Rocket Companies CEO Jay Farner joins Yahoo Finance Live to discuss how the Fed rate hikes will impact the housing market and why he thinks there's an imminent recession.

Video Transcript

- Welcome back. Rocket Companies shares are under pressure this morning after the mortgage lender reported a 41% drop in sales as the rise in interest rates put off refinances and new home buying. Let's check in with Rocket Companies CEO Jay Farner. Jay, always nice to see you. A lot of interesting commentary from Fed members this week on their views on raising rates. I think the consensus is they have to raise rates faster. What are the faster pace of rate hikes mean to your business?

JAY FARNER: Yeah. I think we've seen some of the impact that this rate raise increases have already had on the market. I always try to remind people to keep things in perspective, 5 and 1/2 on a 30-year fixed rate mortgage is still an incredibly good interest rate when you think of it historically. But I think, more importantly, this is just part of the cycle.

And I heard your previous guest talking about inflation. And as you probably know, we acquired true bill late last year, which gives us great insight into consumer behavior, one of the key components of building out our fintech platform. So we could watch and see what was taking place with consumers, how we help them save money, how they're adjusting to these price increases. And so although we're seeing inflation today, we also know that things are accelerating rapidly.

And as people take on higher mortgage interest rates, that means that in the future, we'll be refinancing our clients the millions and millions that we're putting on our platform to lower interest rates because we feel strongly that there'll be a recession coming here in the coming quarters.

- And so if a recession does indeed come in the coming quarters from your expectations, how much of that would be derivative from what you're seeing currently in the housing market?

JAY FARNER: Yeah. So we're seeing people buy homes, prices will probably slow a little bit because of the rising increase and also the lack of inventory. But at 5.5%, people can still afford homes. But what we're doing right now is we're going to see a market, let's say, two $2 $to 2.5 trillion of folks getting mortgages at higher interest rates.

We've also got $26 trillion of equity that's out there available. And so not only are people taking cash out today, but as you move forward quarter after quarter, we see a dip in interest rates a 1/4, 3/8 of a percent. And a lot of those folks will come off the fence. And so here's the key for us, we keep operating a profitable business, we keep taking care of our clients, we watch capacity come out of the mortgage industry. And then as those rates tick, we will grow, we will gain market share and take care of those clients.

So this is part of the cycle we've been through it quite a few times in the past. And we've got to keep growing our marketing base, keep engaging with clients, seeing things like our solar, our auto, our homes businesses grow. All clients were adding that later we can take care of as rates tick down, which they will.

- Jay, you've seen-- you've seen several cycles to say the very least now. Do you think the Fed, because they kept rates for so long, we're looking at another situation like 2007 to 2009?

JAY FARNER: Well, I think it's different in than 2007, 2009, in the sense that there's plenty of liquidity in the mortgage market. So that's not a concern. And the product quality is incredibly high. What we're experiencing right now is lack of demand in certain aspects of the market, and that's why we're going to go to a more like a $2 trillion market this year.

So it creates opportunity because what we're seeing is capacity come out significantly. You're watching lenders cut everywhere. If you hear what we're doing, we're keeping our marketing strong, we're keeping our bankers strong, and we're diversifying. So it gives us a chance to engage with clients and grow that base, as I talked about before. And then probably, we get into '23, '24, opportunities to save people money, and we leapfrog forward again. You've watched us time and time again grow market share when these cycles change.

And so really now, it's about making sure this platform is even stronger. So when we get that next cycle change, we can leapfrog even farther ahead and grow even more market share.

- Considering the year over year declines that we've already seen in this most recent quarter, in total net revenue, also on the adjusted EBITDA scale, is there a point where-- because you mentioned, maintaining profitability as a company-- is there a point where you are forecasting that you would be swinging to a loss?

JAY FARNER: No. We think about adjusted EBITDA. You'll see a lot of people talk about their overall EBITDA, and then we've got the gain in the mortgage servicing rights that we hold. So that's nice. And of course, it was, I think, 3/4 of a billion dollars increase in one in the mortgage servicing right value. We hold those servicing rights. We don't sell them because we like the cash flow coming in between the servicing rights and our true bill business, I think, we've got nearly $1.4 billion of cash coming in. So it helps strengthen our company, combined with the billions of dollars of cash that we've got on the balance sheet.

But when we think about operating our business, we think about being profitable, not including the value of the increase in those servicing rights each and every year. And we've demonstrated that now for 36 plus years. So we're making all the right adjustments to our business to ensure that we can maintain that profitability. So we can lean into marketing. So we can support all of those growth initiatives I've talked about. We're seeing that happen in Canada with our tech businesses. So we're getting growth everywhere.

And right now, in this cycle, you don't want to pull back on that. You want to keep investing, keep growing. And I talked about it before. Why? So when we get an interest rate decrease, probably as this recession occurs, that we will be there to help clients when other people have taken out the capacity to be able to do so.

And again, I'm going to mention this, before, we're watching clients cancel subscriptions, we're watching people already decrease their spending on food, on groceries, and gas. So we're seeing the American public make adjustments already based on the price increases they're experiencing. And so that tells us that the rise in interest rates is actually having an impact already.

- All right, let's leave it there for now. Jay Farner, Rocket Companies CEO, always great to get some time with you. We'll talk to you soon.

JAY FARNER: You bet. Thanks.