Ladies and gentlemen, thank you for standing by, and welcome to Rocket Companies' second quarter 2020 earnings call. At this time, all participants are on a listen only mode. After the speaker's presentation, there will be a question and answer session. If you would like to ask a question at this time, simply press star, then the number one on your telephone keypad. If you require any further assistance, please press star zero. I would now like to turn the call over to your speaker today, Jason McGruder, Vice President of Investor Relations. Please go ahead.
Good afternoon, everyone, and thank you for joining us for Rocket Companies' earnings call covering the second quarter of 2020, its first as a public company. My name is Jason McGruder, and I am the new Vice President of Investor Relations for the company. I had the opportunity to email a number of participants on this call earlier this week, and I look forward to working closely with all of you in my new role. We are excited to share the results of a terrific quarter with you, but before I turn things over to Jay Farner to get us underway, I will read the policy regarding forward-looking statements. Today's call is to provide you with information regarding our second quarter 2020 performance in addition to our financial outlook. This conference call includes forward-looking statements.
For more information about factors that may cause actual results to differ materially from forward-looking statements, please refer to the earnings release that we issued today, as well as risks described in filings with the SEC, particularly in the section of these documents titled Risk Factors. Our commentary today will also include non-GAAP financial measures. Reconciliations between GAAP and non-GAAP metrics for our reported results can be found in our earnings release issued today. Please refer to our filings with the SEC for more information. With that, I'll turn things over to Jay Farner to get us started. Jay?
Thank you and good afternoon, everyone. Welcome to Rocket Companies' second quarter earnings call, our first as a public company. Before we get started, I'd like to thank our 20,000 team members for the dedication and unwavering commitment to our clients. Because of their efforts, I'm proud to share that Rocket Companies achieved record-breaking results in the second quarter. Culture is the foundation of everything we do here at Rocket Companies. Our Founder, Dan Gilbert, created 19 principles known as ISMs They are the heart and soul of our culture and drive every decision we make. They are who we are, our DNA. Our culture has been the secret to our success over the last 35 years. The second quarter was no exception. One of those ISMs is Do the Right Thing, a charge that we take very seriously.
Earlier this year, when we saw the impacts of COVID-19 overseas, we quickly invested in the tools and technology that was needed to ensure that all our team members could effectively work from home, weeks faster than many other large businesses. This allowed us to keep our team members and communities safe while also meeting the needs of our clients as mortgage rates began to fall. This is just one of the many examples of our company making sensible investments in the future. We spoke to many of you during the IPO process about our focus on investing for the long term. We're extremely proud of protecting our team members and achieving record results in the second quarter. That performance has been years in the making.
Thousands of our technology team members have continuously built and refined a platform that has truly risen to the occasion, allowing us to scale to meet unprecedented demand, all while 98% of our team is working from home. It's a pleasure to be here today to talk about our second quarter results, the way we think about our business, and why we believe Rocket Companies is well-positioned to capitalize on the substantial opportunities ahead. In the second quarter, Rocket Mortgage closed $72.3 billion in loan volume, more than any quarter in our 35-year history. Record low interest rates are driving demand for home loans, and as we've highlighted, the power of our platform is proving a key differentiator for Rocket Mortgage. In fact, we've been able to achieve record volumes while maintaining impressive loan turn times.
Industry-wide capacity constraints have led to significant gain on sale margins during the second quarter, with overall margins increasing to 5.19%, up from 3.25% in the first quarter. Our ability to scale volume at these elevated margins led to substantial incremental profitability in the quarter. While second quarter gain on sale margins were certainly elevated by historical standards, this is exactly the kind of market environment we built our platform to perform in. Quite simply, we were able to meet the needs of our growing client base and provide award-winning client experience. Our mortgage servicing business was a key driver of overall performance in the quarter, which Julie will talk about in a moment. I'm also proud to share that we recently earned an unprecedented seventh consecutive J.D. Power Award for customer satisfaction in mortgage servicing, an award we've won every year we've been eligible.
This award is based entirely on feedback from our clients, and it's an honor our team members take tremendous pride in. Turning to our broader ecosystem of businesses, we believe we have substantial opportunities to apply the same focus on client experience, technology, and operations across multiple industries. When we look at our companies holistically, Rocket Companies generated 300% year-over-year growth in adjusted revenue and $2.8 billion of adjusted net income in the second quarter. We are delivering profitable growth at substantial scale. As you continue to get to know Rocket Companies, you will also learn we are passionate about the communities where our team members work, live, and play. We are keenly aware of the role our company plays in building the American dream, and how communities are the foundation of progress, education, and pride. We recently announced the very important Changing the Course initiative here in Detroit.
Unfortunately, Detroit ranks last in digital connectivity among all major cities. We saw the effects of this digital divide truly manifest with the onset of COVID-19, when many of our community members found themselves without access to the technology needed to participate in telemedicine, schooling, or find a job. We knew we needed to step in and make a change. Through the Rocket Mortgage Classic, our PGA Tour event in Detroit, we have risen to the task to ensure that by 2025, every Detroiter will have access to technology within a 10-minute walk from their home. As a technology company and the largest employer in the city of Detroit, this is a program that is near and dear to all our hearts, and one we look forward to bringing to life. Finally, many of you have asked us how things will change now that we're a public company.
The short answer is, they won't. We have many more investors today than we did as a private company, including all of our team members who, once vested, will become shareholders. That doesn't affect who we are. We are committed to providing you with the same plainspoken transparency that has been a hallmark of our company. We also commit to you that we will continue intense dedication to our culture, our focus on the long term, and our commitment to doing the right things the right way. Julie will talk more about our current outlook in just a minute. As we look to the second half of the year, we continue to see strength and durability in consumer sentiment. Record low interest rates and an improving U.S. real estate market continue to drive demand for home loans.
The purchase market, in particular, continues to recover following COVID-related disruption in the second quarter. In fact, we expect the third quarter to be one of our best for purchase origination volume ever at Rocket Mortgage. Demand for a completely digital experience has never been stronger, and Rocket is delivering. With that, I'll turn things over to Julie Booth, who will take you through our second quarter results in more detail.
Thanks, Jay, and good afternoon, everyone. We spoke to many of you during the IPO process about the multiple drivers that we have to profitably grow our business. In the second quarter, broad-based strength across these areas led to record financial performance, highlighted by adjusted revenue of $5.3 billion and adjusted net income of $2.8 billion. Strength in both our direct-to-consumer and partner network channels drove record closed loan volume of $72.3 billion, an increase of 40% from the first quarter of 2020 and 126% compared to the second quarter of 2019. Closed loan volume of $46.8 billion in our direct-to-consumer channel increased 143% year-over-year. The partner network also contributed strong growth, with volume of $19.7 billion compared to $11.2 billion in the same period one year ago, an increase of 76%. Net rate lock volume of $92 billion significantly exceeded closed loan volume in the second quarter.
As a reminder, we recognize revenue at the time when we lock the interest rate with our client. Rate lock typically occurs 30-45 days prior to the closing of a loan. As a result, rate lock volume is a leading indicator of closed loan volume. Accelerating momentum throughout the second quarter drove elevated rate lock volume relative to closings. As Jay referenced earlier, Rocket Mortgage achieved historically strong gain on sale margins in the second quarter, with overall margins increasing to 5.19% from 3.25% in the first quarter of 2020. Gain on sale margins were strong across both channels, coming in at 5.09% in the direct-to-consumer channel and 2.1% in the partner network. As a reminder, overall margins are measured on a rate lock basis, while segment-level margins are reported on a funded loan basis.
The difference in gain on sale margins by channel reflects the partial sharing of economics with our partners in the partner network. Lower client acquisition costs in the partner network lead to strong contribution margins across both channels. Our mortgage servicing business was an important driver of overall loan volume during the second quarter, contributing 46% of total loan volume. These repeat transactions with existing clients come with little to no client acquisition costs, leading to substantial incremental profitability. As we look to the lingering impacts of the COVID-19 pandemic, approximately 5.1% of our servicing portfolio was on a forbearance plan related to COVID as of June 30th. The positive news is that we continue to see improvement in forbearance trends into the third quarter. Outside of our Rocket Mortgage business, growth in other revenue was driven by Amrock, our title insurance and settlement services business.
Our investments in technology and process at Amrock paid off in the second quarter as the business was able to scale up and meet the increased demand for mortgages and the related title insurance and settlement services. Also during the second quarter, we extended our industry-leading position in e-closings by deploying a remote online notarization platform, which further enables the e-closing experience. Amrock processed more than 240,000 settlement transactions during the second quarter of 2020, up 45% as compared to the first quarter of 2020 and up 171% from the second quarter of 2019. Total expenses of $1.6 billion increased 24% compared to the first quarter of 2020. The increase was primarily attributable to higher variable compensation and production costs as a result of increased origination volume. Marketing expenses declined 7% and 11% compared to the prior quarter and prior year periods, respectively. Turning to cash and liquidity.
After June 30th and prior to the IPO, Rocket Companies distributed $2.26 billion to its parent company, Rock Holdings. We remain in a strong liquidity position following our IPO, with total liquidity of $3.7 billion, including $1 billion of cash on hand, plus $2.7 billion of undrawn lines of credit and corporate cash used to self-fund mortgage loans, which could be transferred to warehouse lines at our option. Overall, we are extremely proud of our record performance in the second quarter, demonstrating our ability to deliver profitable growth at scale. I'd like to take a moment to discuss our current outlook and our approach to the investment community as a public company. The guidance philosophy we're sharing today reflects the way we think about and manage our business.
As we shared with many of you during the IPO process, our long-term strategic objective is to achieve 25% share of the mortgage market. We manage the business for long-term growth and aim to continue investing in our brand and technology through all market environments. While our focus remains on the long term, we are committed to providing transparency to our analysts and investors about the trends we are seeing in our business. Today, we are providing our current outlook for loan volume in the third quarter. Given the unique dynamics around gain on sale margins in the current environment, we are also providing our current outlook for third quarter gain on sale margins. Entering the second half of 2020, we continue to see strong consumer demand, as you heard from Jay.
We currently expect third quarter closed loan volume of $82 billion-$85 billion and net rate lock volume of $93 billion-$98 billion. Regarding gain on sale margins, we expect third quarter margins to moderate from the historically elevated levels experienced in Q2, but remain elevated relative to longer-term historical averages. We currently expect third quarter gain on sale margins of 4.05%-4.3%. Finally, for those of you thinking about updating your models, I did want to remind everyone of the normal seasonality we experience at Rocket Mortgage. Our typical pattern follows the seasonality of the U.S. real estate market, with lower sequential volumes in the fourth quarter compared to the third quarter.
We are proud to deliver you these second quarter results, and even more excited about the investments we continue to make in our platform that will guide us to our goal of 25% market share by 2030. With that, we are ready to turn it back to the operator for Q&A.
At this time, I would like to remind everyone, in order to ask a question, please press star then the number one on your telephone keypad. If you would like to withdraw your question, please press the pound key. Your first question comes from James Faucette with Morgan Stanley. Please go ahead.
Great. Thank you very much. I wanted to just quickly ask you the first question was around the seasonality. You talked about fourth quarter being a little bit lower. I'm wondering how we should think about that from a normal percentage basis. Are you seeing the moves in at least Treasury rates, et cetera, having any impact on how you're thinking about that seasonality for the time being?
Thanks, James. Just to open up as our first call, just to get folks familiar with voices, this is Jay Farner, the CEO. I'll be joined by Julie Booth, our CFO, and Bob Walters, our COO. Good afternoon, everyone. Thanks for being here on our first call. Now, heading to your question, I know Julie touched on some of our guidance around Q3, and also referenced that typically we see some seasonality as we enter the fourth quarter, December in particular. I know Julie was referencing kind of the traditional seasonality that you might experience in housing, in particular purchase. Obviously, we're in a different market right now, and I'll let Julie comment, but when it comes to kind of current expectations around interest rates or Treasuries, I would say that what we're experiencing today, we anticipate will continue forward here through the rest of the year. Julie?
Yeah, I agree, Jay, and certainly while we're happy to provide some guidance for Q3, really we typically do see that decrease in the fourth quarter and really wanted to just remind those thinking about our results that that is kind of a typical seasonality in the business. I don't think we're expecting necessarily anything unusual this year other than what we typically see. Of course, that could always change.
My other question is on, you talked, Julie highlighted the long-term target of 25% market share. Can you help sketch out for us or how you're thinking about what that progression should look like? Are there going to be fits and starts, or is there continuity, and are there some medium-term milestones you could share with us on your market share ambitions? Thanks a lot.
Yeah. Thanks, James. I'll start out here, and then Julie or Bob, feel free to chime in. I think it's important we take a step back and think about strategically how we at Rocket Companies go about our planning. We obviously don't control interest rate, for us, it's critical that we think about long-term growth over an extended period of time, make all the right moves to make sure that we're growing and gaining market share. We really look at the mortgage market as roughly a $2 trillion market. There'll be years like this year where the market's much larger than that, based on our tech platform and our ability to scale, we will take advantage of that and grab far more growth and volume than maybe we had prepared for.
Year in, year out, we look more towards a normalized market. We set our strategy to ensure that we're growing market share, we're growing clients throughout any interest rate market. As you followed maybe our last 15 or 20 years that we've shared, especially over the course of the roadshow, certainly it's not a straight line for growth. There are moments in time where production may be flatter, but we're growing market share. Please understand, behind the scenes, strategically, as we think about our model, direct-to-consumer, our partner model, and now the ecosystem that we're building, that's just targeted to strengthen the platform, grow the capabilities of the platform, and continually be able to grow that market share over time.
You'll see things happen like they've occurred this year where, due to interest rates, we're able to see a significant increase in where we really leverage the platform and exceed what our expectations had been when we set the strategy back in the fall of 2019. Julie, feel free to add or make comments.
I guess the thing that I would maybe add to that is while we do expect to see growth over the next 10 years, it really is not something that we are going to be watching on a quarterly basis. We may see some ups and downs when we look quarter to quarter, but really, we're focused on kind of that more annualized look at market share. I just would encourage folks to kind of think about that when you're looking at market share quarter after quarter here and really thinking about how that's going to come out for the year.
Yeah, I think that's a critical component as we take a long-term view. There'll be times for us where opportunity to grow market share or acquire clients is the most important move, focusing less on EBITDA and more on that client growth. Bob Walters can probably chime in on that. As I think Julie pointed out, the significant percentage of the loan volume that we've done this year has come from our servicing book and our retention rates, which is an important component of our business. So when others are pulling away from the market, we tend to lean in because we can grow that client servicing book. Bob, I don't know if you want to touch on that just to help educate everybody.
Yeah, I think we talked a lot about this in the roadshows. In one of our key differentiators for us, we have a very large servicing platform. We think about servicing quite differently than a lot of servicers, especially publicly traded servicers, that are really looking at a return on capital model. We see it really as a retention play, and we have on our refinance loans 80% retention now. Our ability to monetize when those loans are paying off, and they're paying off for everyone. Our ability to monetize those so surpasses most of our competitors that it really is a key differentiator, and you're seeing that in a lot of our results now. It's that ability plus continually building out that platform that Jay talked about, that we're driving that new business.
We're not leaking out as the loans pay off like many of our competitors. We retain those while we continue to bring in new clients, that's marched to 25%. That's the how. As Julie said, that'll come in fits and starts. We've seen that over the last decade, quite frankly. We will grab quite a bit and then hold it, grab quite a bit and hold it. Not giving it up is key, and that retention is a big part of that.
Your next question comes from Ryan Nash with Goldman Sachs. Please go ahead.
Hey, good evening, everyone.
Hey, Ryan.
Jay, maybe we could start with gain on sale margins. In 2Q, they were really wide as the industry faced capacity constraints. We're obviously starting to see a little bit of that coming back on. For 3Q, I think you're talking about 405-430, which given your mix is still elevated relative to history. So can you maybe just talk about what you're seeing competitively in the marketplace for mortgage originations and your views on the ability to continue to sustain elevated margins in the coming quarters?
Yeah, certainly. I'll start here and Julie can jump in. As we've talked about, a defend your margin mentality is critical for our business. We've demonstrated that over the course of 35 years, that client service and technology, the experience is really what drives our growth. You'll find that our margins remain robust year in and year out. Specific to where we are today, certainly there's a bit more capacity in the system than we saw back in March or April. We still feel great about consumer demand. As Julie gave the guidance around those margins, I think we think about where we are today, the demand we're seeing, our ability to defend our margins, and that helps inform us on that guidance. Julie, other thoughts?
Yeah. I would say that as we kind of look at the runway here, I think there is quite a long runway of working through the demand that is in the market, given the constraints that we are seeing. I think that with where rates are kind of anticipated to be here, I think we'll continue to see strong demand for some time. Primary or secondary spreads are wide right now. You may see an opportunity for those to come back in here. I think the 405-430 that we're looking at here in Q3, certainly still very strong. We will continue, as we did talk about on the roadshow, defending our margin, and that is something that won't change. I think over time, we'll probably see those margins come back to more normalized levels.
I think we have some runway here given the demand that we think is still coming yet over the upcoming quarters.
Got it. If I can maybe ask another question just on the size of the market. Originations, Jay, you alluded to, they're likely to pass $3 trillion this year, given how low interest rates are. I think most of the market is eligible for a refinance, which means activity should be elevated again next year. Can you maybe just talk about your expectations for the market? Obviously, we see the industry forecast, which tends to be a little bit of lagging indicators. I'm just curious, based on what you see in your portfolios, what do you think about expectations for the size of the market? Then to follow up on the question from earlier, how do you think about the ability over a one to two year time frame to continue to drive market share gains? Thanks.
As we've maybe alluded to in the past, anchoring to a forecast, whether it's MBA or Fannie or others, is very challenging. It's not as if they're off by a 5% or 10% margin. They're off usually considerably. I'll go back first to the statement I made, which is for our planning purposes, for thinking strategically, we really don't look at the forecast. We look at a more normalized market, we structure our growth around that. If the market is larger, of course, we benefit from it. As we've talked about, by the end of the year, our goal is to have a platform that can close $40 billion a month. We will continue to grow that platform, the tech, the client experience, the brand, and the people required. If the market shrinks, we'll be able to grow market share.
If the market is larger than the forecast may state, well, our capacity will be there to take advantage of it. I think Bob can probably speak to who's in the market today, as you pointed out, a significant portion of mortgages here in the United States are in the money, and we expect them to be in the money for quite some time.
Yeah. Gosh, the total size of the market, between $11 trillion and $12 trillion, depending on how you want to look at it, $9 trillion or $10 trillion of that is in the money would benefit substantially from a refinance. Given the 10-year between 60 and 70 basis points and the Fed essentially taking a really strong long-term view on that, at these levels, it could take two or three years to work through that. It really will become a capacity game. As Jay said, building out close to a half a trillion dollars of annual capacity, the ability to take advantage of that, I think that is really the cornerstone of us picking up share in an environment like this. It's truly capacity. The market is there for the taking.
Absent of a surprise with longer-term interest rates, we're hard at work at adding that capacity and taking advantage of it at high margins.
Yeah. I want to jump into that. I know I mentioned this in the call, I couldn't be more proud of our group. A lot of folks are seeing some growth, which is expected in a market like this. For us to go from $15 billion - $30 billion over the course of the first six months of the year, I think speaks to the true scale that our platform allows for. I just can't say enough about the team members here that allowed that to happen, our tech team and others.
Our next question comes from Timothy Chiodo with Credit Suisse. Please go ahead.
Thank you. Good afternoon, everyone. Thank you for taking my question.
You bet.
Okay. Thanks. I want to ask about the partner opportunity. Talking about how that could relate to share in the purchase market. You gave stats around 18,000 existing influencers, which is de minimis relative to the potential opportunity of 2 million plus financial professionals. I know that you've already got contracts sort of at the parent level with approaching 200,000 of that 2 million. Maybe you could just talk about the approach to attacking that other 1.8 million or so.
Yeah. Maybe even take a step back. Thanks for the question. Very good question. Julie speaks a lot about this. Just to kind of level set how we think about our platform and the growth, I think kind of the old line thought process has been purchase or refi. Since that's a question we'll receive quite a bit, it's important to understand our organization, to understand the differences in how we think or approach the business. We think capacity. We think capacity, brand, and client experience. At any moment in time, there's another loan to add to our platform. The way that we view it is we add the most profitable loan will be the next loan to the platform. In some cases, that'll be a refinance loan. In other cases, that will be a purchase loan. We don't specify purchase or refi.
We think we have a platform that's capable of underwriting, processing, closing X amount of loans growing each and every day. How do we put the next most profitable loan on there? In a market where refinances are more prevalent, you may see more refinance volume from us. In a market where purchases are more prevalent, you may see more purchase volume for us. You need to kind of view it from the perspective of excellence in operations is really our focus, and then maximizing profitability with that excellence. Now, pivoting to the partner or Rocket Pro channel as we reference it, we've rolled that out in the last few years. We've seen great growth from that channel. Yes, I think that channel gives us flexibility to reach prospective clients that our direct-to-consumer advertising may not reach.
In particular, in a heavy purchase market, that channel allows us to have access to those purchase loans that the direct consumer advertising may not have the same reach because we're talking to financial planners, insurance agents, et cetera, who are right there at the point of sale. We have, of course, a sales team that specializes in that. We've got a marketing group that specializes in that. Just like we do with direct consumer, that team is out there each and every day being thoughtful about the partners that we want to approach, taking on a lot of inbound requests, and then figuring out the proper approach to onboard those partners. For us, one of the most complicated things in the industry that we have built proprietary technology to solve for is the licensing requirements.
We're able to onboard those partners, license them so they're legal to originate loans in all 50 states, and then move forward with that. Our approach will be the same that we've taken to this point in time, and Julie talked about it, and I can turn it over to her in terms of size and scope. You've referenced a lot of those numbers, but kind of a methodical, strategic approach of rolling out that channel, finding the right partners, licensing those partners, and allowing them to continue to grow the Rocket Pro business. I think the same process you've seen in the last few years of its growth will continue here in the years to come. Julie, feel free to take it.
Yeah, I know one of the things that we think about when we consider this channel is really the brand that we have built, and these partners that we are approaching also have very strong brands, and really, we want to partner with them, and they want to partner with us. I think that's important to think about as we're considering who those right partners are for us. The technology that we are building and the effort that we have been putting into that platform, which allowed us to launch and grow as we have over the last couple of years here, we'll continue to invest in that.
It's a heavy source of where we've been investing here as of late in trying to really continue to hone that process that we've got so that we can continue to bring on new partners that want to know and partner with us for brands and for technology.
Yeah. I think that also kind of those partners we're talking about. I think I referenced this in the call. Our Q3, while refinances are at record levels, I think Q3 will be one of, if not the best purchase quarter we've ever had. We're seeing strong demand, and a lot of that's coming through that partner channel, which is great.
Great. Thank you so much for taking the question.
Of course.
Your next question comes from Richard Shane with JPMorgan. Please go ahead.
Hey, guys. Thanks for taking my questions this afternoon. One of the topics that's been addressed is the scaling of your peers, and you've talked about the impact over the intermediate term in terms of gain on sale margin and really trying to defend that. You've also talked longer term about market share. I'm curious, in a market where the supply and demand are changing or capacity is changing, do you think that that may put some pressure in the short term on market share?
I think market share for us is something that we look at yearly, two-year, three-year period of time. At any moment in time, and as we touched on even getting the right denominator, that can be a bit challenging to determine what exactly is happening. They're always revising and revising. We don't necessarily fixate on a month or a quarter when we think about market share. Long term, there are really three components to scale. One, of course, is the tech platform and the operations process platform. Bob always touches on this. There are a lot of folks that might go from 5,000 loans to 10,000 loans or 10 - 15, but to go from where we were at 50,000 or 60,000 to over 100,000, and I'll turn it over to you in a second, Bob, you can speak to this, is really a challenge.
We find a lot of our competition getting stuck somewhere along the way that benefits us, that we're able to continue to scale. The other thing, of course, is the financing that's required. As you grow, even if you have the technology or the process to allow for that, having the deep financing that we have, and Julie can speak to this, is another thing that many will struggle with. I think the third is the brand, and this really helps us quite a bit. Speed with our operations, client experience with our operations, and then brand all form a strong moat around price. We, of course, have to be competitive with price, and its capacity comes and goes. As it typically does in the mortgage space, it can apply a little bit of pressure.
Julie talked about the fact that margins can go up and down a bit. Client service, speed to close, that brand really give us a competitive advantage that drive consumers to our experience and make it less about price. For the last 25 plus years, that's really worked in our benefit to defend our margins and have that strong margin that you're seeing today. Bob, I don't know if you want to kind of touch on the capacity piece, which I think is the stopper for most of our competition.
Yeah, I think it's a great question about thinking about market share, and we talked about how we think about when it comes along. Usually, we grab it at some opportunistic times. What we find a lot of times is we scale faster than our competitors, and we're like a rabbit. We run out ahead, and then they begin to add some capacity. At that point, we'll hold it. There are two long-term, bigger picture systemic things that allow us to continue to gain capacity. One is that those smaller lenders, unlike pre-financial crash, where anyone could come rushing into the industry and often did. They were selling cars. They're like, "Oh, look, it's hot in the mortgage industry. We're going to jump in." That's very different now. Licensing has put a big moat around that, and so people can't easily enter small entities.
The big entities, as Jay said, they can add capacity, but it's not linear. It's exponential in the sense of it becomes more and more difficult to add that capacity, so they begin to hit limits. I think we're in that range now where we will find out who can truly add capacity and be able to take advantage of this ongoing market. I think we're very well positioned to do that.
Got it. Okay, that's great. Very helpful. Thank you. Just one housekeeping question. What is the UPB now on servicing portfolio? I missed that.
About $400 billion.
$400 billion? Okay, terrific. Thank you, guys.
Your next question comes from Dennis McGill with Zelman. Please go ahead.
Hi, thank you, guys. First question just has to do with headcount. You've talked about, and we've seen, obviously, an unprecedented environment for the industry and a lot of competitive dynamics in play, loan officers being bid away, people trying to build their own capacity. You're set up differently. I was just hoping you could maybe explain a bit about how you handled headcount during the quarter and since, and what you've seen from a turnover standpoint.
Well, yeah. I think Bob talked a lot about this. Our business model is structured differently. We're able to flex capacity and grow capacity without having to add the same number of heads. Now, of course, when you're growing the way that we are, we're still hiring individuals, but we get a lot of extended capacity through the same team members, really using technology and bringing efficiencies to those team members. In terms of turnover, our folks are very happy. As we mentioned before, all now working on their vesting to become shareholders and experiencing great success. We've had a strong. Our culture is very strong, and it's been very strong going through this period of time. Even with COVID, we've got 98% of our team members working from home very successfully. We're in great shape from a retention perspective.
Bob, I don't know if you want to touch a little bit more about how we think about we're not hiring the same types of folks our competition might be because we don't require someone with 20 years of experience to come in for our group to grow.
Well, that's right. It keeps coming back to this capacity thing that we've been talking about and the ability to get scale, because that is really key, is do you have to add one individual to get the same amount of loans as you were getting before? Can you add one individual and get more loans? We've seen a pretty dramatic increase in the number of closings per team member. We talked a lot through the roadshow about what we call Rocket Logic, and the algorithms that are guiding that work, which allow us to plug people in. Where historically our industry, and even today, you're plugging in highly seasoned people, and there's only so many of them. That remains an impediment for a lot of our competitors to truly grow. Utilizing technology to assist people.
Because we've also bifurcated those roles, so you don't just have a loan processor who needs a couple years of experience to be able to be competent. You can plug people in and teach them and show them and guide them through technology on things to work, and then you can reduce those choke points. That's been really successful for us.
Very helpful. Second question, just there were a couple stats you mentioned. I didn't catch them. I think one was 46% of closed volume came from the servicing book, and then I think you've talked about the 80% retention rate. As you've grown in servicing and added more clients to the portfolio, can you just give us any historical perspective on ratios like that? Have you been able to improve those ratios over time as you've gotten larger?
Yeah, I think, you can speak to this, Bob. They continue to get better. I think the most recent numbers are maybe at the higher percent of where we've been. Go ahead.
We were always industry leading, but usually in that 60- 65 range. The last couple of years, it's been in that 70s. I think it's really a continuation of a number of things. A, we continue to get better at it. We really focus on the data and the analytics to drive that and to just continue to refine, because speed to the client is everything. Also, this is where the brand continues to kick in. People, we talk about barrier to exit as it pertains to servicing. We want to provide an experience because servicing doesn't have the greatest reputation in our industry of high client service. Jay mentioned our seventh J.D. Power Award in a row, and every year that we've been eligible to win that. People want to come back to that experience.
A lot of people have had experiences that weren't so great elsewhere, and so that leads to higher and higher retention. It's not a surprise that that number continues to go north.
Yeah. I think when you think about the investments that we make, technology investments, when we think about servicing, we invest there just like we do in origination. A lot of folks are trying to cut costs to drive increase, I suppose, profit around the servicing. For us, the client experience, having access to property data, what's happening in their market, in their neighborhood, having access to get answers to questions they have about their payment real time, not wait on hold for half an hour or hour. It's all important because as we've talked about, lifetime value of that client is critical to the success of our business. As we think about the amount that we can pay to acquire clients, we're even more competitive because the second time around, there is no acquisition cost for that client if they enjoy our experience.
We really view servicing as a strategic advantage to grow our origination platform.
Very good. Appreciate it. Good luck, guys.
Thank you.
Your next question comes from Dan Perlin with RBC. Please go ahead.
Thanks. Good evening, congratulations on your first quarter out. Obviously, a great setup for you guys. I had a question, if I could revisit the gain on sale margin just for one second. It really is trying to understand the dynamic around price sensitivity and embedded in that when some of that is so much focused on the servicing portfolio. I'm trying to understand the difference between price-sensitive clients versus maybe non-price-sensitive clients that you have to go out and be a little bit more aggressive to acquire.
Well, yeah. Good question. I don't think there's a significant difference around price sensitivity. I do think it's important to point out that there's a floor, and Bob can speak to this as well, a floor to price. That floor is created by the cost to underwrite, process, and close mortgages. We benefit in this area because although margins can go up and down, and Julie talked about how robust they were here in Q2 and how good we feel about the margins in Q3. As we even see more pressure on margin, what stops our competitors from dropping margin is the cost that they have to acquire, process, underwrite, and close. We have to be competitive. I touched on that before. We have to be within an eighth or a quarter of interest rate.
That difference for us, and the profitability it brings versus our competition, which is kind of stuck because of their cost to underwrite, process, and close, really allows us to have very strong margins in tougher markets, in easier markets, regardless because of the advantage we have around the efficiencies to underwrite. We've seen that for years and years and years now, Bob.
Yeah. Gus, another thing we talked about a lot in the roadshow was who's in control of the business? With a lot of traditional mortgage lenders, what you find is that the loan officers are in control of the business. As I said, they are the brand, they're the reason that the client is coming to them. They are the ones that then can really drive those margins. Of course, since they get paid the same, whether margins are high or margins are low, they're always going to be advocating for lower margins. That is a very real and very powerful force at a lot of places driving those down. That doesn't really exist here.
As Jay said, we find that a mortgage is a very difficult thing to price shop because you have interest rates, and you have points, and you have fees. It's a very difficult thing. Yet the difference between one-eighth, which can often be pretty imperceptible day to day, since the market is constantly changing, can mean a half a point in price, which on a $400,000 loan is two grand. Then you couple that with our ability to maximize execution via our size, and that's when you can really see that we can carry more substantial margins than a lot of our competitors over the long haul.
That's super helpful. The follow-up I had is that you clearly have outperformed plan. The guidance suggests that that's likely to continue. Now you've got a public currency, I know that a big part of the strategy long term is to continue to expand into some new verticals as well as geographies. I'm just wondering two things. What is your kind of near-term appetite for all this excess capital that's flowing through the model? Secondly, now that you have the public currency as well, what are your thoughts around M&A to accelerate some of that expansion plan? Thank you very much.
Yeah. I'll take that, and then can have Julie chime in as well here. We've always been, I think, opportunistic when it comes to leveraging capital to grow. Usually organic is the first place that we look. We've touched on our drive to $40 billion a month, investing in technology both at the origination and servicing level. That's the first place that we will go. As a private company, we've historically done special dividends over the course of time. We have lots of cash coming in right now. Something like that is certainly a possibility for us as we think about the future. We feel good about our ability to continue to grow the business. Doesn't mean that we're not always out looking for opportunities. An acquisition is something that we think about as a use for the currency as well.
Of course, repurchase if we think that that makes sense. Julie, am I missing any of our?
No, actually, you said it great, Jay. I think that's right in terms of kind of the waterfall of how we think about using our capital. Investing in the business we've found is generally the best way to deploy that capital. We're certainly looking very hard at all the opportunities that we have to continue to use that capital to invest in technology, invest in our processes, think about things that might be strategic to add to the platform from an M&A standpoint. I think we'll keep looking at that just like we always have here. As Jay said, if it gets to the point where we say, you know what, there's not something that we want to invest in beyond what we're doing already, and we have opportunity to consider a dividend, it is something that we may consider down the road.
Yes.
Your next question comes from Arren Cyganovich with Citi. Please go ahead.
Thanks. If you think about maybe where you started this year and the real massive amount of customer acquisition that you've created through this environment, how does that change your view? Has this accelerated your kind of growth expectations for the business and some of the other businesses you have within the ecosystem?
I'll go back to that comment around kind of strategic thinking. Certainly, this is some wind at our back. The long-term strategies that marketing technology to allow us to grow in markets, whether it's real estate, auto, mortgage, I think we're still on track with all of those things. We certainly benefit from having a larger book of clients that have had a great experience on the mortgage side. It offers up opportunity for us to reach out to them, not only for mortgages down the road, but of course, some of the other businesses that are growing in our ecosystem. I think it's helpful, but nothing that would deviate us from the strategy that we've set out to see growth in all of the businesses here in our ecosystem.
Okay. Just lastly, the GSE adverse market fee. Maybe you just talk a little bit about how that might impact your gain on sale volumes or just general mortgage volumes overall once that's implemented.
Yeah. We noticed, and Julie can speak to this, that there's been a change I'm sure everyone's aware of where it was pushed back, but Julie can kind of elaborate on what's happening and how we think about it.
Yeah. That fee was pushed back to December 1st now, and that's going to be effective for us. That was good news to hear that. I think that what we'll see really depends kind of on how others we react to it. I think everybody's going to be subject to the same fee. The thing is that it's consistent across everybody that's originating mortgages. What sort of impact that has on pricing, I think we'll have yet to see. There's certainly other factors that I can let Bob chime in on this as well, that we consider in thinking about that. Bob, do you want to-
Yeah. Well, we have a real-life experience with how it's going to affect because it went live for us for two weeks.
The FHFA came out and said that the fee is effective right now. That was, I don't know, earlier last month. For two weeks that was in place. We didn't see a material change. Again, at capacity, which the industry is at and will be at for quite some time, primary, secondary spread largely absorbs much of that. Whether all or not, we can talk about, but we didn't see a fundamental change to our volumes or to our margins for that period of time. That pricing that goes live on December 1st will largely be reflected in mortgage companies' rate sheets early October. I would imagine the experience will largely be the same. It'll be a pass-through.
Thank you.
Your next question comes from Jason Kupferberg with Bank of America. Please go ahead.
Hi, good evening. Thanks for taking our question. This is Mihir on for Jason. I wanted to just real quickly start with cost structure, maybe. If you could just talk about that a little bit. How much of it is related, how much of your costs are related specifically tied to origination volumes that will move in lockstep as we go quarter-over-quarter with the seasonality, if you will? Then just any comments overall on just how much is variable versus fixed would be great.
Yeah. I'll let Julie field most of this question, but I think that's another really important concept to understand about our platform. Bob talked about it from the mortgage banker loan officer perspective, from the operational perspective. The next loan that we load onto our platform, the vast majority drops to the bottom line. I think that makes us much different than others who grow capacity. They're growing expense right along with capacity where we're not. Julie can kind of give you some more specifics.
Yeah. The things that tend to vary more directly with production are the banker commissions and compensation that we pay our operations folks as well. Production costs that we have also will increase. It's about 25% of our costs that will vary. When we're adding new loan production to our platform, about 75% of that tends to fall to bottom line. It is a pretty substantial amount as we continue to add on production to our platform, in terms of the profitability of that.
Great. Thank you. Just a quick question on the other income line item. Obviously, you had strong growth this quarter, but some of that I think is the Small Business Administration. I think you had like $248 million extra from that in Rocket Loans. Can you just talk about just the growth expectations for that for the rest of the year? Just, has there been other things that are accelerating in any businesses to call out other than, I guess, Amrock, which is directly tied to origination? Thank you.
Right. Yeah. Julie can speak to this. I think as you go through the documents, you'll see growth in a lot of those businesses. In particular, we touched on this on the roadshow, our Rocket Loans business is really designed as a flex lending tech platform. The relationship that was established, in particular here with the SBA, allowed that group to do somewhere near or over 9 million loans or grants that is reflective in that other income that Julie can speak to. That's over a limited period of time, but the underlying ability for that technology to be adjusted, I think is something we're very excited about. Julie, if you want to talk to the-
Yes, that's right. You got that right. The other income increasing from $244 million - $562 million quarter-over-quarter. There are two significant things, and you mentioned both of them. That opportunity that Jay just mentioned, and also Amrock increasing really kind of alongside the Rocket Mortgage business as well. Those two things do have the majority of the impact on that increase in other income for the quarter. As we look ahead, there may be some additional income that comes in through the rest of the year from that, but we do not expect that, as you'll see when you look at our 10-Q, to be necessarily a recurring source of revenue. I think it's a great point, Jay, that the platform is built to do things like this, and from time to time, there may be further opportunity.
Your next question comes from Mark DeVries with Barclays. Please go ahead.
You mentioned potentially investing in servicing. Would you consider bulk servicing acquisitions or correspondent lending? It seems like it could be a good use of capital with such an unusually high recapture rate.
Yeah. I'll let Bob take this on as he's the expert with capital markets. As we've talked about that, certainly we think a lot about MSRs and understanding the value of MSRs on our platform. In some cases, you may see us sell MSRs if that's the right move. In other cases, we may acquire them. Bob, you can elaborate.
Yeah. There's really two ways to think about acquiring MSRs from a profitability standpoint. One is a simple return on capital and how you might lever that and how that might play out. The other piece, as I talked about earlier, is retention. Often when we look at acquiring MSRs, we look at not only acquiring the MSR to get that cash flow, but also to get that client and how much of that future stream of cash when they refinance or buy another home we'd be able to acquire. It's something that we've done in the past. It's been incredibly valuable to us, but a lot of it also depends on what the market looks like and what the capacity is to handle that market. We're always out there. We're always looking.
I don't know as right now we're thinking, Julie, you can talk about that as far as putting capital to work to get some kind of a levered or unlevered return. From a retention standpoint, in many different ways, we're very active in that market.
The last, I think this is an important thing to point out. When you think of other folks who service loans. Again, we're an originator, and we leverage the servicing of those clients to really drive our origination, and will drive our additional ecosystem moving forward. We can be really thoughtful about how we acquire MSRs. We also, of course, have the largest engine in the world to produce them ourselves. Our competition has to buy servicing. That's the only way for them to grow that business. We're probably more strategic in thinking about how we buy because we have the luxury of being able to produce them ourselves.
Okay, got it. Could you help us size how meaningful the GNMA EBO opportunity is for you guys and kind of timing as to when that could flow through to earnings?
Sure. Go ahead, Julie.
Yeah. That is something that we're looking at, certainly as an opportunity, given what you see on our balance sheet right now. You can kind of size that opportunity and see that we've got about $3.5 billion of loans on our balance sheet because those loans are 90 days past due, which does trigger the ability to buy those loans out of the portfolio. Really the analysis is the pass-through rate that we continue to have to pass through versus how we can finance those loans and what the cost is to do so. We are actively looking at that. We have bought some loans out already and I think the liability about $241 million on our balance sheet at year-end that we had bought out. We're thinking about whether it makes sense to continue to do more of that right now, in fact.
It may be something that we do, but we'll see.
Okay. Any color you can provide on what % of those loans that are in delinquency or in forbearance are GNMA loans?
Yes. I don't know probably the GNMA mix offhand. Maybe Bob knows that.
Well, it's about 90,000 loans and a disproportionate amount of the exact number that are GNMA. I don't have that off the top of my head.
That trend has been decreasing is the good news. Compared to where we saw it at June 30th, we are seeing a decrease in the number of loans in forbearance. It's been a good trend to see.
Yeah, I would say that trend, along with just the strong market that we're experiencing right now, the strong growth that we're experiencing right now, all incredibly exciting for where we're headed here for the second half of this year.
Now we do have time for one more question from Don Fandetti with Wells Fargo. Please go ahead.
Hi, good evening. I just wanted to ask a follow-up question on the Q3 gain on sale margin guidance. Is there a mix component in there or should we sort of view that as just normal capacity coming into the market? Also in Q2, it seemed like the partner network gain on sale margin went up a lot quarter-over-quarter. I didn't know if you could provide a little more color on that.
Well, I think from a mix perspective, if you're referencing direct-to-consumer versus partner, I would expect that mix to remain the same or similar as we think about the Q3 guidance for margin. Julie, I don't know if you want to reference or speak to the partner margin in general. I think that was the second part of the question.
Yeah. You have seen the partner margin come up here as I think we explained the partner margin is reported on a funded loan basis. There was a bit of a lag on that. We had made some investments in the partner network in 2019, and you're really seeing that margin and that channel come up here into 2020, consistent with what we're seeing in the direct-to-consumer channel. I think in both channels, you're seeing the impact of the current market environment on those margins.
Okay. Thanks for clarifying that.
You bet. Well, Go ahead.
I'm sorry, that is all the time we have for questions. I'm going to turn the call back to Jay Farner for his closing remarks.
All right. Thank you. Again, we appreciate everyone joining us here today, taking the time as we answered all of those questions. We're excited about getting to know each of you better as we build the relationship. As I mentioned before, really excited about where we came out here in Q2 and how we feel about Q3. Anxious to get on the phone with you in a few months to talk about those results once we can. Thanks again, everybody. Have a great evening.
This concludes today's conference call. Thank Thank you for joining. You may now disconnect.