Rocket Companies CEO: Here’s How to Fix the Housing Crisis

24:09And what I think is like really interesting is that like all these parts and processes have evolved to be like very disparate right you have like the home search and real estate experience where you you know use websites like you know redfin or zillow to kind of go through that part of the journey then you have the mortgage process which is where you apply for financing and and credit you know you go through title you go through appraisal and then you close and then you go into servicing and these are all like completely different parts of the equation, which is why that LTV to CAC thing is like so important.

24:44Like typically when you value a business or a company in fintech or really any consumer business, you think about LTV to CAC and you think about, well, what's the lifetime value of this relationship relative to the customer acquisition cost? And the problem with housing in general is that these sort of, if you think about it as a funnel, they're all like disparate, A consumer essentially flies out of one funnel and into another funnel. And so the economics are not great given how big of an industry it is and just how big of a transaction it is. And so that's something that really fascinated me is that like one, all of fintech in some ways leads to a consumer caring fundamentally about generational wealth.

25:26and generational wealth, it comes from things like homeownership, right? It comes from long-term appreciation. It comes from, you know, creating something that's safe and sustainable for you and your family and your family's family. And that's the American dream. That's what we've thought about. But the economics of the business are incredibly disparate. And so that's why, you know, for us, a lot of it has been around just integration, right? It's about more vertical integration. It's about connecting these parts of the experience because we think we can, one, build a better experience. Two, we can create a lot more efficiency and therefore lower the cost.

26:04But then three, just completely change the economics of the business as well and just sort of create something that is a bit more of a new species. And so, yeah, mortgage is a really interesting business. You know, I've been, I'm relatively new to it. I've only been, you know, two years or so, you know, in this space and in the industry. But like, it's fascinating. I mean, it is so big and so fundamental to the economy. It is so important to consumers from a long-term perspective. And yet there's so much opportunity to modernize it, transform it, improve on it. And so, yeah, these are all the things that are exciting to me.

26:43Let's get deeper into Rocket and both go into its history and its future. Maybe on the history side, if I understand correctly, the broker model used to dominate and then there was a transition to direct lending and Rocket is one of the big beneficiaries there. Why don't you give some of the history of how the model evolved and the story of Rocket? Yeah, I mean, Rocket, first off, it has been around for a long time. This company is 40 years in the making and that's a generational thing. We have been around for a long time and we've grown. We are one of the largest employers in Detroit and we started by really transforming transforming the mortgage experience from the beginning.

27:25I think we were the first to put mortgages on the internet. We were the first to put them on a mobile phone. We are now the first to really embrace the AI-driven version of the mortgage experience. But, you know, a lot of this is that it is hard to build this kind of an experience at scale. You know, the mortgage process is complicated. I mean, you have to build sort of pricing, licensing, and hedging infrastructure that works on a day-to-day basis. Every state, every county has different lending requirements, different regulatory requirements, and a whole suite of different types of products, right?

27:59FHA, VA, 30-year fixed, adjustable rate mortgages. The compliance requirements change, you know, sometimes day over day, week over week. And so it's a gigantic workflow engine that we've built over the past 40 years. You know, we are licensed in all 50 states, 3 ,000 parachutes. And, you know, we kind of have this mindset of continuous innovation, continuous evolution. And we're great at what we do. It's why we have the most trusted brand to become, you know, the largest mortgage company and lender in the industry. But I'd also say that we are, we're very restless. You know, we have one of our values is obsessed with finding a better way.

28:40And that's something that drives thousands of our team members to just do more restless things, more disruptive things, and continue to sort of transform the space day over day, week over week, month over month. So I have the fortunate benefit of being a new CEO. I've been in a role for two years. I'm the first outside CEO in the company's history. But it's a very special company. There's so much potential for us to do more. And I would say that we are quickly evolving from being a mortgage company to a homeownership company. and that means that we're not just creating innovation in the mortgage space, but we're really transforming homeownership because that's what it's really about.

29:23It's not just about the financing aspect. It's about the search and the real estate aspect. It's about servicing. It's about really making a 30-year bet on consumers who are making 30-year bets on us. And so our grand vision is to really evolve to be a homeownership company. that's why you know some of the decisions that we've made around acquiring redpin mr cooper are fundamental to that thesis but we uh we have a long legacy of of building great products and experiences for our consumers that's how we built a brand that's how we built our presence um we have thousands of team members that are super passionate about what they do and we have a very loyal team member and talent base working for us we actually had a celebration We turned 40 this past year and we had a very special experience where we built a celebration for our long-term tenured team members.

30:18And we had over 500 team members who've been with the company for over 20 years. Wow. And that's pretty cool. You know, I've been in Silicon Valley for some time. I've been in Southern California and Seattle. And you don't have a lot of companies that have that kind of loyalty. And that's something that we really appreciate because you guys know this, right? innovation happens quickly, but it takes a lot of dedication and passion to actually create something special. You have to put a lot of time into it. You have to sometimes spend, you know, the first two years or experimentation realizing what works, what doesn't work.

30:49Then in your third year, you kind of figure out in your fourth year, you figure out better product market fit. In your fifth year, you figure out distribution. And so what I love about Rocket is just that we have a lot of folks here who've been here a long time that will run through walls for this company. And that kind of loyalty and dedication, I think, is something that makes us what we are. And it's something that we're betting on will transform us into the future as well. Alex just hit 10 years at Induce and Horowitz. And I was also similarly inspired at the company picnic just seeing a bunch of people have been here.

31:20I got a gold watch. Yeah, that's the if you're here for 10 years, you get a gold watch. So I got a gold watch. It has a nice little engraving on the back. if I can kind of add to what you were saying I mean like to take like a pithy take on this a lot of companies in Silicon Valley it's like okay I use this product every day and like the company can't figure out how to make money and then you have this other type of company where it's like I make so much money how do I get the person to use me every day not because it's like I just want somebody but it's like I want to add value every day and this is what I found so compelling because I'm, you know, this is not part of my day job at Andreessen Horvitz.

32:01I mean, I invest in a lot of prop tech companies, a lot of fintech companies, and I have kind of an extracurricular activity, which is Rocket. And part of the reason why I find it so interesting is it's like this, so Rocket made, I think it was$10 billion in net income in 2021. Because guess what? Rates go down dramatically. People are like, I'm paying 6 % for it or 5%. I can refinance to 2.5%. I'm going to do that. I'm going to save a lot of money. And Rocket was at the epicenter of that. But you don't refinance your mortgage every day. You don't go buy a new house every day. These are not daily active use type products.

32:38And meanwhile, like in Silicon Valley, you have all of these daily active use type products. They're like, how do we make money? We can't figure out how to make money. Like we get people that use this, like chat GPT. People use it every day. Are they making money? No, they're losing a lot of money. So it's very, very rare to find it's, what's the more unique of those two? Is it like I have a product that people use every single day? It's like a toothbrush. Remember like Larry Page had a rule at Google, which is like, we will not launch new products unless they pass the toothbrush test. What's the toothbrush test?

33:09You have to use it every day. Hopefully you brush your teeth every day. So whereas on the other hand, you have companies where it's like they don't pass the toothbrush test. But that's actually not a qualification for success, right? $10 billion net income. Yeah. So how do you take, I would rather start off with this, you know, here's a very, very valuable thing that's a real business model, you know, perfectly run, very, very profitable. How do you add more products and services that add more value to the consumer? Yeah. Right? It's like you go to the dentist twice a year, like, that's it. That's just like, is there a way to go interact on a more regular basis?

33:49and that's where things like mortgage servicing come in where it's like you get a bill every month. That's an engagement. What do you do with that? Most people, it's actually really interesting. There is a story that Tony Hsieh used to tell about Zappos where Zappos was one of the very, very few companies that decided to take customer support and try to turn it from a cost center and actually turn it into a, well, I think he didn't call it a profit center. I think he called it like a love center or something. But like, you know, really engage the consumer. And there was a famous story from Zappos where there was some woman and the customer support rep at Zappos sent her flowers.

34:27Something bad happened to her. It's just like, you don't expect that to happen. Normally, it's like, okay, I hired McKinsey and they said I could cut, you know, two thirds of my people this way and that way. And then I could put people in this IVR and then I'll save$4 million a year. And like that's how a lot of companies treat their I'm sending a bill to a customer or I'm doing customer support with the customer as opposed to looking at it as an opportunity to upsell something, not in like an evil way. But it's like, hey, we have a monthly communication with you. What is it that we should do?

34:59And the answer can't just be we're going to drive down the cost to zero and have robots do everything and you're going to hate us. It's like a real interesting opportunity if you're engaging somebody every month to do something with them. So it's really, it's like you start off at the profit center. That has been solved. And that's a really hard problem that entrepreneurs that come into our office every day, it's like, I'm going to figure that out eventually. But right now I have a product. I've got a toothbrush, but I have no idea how to make money on it. The other way of doing this, and I think it's a really interesting, you know, it's a 40-year-old company.

35:28Varun's been there for two years. You have, you know, a real profit engine. How do we turn it into a toothbrush? Yeah. So let's talk about how you guys are doing that or thinking about doing that. You made a wave of acquisitions, high profile public companies. Why don't you talk about what is sort of the strategy of how this all fits together, what you're trying to do? Yeah, I mean, look, at the end of the day, we want to redefine the category itself fundamentally. And our thesis is very simple. If we connect more parts of the ecosystem, we can build a better experience. We can pass on that value to the client in the form of lower cost, less friction.

36:06and we can build, you know, fundamentally different economics around the business and drive growth. And from our perspective, you know, when you think about funnels, right, mortgage in some sense is one of the world's most complicated user funnel type products. And when I was into a TurboTax, TurboTax is another example of a funnel centric product. And, you know, our strategy is pretty simple. It's that we want to serve clients across the entire journey of home ownership, not just the financing and mortgage aspect, but also at the top of the funnel, the home search, the real estate aspect, and then at the bottom end, the servicing aspect where, you know, they have a lifetime relationship.

36:47And so we've made two acquisitions in service to that. The first one is Redfin. Redfin is the most visited real estate brokerage site in the U.S. They have relationships with 50 million monthly active users. And so these are consumers that use the Redfin app. They use the Redfin website and they search for homes every single day. What I love about Redfin is they have an amazing mobile app. And so most of those 50 million users, they use the product daily and they use the product on a mobile phone. So they have that really nice, rich interaction. They also have a network of thousands of real estate agents that we now employ with the company, as well as a partner agent network as well.

37:30And so what that represents is really the start of the homeownership experience, right? And so some people start with the mortgage and the financing. Other people start with the house and like browsing and sort of that voyeuristic scheduling tours, right? Exploring the home. And so that's one part of the experience that we want to connect, right? And so those 50 million relationships really help us build a top of funnel relationship. The next thing that I think is also really important is that we want to connect that to financing and then we connect that into the servicing experience as well. And the reason that's important is because that allows us to build more relationships with clients so that we can reserve them with products and services as well.

38:13because once you're in a relationship with Rocket and you have a great experience with home search, real estate, mortgage, and with servicing, the beautiful thing about it is that you create loyalty. And so when that client is ready for their next home ownership transaction, it doesn't have to be a new purchase, but it could also be a home equity loan, right? There's trillions of dollars of home equity that is now trapped in a consumer's home. And so there's a lot of equity there that you can use to generate cashflow. to Alex's earlier point, what are they doing today? Well, they're racking up more credit card debt.

38:46And instead, you know, it's probably better to take more equity out of your home. And what better way to do that with the provider that you already have a relationship with, right? And so for us, the big realization that really led to these acquisitions is that these relationships are part of a super funnel. They're not a singular experience. And if we can do a good job integrating those parts of the experience, we can create a better relationship with clients. We can create more loyalty. We can be sort of their lender for life. And that's the fundamental thesis. Now with Mr. Cooper and Rocket, we have 10 million clients in our servicing book.

39:24And so those are clients that we have a lifetime relationship with. And that's one in six mortgages in the US. So it's massive scale, it's massive distribution. And there's another saying where first-time founders really think about product market fit. And second time founders really started to focus on distribution. And, you know, we have created a pretty amazing engine around refinance, around purchase. But the question is, how do we now get more distribution? And that's really the thesis behind these acquisitions is that we can now get more distribution. And then the last thing I would say is, you know, if you believe that the world is shifting into this AI world, you know, one of the fundamental things that you need to make that successful is you need access to more data.

40:04that data allows you to build better models. Those models give you a better experience, but also better understanding of consumer behavior. That just allows you to build a better experience. And so it's a pretty simple thesis, just connecting more parts of the experience that are naturally part of the consumer journey. It's making it more seamless, right? Less points of data entry, less waiting and wondering, faster turn times, better rates, lower costs, better fee structures, and just earning loyalty over the lifetime of a consumer relationship. And so, you know, these acquisitions are a direct accelerant of our core strategy.

40:41And we're excited about them. You know, it's early days, you know, two big public company deals. The overall company is growing by approximately 60 % in terms of just the overall size of the company. We now have more national presence. You know, we have locations in different parts of the U.S. that has an ancillary benefit of us being able to attract more talent to the company as well. And to be able to build our team members in a way that allows us to be more innovative and grow and scale. And that's kind of the core thesis. Is it accurate to say you're trying to vertically integrate as much as possible?

41:18Yeah, I think there's two things. I think that one of the things that I've learned when it comes to large-scale M &A is you want to be very intentional about when you are integrating and when you are accelerating. And I'll give you two examples because I think the way we look at Redfin and Mr. Cooper are a little bit different around integration versus acceleration. And the word acceleration is really important because I think sometimes what companies get wrong is when they, you know, acquire a company, they try to assimilate them too quickly and, Or they try to assimilate them not quickly enough and they're not intentional about why they're doing what they're doing.

41:57And when you think about something like Redfin, it's like Redfin is a very successful brand that is a very successful following with a very loyal group of consumers. And one of the things we talked about was like, hey, the Redfin brand is like super important, right? Consumers have a lot of affinity to that brand. It's because they build a great product. So as we think about the integration of Redfin and Rocket, we wanted to strengthen Redfin. We did not want to assimilate Redfin too quickly. We wanted to preserve the brand. We wanted to strengthen the brand. We wanted to increase the focus on traffic, on demand generation, to invest in the real estate strategy we have.

42:34because one, it helps us build that top of funnel. But two, we don't want Redfin's brand to disintegrate. We don't want consumers to lose that affinity. If anything, we want to make it stronger. And so we have deliberately decided to make Redfin stronger by allowing it to operate a little bit more autonomously. And that's very intentional. But when you think about Mr. Cooper, well, the biggest synergy is the integration of that kind of origination mortgage business and the servicing business, because we want to bring those two things together so that we can recapture and create more relationships that kind of go between origination and servicing.

43:14And Mr. Cooper looks a lot more like Rocket. You know, they have an origination business, they have a servicing business. And so with that company, we are going to rebrand. We are going to call it all the Rocket platform. We are going to fuse the organizations more closely together. And so that is a much more intentional approach around integration versus acceleration. And so we've studied what has made acquisitions successful and what's made them not successful by looking at a lot of patterns and practices. And we want to be very intentional about that. But to answer your question more directly, integration is our number one focus.

43:49It's the number one focus across the company. We have very specific goals. We have very specific owners. We've organized around it. We've invested in specific milestones around the synergies. And we want to get this right. I mean, this is a big bet that we're making across the company. I mean, these acquisitions are billions and billions of dollars in value. And they're very important to our strategy. You know, Mr. Cooper is almost half the size of Rocket. You know, Redfin is, you know, about half the size of Mr. Cooper. And so when you look at it in totality, you know, it's quite a substantial addition to Rocket that we're making.

44:22And so it is a very important priority for me, for our board, for our leadership team. And I'm also excited, by the way, about just the talent. When you think about the Rocket leadership team, as well as the organization now, I mean, we have many of the best and brightest in the industry. We have folks that are very steeped in mortgage and servicing and the technologies that are around it. We've also hired, you know, we have leaders like Alex that are now on our board that really represent the future state of the art in fintech and in tech in general. We have a new CMO, we have a new CTO who really come from industry, not mortgage.

44:58And so we have a very balanced leadership team. And I think these acquisitions are going to strengthen that significantly as well. So we were talking offline about the importance of companies being balanced in their business model. Why don't you explain what that means? Yeah, so I think one thing that is interesting about companies is that especially in regulated environments or environments that are sensitive to macroeconomic dynamics, is that their business and profitability fluctuates, right? In good times, like low rate environments, they print money. In other times, you know, they sort of tend to struggle.

45:34and so they float a little bit with the wind. And one thing that I'm really excited about with our company, especially with these acquisitions, is that we are now incredibly counterbalanced. We can survive and thrive in any market rate or economic cycle. And the reason for that is our origination and our servicing business counterbalance each other. And so, for example, when rates rise, the value of our servicing portfolio continues to increase and we earn recurring revenue on an increased servicing book. But when rates fall, we can originate more mortgages and refinance and create new opportunities for that same servicing book.

46:13And so the cool thing about Rocket is it's one of the only companies, and I would argue the only company, that is super counterbalanced in the housing industry. And it has the ability to survive, thrive, grow market share in sort of any market or any interest rate environment. And that's something that I think is tremendously exciting when you think about a company that is in a multi-trillion dollar industry that has single digit market share where there's a lot of consolidation, a lot of opportunity to really disrupt and transform experiences with artificial intelligence. And just having these different assets sort of put together in the same place makes us very unique.

46:49I was going to say, so there's a concept in math, it's called a Fourier transform. And basically what that is, is like if you have any function, if you have a line, like every business, their revenue and their profit should look like this. If you look like this, everybody's happy. If you look like this, everybody's not happy. If you look like this, people are like probably not happy. But actually there's nothing wrong. And what a Fourier transform is, is basically you can decompose any function into a bunch of sine curves, right? So if I have a line that looks like this, it actually might be composed of 50 things that look like this, but to Varun's point, they kind of counterbalance.

47:24And a big mistake that entrepreneurs often make is like, I have a business that is a sine curve. Let's kill it. I don't like that business. No, no, no, no. It's actually a great, like most businesses are in some way, shape or form cyclical, even if you don't think of it that way. Like just add another sign curve that has like a slightly different period. So it just counterbalances. Like if you're like, and the banks actually have done it, like JP Morgan is the most valuable bank in the world. And they have done this because they have a bunch of sign curves, right? It's like, should they get rid of their investment banking business, even though in like 2022, the investment banking business was not profitable.

48:01No, but they're going to make a lot of money sometimes. It's like a feast or famine type thing. But let's add wealth management because we get 50 basis points on a trillion dollars every single year. Let's add, you know, retail. Let's add, like they have so many different product lines. And the reason why is because they all are like, you know, if you have a curve that looks like this and then you have the exact opposite curve, you combine this with that and then you get a straight line. and you want to have straight lines because they're predictable, but your business actually under the cover is typically is not a straight line.

48:34It's composed, it's like a Fourier transform. You have these overlapping sign curves in such a way where you actually do get hopefully a monotonically increasing straight line. Okay, you were talking about earlier how there are kind of money printing machines and, you know, Silicon Valley startups that have, you know, toothbrush tests but don't have a money printing machine attached to it. you know, Rocket has been able to acquire a sort of demand machine, you know, in Redfin and others. Why is it so hard in real estate if you own sort of the place where people are searching every day to build the money printing machine next to it?

49:09Well, there's so much latency. I mean, like I think of Zillow is a good example of this. Like Zillow, a lot of people use Zillow. It actually doesn't make that much money because it's like, Like it's a lead generation machine for agents. That's how they make money. The vast majority of their revenue comes from like you do a search. Why are you doing a search? You're not even doing a search with purchase intent. Like Google makes a lot. We've talked about Google a lot in many podcasts, right? Like so Google makes lots of money and it's a freemium model where it's like 99 % of the time you're searching for like how do I kill this annoying fly that keeps like buzzing around our pot.

49:43And then 1 % of the time it's like I want to go buy a fly swatter. And that's purchase intent. and then there is a fly in our studio, Varun. That's what I'm referencing here. So, you know, 1 % of the time there's purchase intent. Whereas if I'm, there are people, you know the term Netflix and chill, right? There are people that have done this with like looking for homes. It's like, oh, I'm gonna spend all night looking at homes that I cannot afford in a weird part of the world that I'm never gonna even visit. Why do people do that? I don't know. Like, it's fun. Like, it's kind of like this aspiration.

50:16I like looking at homes. oh, like I heard that, you know, Sheryl Sandberg sold, like let me look at that house. Or I heard that, you know, Sharon Stone this, or I heard that, you know, Liam Neeson that, like you're not going to buy Liam Neeson's house, but you're still curious. You go look at it. The purchase intent tends to be low. So you have people, like it's kind of like there's some search engines that are very, very tightly coupled to transaction. And real estate is not always that way for two reasons. Number one is that there is this entertainment value to it. And then number two, there's just a lot of latency.

50:48Like I was looking at homes when I couldn't have, when I was just a little renter in Santa Clara, having just moved here, I couldn't afford a house in Palo Alto. And I would look at homes all the time. And that was actually like, there was purchase intent, but just with like years of latency, you know, versus like Google, you don't, that's not how you use Google. Like, it's like, I want to buy a flyswatter. I type in flyswatter and then I see 50 like search links pop up. I click on one of those and then I buy. and maybe I'll buy tomorrow, but there's just much more near-term proximity to that.

51:18So that's part of the reason why, like, you've got a DAU product, and that does not necessarily mean you just bolt on a monetization engine and then you get it to work, particularly where the monetization engine, it's like that almost, like, undersells how hard it is to build a monetization engine. Like, you know, mortgage, I've had to get, like, fingerprinted in God knows how many states. Like, you know, we're doing this Mr. Cooper deal, and I had to send, like, you know, ink fingerprints to the state of Virginia, like every single bank account I've ever had. Ah, it's just so complicated. I mean, I wish it weren't that way, but it turns out it's very, very complicated to add on and bolt on the monetization engine.

51:53And it's, by the way, it's very hard to build one of these, you know, daily active use products, but because you have a little bit more voyeurism in the field of real estate, it's not necessarily like, I have very, very near-term proximity to purchase intent. And then, you know, like, why hasn't Zillow done this? You know why? I'll tell you what. It's really, really hard. And they're addicted to the current business model of selling leads to agents. Yeah, I would just add that winning in housing is not for the faint of heart. Like, I just don't expect that an early stage company in a garage is going to be able to deploy.

52:23There's just such an activation energy that's required. The regulations vary by state. Products are fragmented. The distribution is hyper local. And, you know, you have the cyclicality where the volume swing with rates. The lenders have to scale up and scale back. You know, you have banks stepping in after the financial crisis. you have the secondary market with like originators and aggregators and services you have a bunch of legacy processes manual docs appraisals um and then like you also just have all kinds of other things right you have like employers that have to verify income you have banks that have to confirm your assets you have insurers appraisers title companies and so like everyone uses different timelines and systems so it's it's just friction and fragmentation and like part of it is just the amount of activation energy that's required to decide to do that is just not for the faint of heart, which is one of the things that I love about what we do is that we have decided to overcome that activation energy.

53:22And guess what? It took us 40 years, right? And so it's sort of like, you know, why is there, why is it that like credit card networks have such a dominant presence in the, in the market, like the big ones, right? The visas, the MasterCards, you know, the Amexes. this. And why is it that you have a bunch of neobanks that are creating your credit cards, but they're not taking significant share. And like the simple answer is it took them a long, long time. Like it wasn't like something that just happened where there was this virality and network effect where suddenly these things grow. Some of the things are just the simple fact that, you know, the easy way is the long way and the long way is the hard way.

54:00There is no sort of easy way. And so that's something that I think gives us a little bit of a first mover advantage. It's not something that we take for granted, but just the amount of serious fragmentation, the amount of disparate technology and systems, the incentive models around the different players are all at odds with each other. And we look at that as a good problem because we've overcome some of that activation energy. Now you have technology and AI, you have automation, you have the ability to compress turn times, lower fixed costs, connect the different pieces of it and just build a more connected journey.

54:36But that's like, you know, where I think it's a good problem to have, but it's also one that, you know, we have an opportunity to do significantly more just given we've overcome that activation in there. That's a good note to wrap on. Guys, thank you so much for coming on the podcast. Thanks for listening to this episode of the A16Z podcast. If you liked this episode, be sure to like, comment, subscribe, leave us a rating or review, and share it with your friends and family. For more episodes, go to YouTube, Apple Podcasts, and Spotify. Follow us on X at A16Z and subscribe to our Substack at a16z.substack.com.

55:12Thanks again for listening, and I'll see you in the next episode. As a reminder, the content here is for informational purposes only. It should not be taken as legal business, tax, or investment advice, or be used to evaluate any investment or security and is not directed at any investors or potential investors in any A16Z fund. Please note that A16Z and its affiliates may also maintain investments in the companies discussed in this podcast. For more details, including a link to our investments, please see a16z.com forward slash disclosures.

55:53Thank you.