced portfolio) were in COVID-19 related forbearance plans[300] - By February 28, 2021, the number of clients in forbearance decreased to 74,000 (3.4% of the portfolio), showing positive developments[300] Year ended December 31, 2020 summary In 2020, the company achieved significant growth, with residential mortgage originations increasing by 120.6% to $320.2 billion and net income soaring to $9.4 billion, primarily driven by a 206.9% increase in gain on sale of loans, net, and a 144.4% rise in other income, partially offset by increased prepayment speeds affecting MSRs and higher operating expenses due to increased production and related services Key Financial Highlights (Year Ended December 31, 2020) | Metric | 2020 Value | Change from 2019 | | :--------------------------------- | :----------- | :--------------- | | Residential Mortgage Originations | $320.2 billion | +120.6% ($175.0 billion) | | Net Income | $9.4 billion | From $897.1 million | | Adjusted EBITDA | $11.1 billion | +472.1% ($9.2 billion) | | Gain on sale of loans, net | +$10.2 billion | +206.9% | | Other income | +$1.1 billion | +144.4% | - Increase in other income was driven by Amrock's title insurance, property valuation, and settlement services, and Rocket Loans' revenue from processing economic injury disaster loans[302] - Partially offset by a $284.5 million (35.3%) reduction in revenue from MSRs due to increased prepayment speeds[302][303] - Expenses increased due to higher production levels: salaries, commissions, and team member benefits rose by $1.2 billion (55.5%), general and administrative costs by $368.1 million (53.7%), and other expenses by $497.8 million (121.3%)[303] - Servicing portfolio included $409.6 billion UPB and 2.1 million client loans; 3.9% of loans were in forbearance, and the 60-plus days past-due delinquency rate (excluding forbearance) was 0.84%[304] - Sold servicing on approximately 240,000 loans with $90.8 billion in UPB in 2020, offset by new organic additions to the MSR portfolio[304] Year ended December 31, 2019 summary In 2019, the company's residential mortgage originations increased by 74.7% to $145.2 billion, leading to a 45.9% rise in net income to $897.1 million and a 265.7% increase in Adjusted EBITDA to $1,945.8 million, with this growth primarily driven by a 67.7% increase in gain on sale of loans, net, and higher servicing fee income, partially offset by increased prepayment speeds and associated expenses Key Financial Highlights (Year Ended December 31, 2019) | Metric | 2019 Value | Change from 2018 | | :--------------------------------- | :----------- | :--------------- | | Residential Mortgage Originations | $145.2 billion | +74.7% ($62.1 billion) | | Net Income | $897.1 million | +45.9% ($282.3 million) | | Adjusted EBITDA | $1,945.8 million | +265.7% ($1,413.8 million) | | Gain on sale of loans, net | +$1,983.4 million | +67.7% | | Other income | +$148.2 million | +25.2% | | Servicing fee income | +$129.9 million | +15.8% | - Partially offset by a $251.4 million (45.3%) reduction in revenue from MSRs due to higher prepayment speeds[306] - Expenses increased due to higher production: salaries, commissions, and employee benefits rose by $379.3 million (22.3%), general and administrative costs by $92.5 million (15.6%), and other expenses by $119.8 million (41.2%)[306] - Servicing portfolio included $338.6 billion UPB and 1.8 million client loans; sold servicing on approximately 153,000 loans with $42.5 billion in UPB[307] Non-GAAP Financial Measures This section defines and reconciles non-GAAP financial measures—Adjusted Revenue, Adjusted Net Income, Adjusted Diluted EPS, and Adjusted EBITDA—which management uses to assess performance by excluding non-cash, non-realized adjustments like changes in MSR fair value due to valuation assumptions and stock-based compensation, providing insights into operating performance, but with limitations as they do not reflect all cash expenditures or debt servicing requirements - Non-GAAP measures (Adjusted Revenue, Adjusted Net Income, Adjusted Diluted EPS, Adjusted EBITDA) are used to provide useful information to investors, supplementing GAAP results[308] - Adjusted Revenue excludes the change in fair value of MSRs due to valuation assumptions (net of hedges), as it's a non-cash, non-realized adjustment[309] - Adjusted Net Income is tax-effected earnings before stock-based compensation and MSR fair value changes (valuation assumptions)[309] - Adjusted EBITDA excludes interest/amortization on non-funding debt, income tax, depreciation/amortization, MSR fair value changes (valuation assumptions, net of hedges), and stock-based compensation[309] - These non-GAAP measures help analyze and benchmark performance, compare operating performance across periods, and compare with other companies, but have limitations as they don't reflect all cash expenditures or debt obligations[310][312] Reconciliation of Adjusted Revenue to Total Revenue, net ($ in thousands) | Indicator | 2020 | 2019 | 2018 | | :------------------------------------------------- | :----------- | :----------- | :----------- | | Total Revenue, net | $15,735,182 | $5,117,320 | $4,209,564 | | Change in fair value of MSRs due to valuation assumptions (net of hedges) | $1,203,041 | $789,901 | $(326,637) | | Adjusted Revenue | $16,938,223 | $5,907,221 | $3,882,927 | Reconciliation of Adjusted Net Income to Net Income Attributable to Rocket Companies ($ in thousands) | Indicator | 2020 | 2019 | 2018 | | :------------------------------------------------- | :----------- | :----------- | :----------- | | Net income attributable to Rocket Companies | $197,951 | $— | $— | | Net income impact from pro forma conversion of Class D common shares to Class A common shares | $9,203,435 | $898,497 | $615,132 | | Adjustment to the provision for income tax | $(2,235,345) | $(217,059) | $(147,949) | | Tax-effected net income | $7,166,041 | $681,438 | $467,183 | | Non-cash stock compensation expense | $136,187 | $39,703 | $33,636 | | Change in fair value of MSRs due to valuation assumptions (net of hedges) | $1,203,041 | $789,901 | $(326,637) | | Tax impact of adjustments | $(332,456) | $(205,493) | $71,639 | | Other tax adjustments | $4,548 | $— | $— | | Adjusted Net Income | $8,177,361 | $1,305,549 | $245,821 | Reconciliation of Adjusted EBITDA to Net Income ($ in thousands) | Indicator | 2020 | 2019 | 2018 | | :------------------------------------------------- | :----------- | :----------- | :----------- | | Net income | $9,399,276 | $897,130 | $614,860 | | Interest and amortization expense on non-funding debt | $186,301 | $136,853 | $130,022 | | Income tax provision | $132,381 | $7,310 | $3,244 | | Depreciation and amortization | $74,316 | $74,952 | $76,917 | | Non-cash stock compensation expense | $136,187 | $39,703 | $33,636 | | Change in fair value of MSRs due to valuation assumptions (net of hedges) | $1,203,041 | $789,901 | $(326,637) | | Adjusted EBITDA | $11,131,502 | $1,945,849 | $532,042 | Key Performance Indicators The company monitors key performance indicators (KPIs) across loan production, servicing portfolio, and other Rocket Companies to evaluate business operations, with loan production KPIs tracking gain on sale revenue and market share, servicing portfolio KPIs monitoring UPB, MSR fair value, delinquency rates, and client retention, and other Rocket Companies KPIs including gross revenue, unit sales, and website traffic, providing a holistic view of