Rocket Companies, Inc. - Quarter Report: 2021 September (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2021

☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from _______________ to _______________

Commission file number: 001-39432

Rocket Companies, Inc.

(Exact name of registrant as specified in its charter)


Delaware						84-4946470
(State or other jurisdiction of incorporation or organization)						(I.R.S. Employer Identification No.)

1050 Woodward Avenue, Detroit, MI						48226
(Address of principal executive offices)						(Zip Code)

(313) 373-7990

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Class A common stock, par value $0.00001 per share

RKT

New York Stock Exchange

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.

Large accelerated filer

☐

Accelerated filer

☐

Non-accelerated filer

☒

Smaller reporting company

☐

Emerging growth company

☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No ☒

As of November 3, 2021, 135,133,288 shares of the registrant's Class A common stock, $0.00001 par value, and 1,848,879,483 shares of the registrant's Class D common stock, $0.00001 par value, were outstanding.

Rocket Companies, Inc.

Form 10-Q

For the period ended September 30, 2021


	Table of Contents

	PART I. FINANCIAL INFORMATION
Item 1.	Financial Statements (unaudited)
	Condensed Consolidated Balance Sheets	3
	Condensed Consolidated Statements of Income and Comprehensive Income	4
	Condensed Consolidated Statements of Changes in Equity	5
	Condensed Consolidated Statements of Cash Flows	7
	Notes to Condensed Consolidated Financial Statements	8
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	39
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	60
Item 4.	Controls and Procedures	60

	PART II. OTHER INFORMATION
Item 1.	Legal Proceedings	61
Item 1A.	Risk Factors	61
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	61

Item 6.	Exhibits	62
Signatures		63

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements (unaudited)

Rocket Companies, Inc.

Condensed Consolidated Balance Sheets

(In Thousands, Except Shares and Per Share Amounts)


	September 30, 2021		December 31, 2020
Assets	(Unaudited)
Cash and cash equivalents	$	2,233,667	$	1,971,085
Restricted cash	145,978		83,018
Mortgage loans held for sale, at fair value	23,251,936		22,865,106
Interest rate lock commitments (“IRLCs”), at fair value	794,258		1,897,194
Mortgage servicing rights (“MSRs”), at fair value	4,701,045		2,862,685
MSRs collateral for financing liability, at fair value	—		205,033
Notes receivable and due from affiliates	9,671		22,172
Property and equipment, net of accumulated depreciation and amortization of $549,657 and $497,812, respectively	253,886		211,161
Deferred tax asset, net	588,507		519,933
Lease right of use assets	328,361		238,546
Forward commitments, at fair value	253,200		20,584
Loans subject to repurchase right from Ginnie Mae	2,306,673		5,696,608
Other assets	941,843		941,477
Total assets	$	35,809,025	$	37,534,602
Liabilities and equity
Liabilities
Funding facilities	$	16,623,031	$	17,742,573
Other financing facilities and debt
Lines of credit	75,000		375,000
Senior Notes, net	2,976,439		2,973,046
Early buy out facility	2,219,319		330,266
MSRs financing liability, at fair value	—		187,794
Accounts payable	347,288		251,960
Lease liabilities	381,104		272,274
Forward commitments, at fair value	35,795		506,071
Investor reserves	80,321		87,191
Notes payable and due to affiliates	29,892		73,896
Tax receivable agreement liability	669,738		550,282
Loans subject to repurchase right from Ginnie Mae	2,306,673		5,696,608
Other liabilities	878,613		605,485
Total liabilities	$	26,623,213	$	29,652,446
Equity
Class A common stock, $0.00001 par value - 10,000,000,000 shares authorized, 137,367,428 and 115,372,565 shares issued and outstanding as of September 30, 2021 and December 31, 2020, respectively.	$	1	$	1
Class B common stock, $0.00001 par value - 6,000,000,000 shares authorized, none issued and outstanding as of September 30, 2021 and December 31, 2020.	—		—
Class C common stock, $0.00001 par value - 6,000,000,000 shares authorized, none issued and outstanding as of September 30, 2021 and December, 31, 2020.	—		—
Class D common stock, $0.00001 par value - 6,000,000,000 shares authorized, 1,848,879,483 and 1,869,079,483 shares issued and outstanding as of September 30, 2021 and December 31, 2020, respectively.	19		19
Additional paid-in capital	367,860		282,743
Retained earnings	336,594		207,422
Accumulated other comprehensive income	124		317
Non-controlling interest	8,481,214		7,391,654
Total equity	9,185,812		7,882,156
Total liabilities and equity	$	35,809,025	$	37,534,602

See accompanying Notes to the Unaudited Condensed Consolidated Financial Statements.

Rocket Companies, Inc.

Condensed Consolidated Statements of Income and Comprehensive Income

(In Thousands, Except Shares and Per Share Amounts)

(Unaudited)


	Three Months Ended September 30,				Nine Months Ended September 30,
	2021		2020		2021		2020
Revenue
Gain on sale of loans
Gain on sale of loans excluding fair value of MSRs, net	$	1,746,971	$	3,443,885	$	5,610,627	$	8,814,236
Fair value of originated MSRs	907,242		836,557		2,937,517		2,041,899
Gain on sale of loans, net	2,654,213		4,280,442		8,548,144		10,856,135
Loan servicing (loss) income
Servicing fee income	334,348		272,158		970,058		779,093
Change in fair value of MSRs	(341,361)		(392,688)		(556,201)		(1,985,545)
Loan servicing (loss) income, net	(7,013)		(120,530)		413,857		(1,206,452)
Interest income
Interest income	129,963		79,890		311,853		231,971
Interest expense on funding facilities	(72,778)		(69,364)		(205,000)		(162,580)
Interest income, net	57,185		10,526		106,853		69,391
Other income	410,345		445,757		1,252,845		1,250,481
Total revenue, net	3,114,730		4,616,195		10,321,699		10,969,555
Expenses
Salaries, commissions and team member benefits	870,010		816,408		2,552,679		2,354,021
General and administrative expenses	313,405		280,705		867,639		763,962
Marketing and advertising expenses	316,471		250,558		943,999		670,749
Depreciation and amortization	19,577		15,329		55,470		47,633
Interest and amortization expense on non-funding debt	34,163		38,016		104,772		104,291
Other expenses	135,415		158,113		467,584		386,024
Total expenses	1,689,041		1,559,129		4,992,143		4,326,680
Income before income taxes	1,425,689		3,057,066		5,329,556		6,642,875
Provision for income taxes	(32,830)		(61,683)		(122,709)		(84,363)
Net income	1,392,859		2,995,383		5,206,847		6,558,512
Net income attributable to non-controlling interest	(1,317,522)		(2,937,480)		(4,946,688)		(6,500,609)
Net income attributable to Rocket Companies	$	75,337	$	57,903	$	260,159	$	57,903

Earnings per share of Class A common stock
Basic	$	0.55	$	0.54	$	2.00	0.54
Diluted	$	0.54	$	0.54	$	2.00	0.54

Weighted average shares outstanding
Basic	137,664,471		106,265,422		129,902,253		106,265,422
Diluted	1,990,828,351		106,265,422		135,392,670		106,265,422

Comprehensive income
Net income	$	1,392,859	$	2,995,383	$	5,206,847	$	6,558,512
Cumulative translation adjustment	(995)		410		(194)		(630)
Unrealized (loss) gain on investment securities	(3,639)		(66)		(3,475)		7,021
Comprehensive income	1,388,225		2,995,727		5,203,178		6,564,903
Comprehensive income attributable to non-controlling interest	(1,313,201)		(2,937,826)		(4,943,273)		(6,507,002)
Comprehensive income attributable to Rocket Companies	$	75,024	$	57,901	$	259,905	$	57,901

See accompanying Notes to the Unaudited Condensed Consolidated Financial Statements.

Rocket Companies, Inc.

Condensed Consolidated Statements of Changes in Equity

(In Thousands, Except Shares and Per Share Amounts)

(Unaudited)


	Class A Common Stock Shares	Class A Common Stock Amount		Class D Common Stock Shares	Class D Common Stock Amount		Additional Paid-in Capital		Retained Earnings		Net Parent Investment		Accumulated Other Comprehensive Income (Loss)		Total Non-controlling Interest		Total Equity
Balance, December 31, 2019	—	$	—	—	$	—	$	—	$	—	$	3,510,698	$	(151)	$	5,008	$	3,515,555
Net income (loss)	—	—		—	—		—		—		99,487		—		(440)		99,047
Other comprehensive loss	—	—		—	—		—		—		—		(1,439)		(321)		(1,760)
Net transfers to Parent	—	—		—	—		—		—		21,919		—		—		21,919
Share-based compensation, net	—	—		—	—		—		—		29,049		—		9		29,058
Balance, March 31, 2020	—	$	—	—	$	—	$	—	$	—	$	3,661,153	$	(1,590)	$	4,256	$	3,663,819
Net income (loss)	—	—		—	—		—		—		3,464,518		—		(436)		3,464,082
Other comprehensive income	—	—		—	—		—		—		—		588		131		719
Net transfers to Parent	—	—		—	—		—		—		(1,612,629)		—		—		(1,612,629)
Share-based compensation, net	—	—		—	—		—		—		31,244		—		9		31,253
Other equity adjustment	—	—		—	—		—		—		156		(156)		—		—
Unrealized gain on investment securities	—	—		—	—		—		—		—		7,087		—		7,087
Non-controlling interest attributed to dissolution	—	—		—	—		—		—		—		—		(884)		(884)
Balance, June 30, 2020	—	$	—	—	$	—	$	—	$	—	$	5,544,442	$	5,929	$	3,076	$	5,553,447
Net income (loss) attributed to NPI prior to reorganization transactions	—	—		—	—		—		—		1,080,284		—		(178)		1,080,106
Other comprehensive income attributed to NPI prior to reorganization transactions	—	—		—	—		—		—		—		309		68		377
Net transfers to parent	—	—		—	—		—		—		(2,236,995)		—		—		(2,236,995)
Stock based compensation attributed to NPI prior to reorganization transactions	—	—		—	—		—		—		885		—		3		888
Effect of reorganization transactions	372,565	—		1,984,079,483	20		245,920		—		(4,388,616)		(5,923)		4,185,331		36,732
Distributions for state taxes on behalf of unit holders (members), net	—	—		—	—		—		(335)		—		—		(5,670)		(6,005)
Proceeds received from IPO, net of cost	100,000,000	1		(100,000,000)	—		1,758,719		—		—		—		(14,645)		1,744,075
Proceeds received from Greenshoe option	15,000,000	—		(15,000,000)	—		263,925		—		—		—		—		263,925
Use of proceeds to purchase Class D shares and Holding Units from RHI	—	—		—	(1)		(2,023,424)		—		—		—		—		(2,023,425)
Increase in controlling interest resulting from Greenshoe	—	—		—	—		2,047		4,847		—		(26)		(6,868)		—
Net income subsequent to reorganization transactions	—	—		—	—		—		53,056		—		—		1,862,222		1,915,278
Other comprehensive income subsequent to reorganization transactions	—	—		—	—		—		—		—		2		32		34
Unrealized loss on investment securities	—	—		—	—		—		—		—		(3)		(63)		(66)
Stock Based Compensation subsequent to reorganization transactions	—	—		—	—		25,619		—		—		—		6,746		32,365
Balance, September 30, 2020	115,372,565	$	1	1,869,079,483	$	19	$	272,806	$	57,568	$	—	$	288	$	6,030,054	$	6,360,736

See accompanying Notes to the Unaudited Condensed Consolidated Financial Statements.

Rocket Companies, Inc.

Condensed Consolidated Statements of Changes in Equity (Continued)

(In Thousands, Except Shares and Per Share Amounts)

(Unaudited)


	Class A Common Stock Shares	Class A Common Stock Amount		Class D Common Stock Shares	Class D Common Stock Amount		Additional Paid-in Capital		Retained Earnings		Net Parent Investment		Accumulated Other Comprehensive Income (Loss)		Total Non-controlling Interest		Total Equity
Balance, December 31, 2020	115,372,565	$	1	1,869,079,483	$	19	$	282,743	$	207,422	$	—	$	317	$	7,391,654	$	7,882,156
Net income	—	—		—	—		—		123,702		—		—		2,653,636		2,777,338
Other comprehensive income	—	—		—	—		—		—		—		14		293		307
Share-based compensation, net	2,300	—		—	—		2,116		—		—		—		37,033		39,149
Unrealized loss on investment securities	—	—		—	—		—		—		—		(21)		(343)		(364)
Distributions for state taxes on behalf of unit holders (members), net	—	—		—	—		—		(281)		—		—		(4,559)		(4,840)
Distributions to unit holders (members) from subsidiary investment	—	—		—	—		—		—		—		—		(2,242,999)		(2,242,999)
Special Dividend to Class A Shareholders	—	—		—	—		—		(145,903)		—		—		—		(145,903)
Change in controlling interest of investment, net	20,200,000	—		(20,200,000)	—		85,351		(1)		—		55		(84,420)		985
Balance, March 31, 2021	135,574,865	$	1	1,848,879,483	$	19	$	370,210	$	184,939	$	—	$	365	$	7,750,295	$	8,305,829
Net income	—	—		—	—		—		61,120		—		—		975,530		1,036,650
Other comprehensive income	—	—		—	—		—		—		—		29		465		494
Share-based compensation, net	4,177	—		—	—		2,621		—		—		—		35,622		38,243
Unrealized gain on investment securities	—	—		—	—		—		—		—		36		491		527
Distributions for state taxes on behalf of unit holders (members), net	—	—		—	—		—		(1,346)		—		—		(18,255)		(19,601)
Distributions to unit holders (members) from subsidiary investment	—	—		—	—		—		—		—		—		(1,188,294)		(1,188,294)
Dividend adjustments from forfeited restricted stock units	—	—		—	—		—		211		—		—		111		322
Pushdown of dividend equivalent	—	—		—	—		—		16,427		—		—		(16,427)		—
Issuance of Class A Common Shares under stock compensation and benefit plans	896,701	—		—	—		1,369		—		—		—		18,582		19,951
Repurchase of Class A Common Shares	(496,829)	—		—	—		(8,313)		—		—		—		—		(8,313)
Change in controlling interest of investment, net	—	—		—	—		(1,971)		—		—		1		1,970		—
Balance, June 30, 2021	135,978,914	$	1	1,848,879,483	$	19	$	363,916	$	261,351	$	—	$	431	$	7,560,090	$	8,185,808
Net income	—	—		—	—		—		75,337		—		—		1,317,522		1,392,859
Other comprehensive loss	—	—		—	—		—		—		—		(59)		(936)		(995)
Share-based compensation, net	2,508,497	—		—	—		2,654		—		—		—		35,656		38,310
Unrealized loss on investment securities	—	—		—	—		—		—		—		(253)		(3,386)		(3,639)
Distributions for state taxes on behalf of unit holders (members), net	—	—		—	—		—		(118)		—		—		(1,594)		(1,712)
Distributions to unit holders (members) from subsidiary investment	—	—		—	—		—		—		—		—		(393,463)		(393,463)
Dividend adjustments from forfeited restricted stock units	—	—		—	—		—		24		—		—		312		336
Taxes withheld on employees' restricted share award vesting	—	—		—	—		(877)		—		—		—		(11,706)		(12,583)
Issuance of Class A Common Shares under stock compensation and benefit plans	947,358	—		—	—		1,135		—		—		—		15,328		16,463
Repurchase of Class A Common Shares	(2,067,341)	—		—	—		(35,572)		—		—		—		—		(35,572)
Change in controlling interest of investment, net	—	—		—	—		36,604		—		—		5		(36,609)		—
Balance, September 30, 2021	137,367,428	$	1	1,848,879,483	$	19	$	367,860	$	336,594	$	—	$	124	$	8,481,214	$	9,185,812

See accompanying Notes to the Unaudited Condensed Consolidated Financial Statements.

Rocket Companies, Inc.

Condensed Consolidated Statements of Cash Flows

(In Thousands)

(Unaudited)


	Nine Months Ended September 30,
	2021		2020
Operating activities
Net income	$	5,206,847	$	6,558,512
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Depreciation and amortization	55,470		47,633
Provision for deferred income taxes	54,817		32,021


Origination of mortgage servicing rights	(2,937,517)		(2,041,899)
Change in fair value of MSRs, net	513,344		1,929,515
Gain on sale of loans excluding fair value of MSRs, net	(5,610,627)		(8,814,236)
Disbursements of mortgage loans held for sale	(275,516,411)		(209,540,623)
Proceeds from sale of loans held for sale	281,117,441		208,127,818
Share-based compensation expense	123,873		93,565
Change in assets and liabilities
Due from affiliates	12,501		16,350

Other assets	(72,025)		(232,635)
Accounts payable	95,328		95,154
Due to affiliates	(44,541)		20,130
Premium recapture and indemnification losses paid	772		(3,067)
Other liabilities	337,907		50,142
Total adjustments	$	(1,869,668)	$	(10,220,132)
Net cash provided by (used in) operating activities	$	3,337,179	$	(3,661,620)
Investing activities
Proceeds from sale of MSRs	$	665,901	$	320,028
Net purchase of MSRs	(34,817)		—
Net decrease in notes receivable from affiliates	—		60,516
(Increase) decrease in mortgage loans held for investment	(25,380)		6,203
Net increase in investment securities	—		(2,500)
Purchase and other additions of property and equipment, net of disposals	(98,549)		(73,195)
Net cash provided by investing activities	$	507,155	$	311,052
Financing activities
Net (payments) borrowings on funding facilities	$	(1,119,542)	$	7,047,521
Net (payments) borrowings on lines of credit	(300,000)		209,971
Borrowings on Senior Notes	—		2,000,000

Net borrowings on early buy out facility	1,889,053		17,092
Net borrowings (payments) notes payable from unconsolidated affiliates	537		(9,459)
Proceeds from MSRs financing liability	21,635		14,121
Issuance of Class D Shares to RHI	—		20
Proceeds from Class A Shares Issued prior to Offering	—		6,706
Proceeds received from IPO, net of cost	—		1,744,075
Proceeds received from Greenshoe option	—		263,925
Use of Proceeds to Purchase Class D Shares and Holding Units from RHI	—		(2,023,424)
Stock issuance	28,778		—
Share repurchase	(43,885)		—

Taxes withheld on employees' restricted share award vesting	(12,583)		—
Distributions to other unit holders (members) of Holdings	(3,982,591)		(6,005)
Net transfer to parent	—		(3,798,582)
Net cash (used in) provided by financing activities	$	(3,518,598)	$	5,465,961
Effects of exchange rate changes on cash and cash equivalents	(194)		(630)
Net increase in cash and cash equivalents and restricted cash	325,542		2,114,763
Cash and cash equivalents and restricted cash, beginning of period	2,054,103		1,455,725
Cash and cash equivalents and restricted cash, end of period	$	2,379,645	$	3,570,488
Non-cash activities
Loans transferred to other real estate owned	$	1,023	$	960
Supplemental disclosures
Cash paid for interest on related party borrowings	$	3,330	$	2,126

See accompanying Notes to the Unaudited Condensed Consolidated Financial Statements.

Rocket Companies, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

(Dollars in Thousands, Except Shares and Per Share)

1. Business, Basis of Presentation and Accounting Policies

Rocket Companies, Inc. (the "Company", and together with its consolidated subsidiaries, "Rocket Companies", "we", "us", "our") was incorporated in Delaware on February 26, 2020 as a wholly owned subsidiary of Rock Holdings Inc. ("RHI") for the purpose of facilitating an initial public offering ("IPO") of its Class A common stock, $0.00001 par value (the “Class A common stock”) and other related transactions in order to carry on the business of RKT Holdings, LLC ("Holdings") and its wholly owned subsidiaries.

We are a Detroit-based holding company consisting of tech-driven real estate, mortgage and eCommerce businesses. We are committed to providing an industry-leading client experience powered by our platform. In addition to Rocket Mortgage, the nation’s largest mortgage lender, we have expanded into complementary industries, such as real estate services, personal lending, and auto sales where we seek to deliver innovative client solutions leveraging our Rocket platform. Our business operations are organized into the following two segments: (1) Direct to Consumer and (2) Partner Network, refer to Note 12, Segments.

Rocket Companies, Inc. is a holding company. Its primary material asset is the equity interest in Holdings which, through its direct and indirect subsidiaries, conducts all of the Company's operations. Holdings is a Michigan limited liability company and wholly owns the following entities, with each entity's subsidiaries identified in parentheses: Rocket Mortgage, LLC (formerly known as Quicken Loans, LLC), Amrock Holdings, LLC (“Amrock”, "Amrock Title Insurance Company" and "Nexsys Technologies LLC"), LMB HoldCo LLC (“Core Digital Media”), RCRA Holdings LLC (“Rock Connections” and “Rocket Auto”), Rocket Homes Real Estate LLC (“Rocket Homes”), RockLoans Holdings LLC (“Rocket Loans”), Rock Central LLC, EFB Holdings Inc. (“Edison Financial”), Lendesk Canada Holdings Inc., RockTech Canada Inc., and Woodward Capital Management LLC. As used herein, “Rocket Mortgage” refers to either the Rocket Mortgage brand or platform, or the Rocket Mortgage business, as the context allows.

Quicken Loans, LLC, changed its name to “Rocket Mortgage, LLC”, effective as of July 31, 2021, pursuant to the filing of a Certificate of Amendment to the Articles of Organization with the Michigan Department of Licensing and Regulatory Affairs, Corporations, Securities & Commercial Licensing Bureau.

Initial Public Offering

On August 10, 2020 we completed the IPO of our common stock pursuant to a Registration Statement on Form S-1 (File No. 333-239726), which closed on August 10, 2020. In the IPO, we sold an aggregate of 115,000,000 shares of Class A common stock, including 15,000,000 shares purchased by the underwriters on September 9, 2020. Rocket Companies, Inc. received net proceeds from the IPO of approximately $2,023,000 after deducting underwriting discounts and commissions, all of which was used to purchase 115,000,000 non-voting membership units of Holdings (the “Holdings Units”) and shares of Class D common stock from RHI.

Holdings is treated as a partnership for U.S. federal income tax purposes and, as such, is itself generally not subject to U.S. federal income tax under current U.S. tax laws. Each member of Holdings will be required to take into account for U.S. federal income tax purposes its distributive share of the items of income, gain, loss and deduction of Holdings. As indicated in Note 8, Income Taxes, the Company is party to a Tax Receivable Agreement.

Basis of Presentation and Consolidation

Prior to the completion of the initial public offering, RHI, Holdings and its subsidiaries consummated an internal reorganization in which Rocket Companies, Inc. became the sole managing member of Holdings. Prior to the reorganization, Rocket Companies, Inc. had no operations.

As the sole managing member of Holdings, the Company operates and controls all of the business affairs of Holdings, and through Holdings and its subsidiaries, conducts its business. Holdings is considered a variable interest entity (“VIE”) and we consolidate the financial results of Holdings under the guidance of ASC 810, Consolidation. A portion of our Net income is allocated to Net income attributable to non-controlling interest. For further details, refer to Note 13, Variable Interest Entities and Note 14, Non-controlling Interests.

Rocket Companies, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements (Continued)

(In Thousands, Except Shares and Per Share Amounts)

Income from Holdings and its subsidiaries prior to the reorganization and IPO has been accounted for as a non-controlling interest in our Condensed Consolidated Statements of Income and Comprehensive Income. Accumulated net income prior to the reorganization and IPO is presented in Net Parent Investment in our Condensed Consolidated Statements of Changes in Equity as the financial statements prior to the reorganization and IPO reflect combined subsidiaries operating as part of RHI.

We have accounted for the reorganization as one of entities under common control and the Net Parent Investment was allocated between Total Non-controlling Interest and Additional Paid-in Capital based on the ownership of Holdings.

Our condensed consolidated financial statements for periods prior to the reorganization and IPO reflect the combined subsidiaries that historically operated as part of RHI. We have further adjusted the prior period results for the three and nine months ended September 30, 2020, to retrospectively reflect the acquisition of Amrock Title Insurance Company (“ATI”) which qualified as a common control transaction as discussed further below in the Acquisition Agreement section.

All significant intercompany transactions and accounts between the businesses comprising the Company have been eliminated in the accompanying condensed consolidated financial statements.

All transactions and accounts between RHI and other related parties with the Company have a history of settlement or will be settled for cash and are reflected as related party transactions. For further details of the Company’s related party transactions refer to Note 6, Transactions with Related Parties.

Our condensed consolidated financial statements are unaudited and presented in U.S. dollars. They have been prepared in accordance with accounting principles generally accepted in the United States of America ("U.S. GAAP") pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). The interim financial information should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2020, as filed with the SEC. In our opinion, these condensed consolidated financial statements include all normal and recurring adjustments considered necessary for a fair statement of our results of operations, financial position and cash flows for the periods presented. Certain prior period amounts have been reclassified to conform to the current period financial statement presentation. However, our results of operations for any interim period are not necessarily indicative of the results that may be expected for a full fiscal year or for any other future period.

Acquisition Agreement

On August 5, 2020, Rocket Companies, Inc. entered into an acquisition agreement with RHI and its direct subsidiary Amrock Holdings Inc. pursuant to which we acquired ATI, a title insurance underwriting business, for total aggregate consideration of $14,400 that consisted of 800,000 Holdings Units and shares of Rocket Companies, Inc. Class D common stock valued at the initial public offering price of $18.00 per share (the number of shares issued equals the purchase price divided by the price to the public in our initial public offering), the acquisition closed on August 14, 2020 subsequent to the IPO date on August 10, 2020. ATI's net income for the year ended December 31, 2019 was $4,700. Because the Acquisition was a transaction between commonly controlled entities, U.S. GAAP requires the retrospective combination of the entities for all periods presented as if the combination had been in effect since the inception of common control. Accordingly, the Company’s condensed consolidated financial statements included in this Form 10-Q, including for the three and nine months ended September 30, 2020, reflect the retrospective combination of the entities as if the combination had been in effect since inception of common control.

Management Estimates

The preparation of condensed consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosures of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Although management is not currently aware of any factors that would significantly change its estimates and assumptions, actual results may differ from these estimates.

Rocket Companies, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements (Continued)

(In Thousands, Except Shares and Per Share Amounts)

Subsequent Events

In preparing these condensed consolidated financial statements, the Company evaluated events and transactions for potential recognition or disclosure through the date these condensed consolidated financial statements were issued. Refer to Note 5, Borrowings for disclosures on changes to the Company’s debt agreements that occurred subsequent to September 30, 2021, which includes additional details on the October 2021, issuance of $1,150,000 of 2.875% Senior Notes and $850,000 of 4.000% Senior Notes, along with details on how a portion of these proceeds were used to repurchase $948,015 of the 5.250% Senior Notes with an outstanding principal amount of $1,010,000 as of September 30, 2021.

In November 2021, the Company purchased MSRs relating to certain single-family mortgage loans with an aggregate unpaid principal balance of approximately $9.0 billion and a fair market value of approximately $82.1 million.

Special Dividend

On February 25, 2021, our board of directors authorized and declared a cash dividend (the "Special Dividend") of $1.11 per share to the holders of our Class A common stock. The Special Dividend was paid on March 23, 2021 to holders of the Class A common stock of record as of the close of business on March 9, 2021. The Company funded the Special Dividend from cash distributions of approximately $2.2 billion by RKT Holdings, LLC to all of its members, including the Company.

Revenue Recognition

Gain on sale of loans, net—includes all components related to the origination and sale of mortgage loans, including (1) net gain on sale of loans, which represents the premium we receive in excess of the loan principal amount and certain fees charged by investors upon sale of loans into the secondary market, (2) loan origination fees (credits), points and certain costs, (3) provision for or benefit from investor reserves, (4) the change in fair value of interest rate locks and loans held for sale, (5) the gain or loss on forward commitments hedging loans held for sale and interest rate lock commitments (IRLCs), and (6) the fair value of originated MSRs. An estimate of the Gain on sale of loans, net is recognized at the time an IRLC is issued, net of a pull-through factor. Subsequent changes in the fair value of IRLCs and mortgage loans held for sale are recognized in current period earnings. When the mortgage loan is sold into the secondary market, any difference between the proceeds received and the current fair value of the loan is recognized in current period earnings in Gain on sale of loans, net. Included in Gain on sale of loans, net is the Fair value of originated MSRs, which represents the estimated fair value of MSRs related to loans which we have sold and retained the right to service. Refer to Note 3, Mortgage Servicing Rights for information related to the Total changes in fair value of MSRs.

Loan servicing (loss) income, net—includes income from servicing, sub-servicing and ancillary fees, and is recorded to income as earned, which is upon collection of payments from borrowers. This amount also includes the Change in fair value of MSRs, which is the adjustment for the fair value measurement of the MSRs asset as of the respective balance sheet date.

Interest income, net—includes interest earned on mortgage loans held for sale and mortgage loans held for investment net of the interest expense paid on our loan funding facilities. Interest income is recorded as earned and interest expense is recorded as incurred.

Other income—is derived primarily from lead generation revenue, professional service fees, real estate network referral fees, contact center revenue, personal loans business, closing fees, net appraisal revenue, and net title insurance fees.

The following revenue streams fall within the scope of ASC Topic 606—Revenue from Contracts with Customers and are disaggregated hereunder:

Core Digital Media lead generation revenue—The Company recognizes online consumer acquisition revenue based on successful delivery of marketing leads to a client at a fixed fee per lead. This service is satisfied at the time the lead is delivered, at which time revenue for the service is recognized. Online consumer acquisition revenue, net of intercompany eliminations, were $7,784 and $5,755 for the three months ended September 30, 2021 and 2020, respectively and $22,549 and $18,819 for the nine months ended September 30, 2021 and 2020, respectively.

Rocket Companies, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements (Continued)

(In Thousands, Except Shares and Per Share Amounts)

Professional service fees—The Company recognizes professional service fee revenue based on the delivery of services (e.g., human resources, technology, training) over the term of a contract. Consideration for the promised services is received through a combination of a fixed fee for the period and incremental fees paid for optional services that are available at an incremental rate determined at the time such services are requested. The Company recognizes the annual fee ratably over the life of the contract, as the performance obligation is satisfied equally over the term of the contract. For the optional services, revenue is only recognized at the time the services are requested and delivered and pricing is agreed upon. Professional service fee revenues were $3,434 and $3,528 for the three months ended September 30, 2021 and 2020, respectively and $10,181 and $7,155 for the nine months ended September 30, 2021 and 2020, respectively, and were rendered entirely to related parties.

Rocket Homes real estate network referral fees—The Company recognizes real estate network referral fee revenue based on arrangements with partner agencies contingent on the closing of a transaction. As this revenue stream is variable, and is contingent on the successful transaction close, the revenue is constrained until the occurrence of the transaction. At this point, the constraint on recognizing revenue is deemed to have been lifted and revenue is recognized for the consideration expected to be received. Real estate network referral fees, net of intercompany eliminations, were $16,068 and $13,633 for the three months ended September 30, 2021 and 2020, respectively and $39,778 and $33,459 for the nine months ended September 30, 2021 and 2020, respectively.

Rock Connections and Rocket Auto contact center revenue—The Company recognizes contact center revenue for communication services including client support and sales. Consideration received mainly includes a fixed base fee and/or a variable contingent fee. The fixed base fee is recognized ratably over the period of performance, as the performance obligation is considered to be satisfied equally throughout the service period. The variable contingent fee related to car sales is constrained until the sale of the car is completed. Contact center revenues, net of intercompany eliminations, were $10,847 and $6,246 for the three months ended September 30, 2021 and 2020, respectively and $34,769 and $19,403 for the nine months ended September 30, 2021 and 2020, respectively.

Amrock closing fees—The Company recognizes closing fees for non-recurring services provided in connection with the origination of the loan. These fees are recognized at the time of loan closing for purchase transactions or at the end of a client's three-day rescission period for refinance transactions, which represents the point in time the loan closing services performance obligation is satisfied. The consideration received for closing services is a fixed fee per loan that varies by state and loan type. Closing fees were $120,381 and $122,735 for the three months ended September 30, 2021 and 2020, respectively and $395,509 and $302,260 for the nine months ended September 30, 2021 and 2020, respectively.

Amrock appraisal revenue, net—The Company recognizes appraisal revenue when the appraisal service is completed. The Company may choose to deliver appraisal services directly to its client or subcontract such services to a third-party licensed and/or certified appraiser. In instances where the Company performs the appraisal, revenue is recognized as the gross amount of consideration received at a fixed price per appraisal. The Company is an agent in instances where a third-party appraiser is involved in the delivery of appraisal services and revenue is recognized net of third-party appraisal expenses. Appraisal revenue, net was $23,222 and $20,655 for the three months ended September 30, 2021 and 2020, respectively and $68,792 and $59,054 for the nine months ended September 30, 2021 and 2020, respectively.

Cash, Cash Equivalents and Restricted Cash

The Company considers all highly liquid investments purchased with a maturity of three months or less to be cash equivalents. We maintain our bank accounts with a relatively small number of high-quality financial institutions.

Restricted cash as of September 30, 2021 and 2020 consisted of cash on deposit for a repurchase facility, client application deposits, title premiums collected from the insured that are due to the underwriters, principal and interest received in collection accounts for purchased assets, and a $25,000 bond.

Rocket Companies, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements (Continued)

(In Thousands, Except Shares and Per Share Amounts)


	September 30,
	2021		2020
Cash and cash equivalents	$	2,233,667	$	3,485,137
Restricted cash	145,978		85,351
Total cash, cash equivalents, and restricted cash in the statement of cash flows	$	2,379,645	$	3,570,488

Loans subject to repurchase right from Ginnie Mae

For certain loans sold to Ginnie Mae, the Company as the servicer has the unilateral right to repurchase any individual loan in a Ginnie Mae securitization pool if that loan meets defined criteria, including being delinquent more than 90 days. Once the Company has the unilateral right to repurchase the delinquent loan, the Company has effectively regained control over the loan and must re-recognize the loan on the Condensed Consolidated Balance Sheets and establish a corresponding finance liability regardless of the Company's intention to repurchase the loan. The asset and corresponding liability are recorded at the unpaid principal balance of the loan, which approximates its fair value.

Recently Adopted Accounting Standards

In March 2020, the Financial Accounting Standards Board ("FASB") issued Accounting Standard Update ("ASU") No. 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting. In January 2021, the FASB issued ASU No. 2021-01, Reference Rate Reform (Topic 848): Scope to clarify that Topic 848 is applicable to many derivative instruments and hedging relationships.

Subject to meeting certain criteria, the new guidance provides optional expedients and exceptions to applying contract modification accounting under existing U.S. GAAP, to address the expected phase out of the London Inter-bank Offered Rate (“LIBOR”) by the end of 2022. This guidance is effective upon issuance and allows application to contract changes as early as January 1, 2020. For all funding and financing facilities, the Company amended the agreements to include alternative base rate language which may reference the Secured Overnight Financing Rate ("SOFR") as a successor benchmark. We have applied the optional expedients available from ASU 2020-04 and accounted for the contract modifications related to reference rate reform prospectively. There has been no impact on the condensed consolidated financial statements from adopting this standard.

2. Fair Value Measurements

Fair value is the price that would be received if an asset were sold or the price that would be paid to transfer a liability in an orderly transaction between willing market participants at the measurement date. Required disclosures include classification of fair value measurements within a three-level hierarchy (Level 1, Level 2, and Level 3). Classification of a fair value measurement within the hierarchy is dependent on the classification and significance of the inputs used to determine the fair value measurement. Observable inputs are those that are observed, implied from, or corroborated with externally available market information. Unobservable inputs represent the Company’s estimates of market participants’ assumptions.

Fair value measurements are classified in the following manner:

Level 1—Valuation is based on quoted prices in active markets for identical assets or liabilities at the measurement date.

Level 2—Valuation is based on either observable prices for identical assets or liabilities in inactive markets, observable prices for similar assets or liabilities, or other inputs that are derived directly from, or through correlation to, observable market data at the measurement date.

Level 3—Valuation is based on the Company’s internal models using assumptions at the measurement date that a market participant would use.

Rocket Companies, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements (Continued)

(In Thousands, Except Shares and Per Share Amounts)

In determining fair value measurement, the Company uses observable inputs whenever possible. The level of a fair value measurement within the hierarchy is dependent on the lowest level of input that has a significant impact on the measurement as a whole. If quoted market prices are available at the measurement date or are available for similar instruments, such prices are used in the measurements. If observable market data is not available at the measurement date, judgment is required to measure fair value.

The following is a description of measurement techniques for items recorded at fair value on a recurring basis. There were no material items recorded at fair value on a nonrecurring basis as of September 30, 2021 or December 31, 2020.

Mortgage loans held for sale: Loans held for sale that trade in active secondary markets are valued using Level 2 measurements derived from observable market data, including market prices of securities backed by similar mortgage loans adjusted for certain factors to approximate the fair value of a whole mortgage loan, including the value attributable to mortgage servicing and credit risk. Loans held for sale for which there is little to no observable trading activity of similar instruments are valued using Level 3 measurements based upon dealer price quotes.

IRLCs: The fair value of IRLCs is based on current market prices of securities backed by similar mortgage loans (as determined above under mortgage loans held for sale), net of costs to close the loans, subject to the estimated loan funding probability, or “pull-through factor”. Given the significant and unobservable nature of the pull-through factor, IRLCs are classified as Level 3.

MSRs: The fair value of MSRs (including MSRs collateral for financing liability and MSRs financing liability) is determined using a valuation model that calculates the present value of estimated net future cash flows. The model includes estimates of prepayment speeds, discount rate, cost to service, float earnings, contractual servicing fee income, and ancillary income among others. These fair value measurements are classified as Level 3.

Forward commitments: The Company’s forward commitments are valued based on quoted prices for similar assets in an active market with inputs that are observable and are classified within Level 2 of the valuation hierarchy.

Rocket Companies, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements (Continued)

(In Thousands, Except Shares and Per Share Amounts)

Assets and Liabilities Measured at Fair Value on a Recurring Basis

The table below shows a summary of financial statement items that are measured at estimated fair value on a recurring basis, including assets measured under the fair value option. There were no material transfers of assets or liabilities recorded at fair value on a recurring basis between Levels 1, 2 or 3 during the nine months ended September 30, 2021 or the year ended December 31, 2020.


	Level 1		Level 2		Level 3		Total
Balance at September 30, 2021
Assets:
Mortgage loans held for sale	$	—	$	20,587,535	$	2,664,401	$	23,251,936
IRLCs	—		—		794,258		794,258
MSRs	—		—		4,701,045		4,701,045

Forward commitments	—		253,200		—		253,200
Total assets	$	—	$	20,840,735	$	8,159,704	$	29,000,439
Liabilities:
Forward commitments	$	—	$	35,795	$	—	$	35,795

Total liabilities	$	—	$	35,795	$	—	$	35,795

Balance at December 31, 2020
Assets:
Mortgage loans held for sale	$	—	$	22,285,440	$	579,666	$	22,865,106
IRLCs	—		—		1,897,194		1,897,194
MSRs	—		—		2,862,685		2,862,685
MSRs collateral for financing liability (1)	—		—		205,033		205,033
Forward commitments	—		20,584		—		20,584
Total assets	$	—	$	22,306,024	$	5,544,578	$	27,850,602
Liabilities:
Forward commitments	$	—	$	506,071	$	—	$	506,071
MSRs financing liability (1)	—		—		187,794		187,794
Total liabilities	$	—	$	506,071	$	187,794	$	693,865

(1) Refer to Note 3, Mortgage Servicing Rights for further information regarding both the MSRs collateral for financing liability and MSRs financing liability.

The following tables present the quantitative information about recurring Level 3 fair value financial instruments and the fair value measurements as of:


	September 30, 2021			December 31, 2020
Unobservable Input	Range	Weighted Average		Range	Weighted Average
Mortgage loans held for sale
Dealer pricing	92% - 107%	100	%	89% - 105%	99	%
IRLCs
Loan funding probability	0% - 100%	78	%	0% - 100%	74	%
MSRs, MSRs collateral for financing liability, and MSRs financing liability
Discount rate	9.0% - 12.0%	9.5	%	9.5% - 12.0%	9.9	%
Conditional prepayment rate	6.9% - 42.0%	9.8	%	6.6% - 52.1%	15.8	%

Rocket Companies, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements (Continued)

(In Thousands, Except Shares and Per Share Amounts)

The table below presents a reconciliation of Level 3 assets measured at fair value on a recurring basis for the three and nine months ended September 30, 2021 and 2020. Mortgage servicing rights (including MSRs collateral for financing liability and MSRs financing liability) are also classified as a Level 3 asset measured at fair value on a recurring basis and its reconciliation is found in Note 3, Mortgage Servicing Rights.


	Loans Held for Sale		IRLCs
Balance at June 30, 2021	$	2,579,313	$	907,978
Transfers in (1)	461,014		—
Transfers out/principal reductions (1)	(378,302)		—
Net transfers and revaluation losses	—		(113,720)
Total gains included in net income	2,376		—
Balance at September 30, 2021	$	2,664,401	$	794,258

Balance at June 30, 2020	$	416,100	$	2,393,764
Transfers in (1)	122,763		—
Transfers out/principal reductions (1)	(164,211)		—
Net transfers and revaluation gains	—		196,555
Total gains included in net income	1,380		—
Balance at September 30, 2020	$	376,032	$	2,590,319

Balance at December 31, 2020	$	579,666	$	1,897,194
Transfers in (1)	3,244,577		—
Transfers out/principal reductions (1)	(1,159,712)		—
Net transfers and revaluation losses	—		(1,102,936)
Total losses included in net income	(130)		—
Balance at September 30, 2021	$	2,664,401	$	794,258

Balance at December 31, 2019	$	308,793	$	508,135
Transfers in (1)	906,527		—
Transfers out/principal reductions (1)	(825,197)		—
Net transfers and revaluation gains	—		2,082,184
Total losses included in net income	(14,091)		—
Balance at September 30, 2020	$	376,032	$	2,590,319

(1) Transfers in represent loans repurchased from investors or loans originated for which an active market currently does not exist. Transfers out primarily represent loans sold to third parties and loans paid in full.

Rocket Companies, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements (Continued)

(In Thousands, Except Shares and Per Share Amounts)

Fair Value Option

The following is the estimated fair value and unpaid principal balance (“UPB”) of mortgage loans held for sale that have contractual principal amounts and for which the Company has elected the fair value option. The fair value option was elected for mortgage loans held for sale as the Company believes fair value best reflects their expected future economic performance:


	Fair Value		Unpaid Principal Balance		Difference (1)
Balance at September 30, 2021	$	23,251,936	$	22,825,105	$	426,831
Balance at December 31, 2020	$	22,865,106	$	21,834,817	$	1,030,289

(1) Represents the amount of gains included in Gain on sale of loans, net due to changes in fair value of items accounted for using the fair value option.

Disclosures of the fair value of certain financial instruments are required when it is practical to estimate the value. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques.

The following table presents the carrying amounts and estimated fair value of financial liabilities that are not recorded at fair value on a recurring or nonrecurring basis. This table excludes cash and cash equivalents, restricted cash, warehouse borrowings, and line of credit borrowing facilities as these financial instruments are highly liquid or short-term in nature and as a result, their carrying amounts approximate fair value:


	September 30, 2021				December 31, 2020
	Carrying Amount		Estimated Fair Value		Carrying Amount		Estimated Fair Value
Senior Notes, due 1/15/2028	$	996,612	$	1,089,527	$	994,986	$	1,079,629
Senior Notes, due 3/1/2029	$	742,699	$	761,370	$	741,946	$	766,365
Senior Notes, due 3/1/2031	$	1,237,128	$	1,264,263	$	1,236,114	$	1,298,175

The fair value of Senior Notes was calculated using the observable bond price at September 30, 2021 and December 31, 2020, respectively. The Senior Notes are classified as Level 2 in the fair value hierarchy.

Rocket Companies, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements (Continued)

(In Thousands, Except Shares and Per Share Amounts)

3. Mortgage Servicing Rights

Mortgage servicing rights are recognized as assets on the Condensed Consolidated Balance Sheets when loans are sold, and the associated servicing rights are retained. The Company maintains one class of MSRs asset and has elected the fair value option. These MSRs are recorded at fair value, which is determined using a valuation model that calculates the present value of estimated future net servicing fee income. The model includes estimates of prepayment speeds, discount rate, cost to service, float earnings, contractual servicing fee income, and ancillary income and late fees, among others.

The following table summarizes changes to the MSRs assets for the three and nine months ended:


	Three Months Ended September 30,				Nine Months Ended September 30,
	2021		2020		2021		2020
Fair value, beginning of period	$	4,644,172	$	2,289,209	$	2,862,685	$	2,874,972
MSRs originated	907,242		836,557		2,937,517		2,041,899
MSRs sales	(572,218)		(140,359)		(671,278)		(326,652)
MSRs purchases	38,281		—		38,281		—
Changes in fair value:
Due to changes in valuation model inputs or assumptions (1)	(16,123)		(113,547)		426,111		(1,191,967)
Due to collection/realization of cash flows	(300,309)		(265,711)		(892,271)		(792,103)
Total changes in fair value	(316,432)		(379,258)		(466,160)		(1,984,070)
Fair value, end of period	$	4,701,045	$	2,606,149	$	4,701,045	$	2,606,149

(1) Reflects changes in assumptions including discount rates and prepayment speed assumptions, mostly due to changes in market interest rates. Does not include the change in fair value of derivatives that economically hedge MSRs identified for sale or the effects of contractual prepayment protection resulting from sales of MSRs.

The total UPB of mortgage loans serviced, excluding subserviced loans, at September 30, 2021 and December 31, 2020 was $454,666,840 and $371,494,905, respectively. The portfolio primarily consists of high-quality performing agency and government (FHA and VA) loans. As of September 30, 2021, delinquent loans (defined as 60-plus days past-due) were 2.15% of our total portfolio. Excluding clients in COVID-19 related forbearance plans, our delinquent loans (defined as 60-plus days past-due) were 0.83% as of September 30, 2021.

During the first quarter of 2021 and fourth quarter of 2020, the Company sold MSRs with a fair value of $4,885 and $193,739, respectively, relating to certain single-family mortgage loans. Based on the contract terms, the sale of those MSRs did not immediately qualify for sale accounting treatment under U.S. GAAP. The Company reported an MSRs asset (i.e., MSRs collateral for financing liability, at fair value) and MSRs liability (i.e., MSRs financing liability, at fair value) on the Condensed Consolidated Balance Sheets using a methodology consistent with the Company's method for valuing MSRs until certain contractual provisions lapsed, which occurred during the second quarter of 2021. In the nine months ended September 30, 2021 and 2020, the Company also sold MSRs relating to certain mortgage loans, with a fair value of $666,374 and $326,653, respectively, which qualified for sale accounting treatment under U.S. GAAP.

The following is a summary of the weighted average discount rate and prepayment speed assumptions used to determine the fair value of MSRs as well as the expected life of the loans in the servicing portfolio:


	September 30, 2021		December 31, 2020
Discount rate	9.5	%	9.9	%
Prepayment speeds	9.8	%	15.8	%
Life (in years)	6.80		5.05

Rocket Companies, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements (Continued)

(In Thousands, Except Shares and Per Share Amounts)

The key assumptions used to estimate the fair value of MSRs are prepayment speeds and the discount rate. Increases in prepayment speeds generally have an adverse effect on the value of MSRs as the underlying loans prepay faster. In a declining interest rate environment, the fair value of MSRs generally decreases as prepayments increase and therefore, the estimated life of the MSRs and related cash flows decrease. Decreases in prepayment speeds generally have a positive effect on the value of MSRs as the underlying loans prepay less frequently. In a rising interest rate environment, the fair value of MSRs generally increases as prepayments decrease and therefore, the estimated life of the MSRs and related cash flows increase. Increases in the discount rate result in a lower MSRs value and decreases in the discount rate result in a higher MSRs value. MSRs uncertainties are hypothetical and do not always have a direct correlation with each assumption. Changes in one assumption may result in changes to another assumption, which might magnify or counteract the uncertainties.

The following table stresses the discount rate and prepayment speeds at two different data points:


	Discount Rate				Prepayment Speeds
	100 BPS Adverse Change		200 BPS Adverse Change		10% Adverse Change		20% Adverse Change
September 30, 2021
Mortgage servicing rights	$	(201,591)	$	(375,589)	$	(187,901)	$	(358,121)
December 31, 2020
Mortgage servicing rights	$	(115,130)	$	(212,119)	$	(147,420)	$	(279,691)

4. Mortgage Loans Held for Sale

The Company sells substantially all of its originated mortgage loans into the secondary market. The Company may retain the right to service some of these loans upon sale through ownership of servicing rights. A reconciliation of the changes in mortgage loans held for sale to the amounts presented on the Condensed Consolidated Statements of Cash Flows is below:


	Nine Months Ended September 30,
	2021		2020
Balance at the beginning of period	$	22,865,106	$	13,275,735
Disbursements of mortgage loans held for sale	275,516,411		209,540,623
Proceeds from sales of mortgage loans held for sale (1)	(281,117,441)		(208,122,820)
Gain on sale of mortgage loans excluding fair value of other financial instruments, net (2)	5,987,860		6,983,862

Balance at the end of period	$	23,251,936	$	21,677,400

(1) The proceeds from sales of loans held for sale on the Condensed Consolidated Statements of Cash Flows includes amounts related to the sale of consumer loans.

(2) The Gain on sale of loans excluding fair value of MSRs, net on the Condensed Consolidated Statements of Cash Flows includes amounts related to the sale of consumer loans, interest rate lock commitments, forward commitments, and provisions for investor reserves.

Credit Risk

The Company is subject to credit risk associated with mortgage loans that it purchases and originates during the period of time prior to the sale of these loans. The Company considers credit risk and losses associated with these loans to be insignificant as it holds the loans for a short period of time, which for the nine months ended September 30, 2021 is, on average, approximately 18 days from the date of borrowing, and the market for these loans continues to be highly liquid. The Company is also subject to credit risk associated with mortgage loans it has repurchased as a result of breaches of representations and warranties during the period of time between repurchase and resale.

Rocket Companies, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements (Continued)

(In Thousands, Except Shares and Per Share Amounts)

5. Borrowings

The Company maintains various funding facilities and other non-funding debt as shown in the tables below. Interest rates typically have two main components – a base rate most commonly LIBOR or SOFR, which is sometimes subject to a minimum floor plus a spread. Some facilities have a commitment fee, which can range from 0.0% to 0.5% per year. The commitment fee charged by lenders is calculated based on the committed line amount multiplied by a negotiated rate. The Company is required to maintain certain covenants, including minimum tangible net worth, minimum liquidity, maximum total debt or liabilities to net worth ratio, pretax net income requirements, and other customary debt covenants, as defined in the agreements. The Company was in compliance with all covenants as of September 30, 2021.

The amount owed and outstanding on the Company’s loan funding facilities fluctuates greatly based on its origination volume, the amount of time it takes the Company to sell the loans it originates, and the Company’s ability to use its cash to self-fund loans. In addition to self-funding, the Company may from time to time use surplus cash to “buy-down” the effective interest rate of certain loan funding facilities or to self-fund a portion of our loan originations. As of September 30, 2021, $3,399,503 of the Company’s cash was used to buy-down our funding facilities and self-fund, $500,732 of which are buy-down funds that are included in Cash and cash equivalents on the Condensed Consolidated Balance Sheets and an estimated $2,898,771 of which is discretionary self-funding that reduces Cash and cash equivalents on the Condensed Consolidated Balance Sheets. The Company has the right to withdraw the $500,732 at any time, unless a margin call has been made or a default has occurred under the relevant facilities. The Company has an estimated $2,898,771 of discretionary self-funded loans, of which a portion can be transferred to a warehouse line or the early buy out line, provided that such loans meet the eligibility criteria to be placed on such lines. The remaining portion will be funded in normal course over a short period of time, generally less than one month. A large unanticipated margin call could also have a material adverse effect on the Company’s liquidity.

The terms of the Senior Notes restrict our ability and the ability of our subsidiary guarantors among other things to: (1) incur additional debt or issue preferred stock; (2) pay dividends or make distributions in respect of capital stock; (3) purchase or redeem capital stock; (4) make investments or other restricted payments; (5) sell assets; (6) enter into transactions with affiliates; (7) effect a consolidation or merger, taken as a whole; (8) designate our subsidiaries as unrestricted subsidiaries, unless certain conditions are met, as defined in the agreements; (9) merge, consolidate or sell, transfer or lease assets, and; (10) create liens on assets. Items (1) through (9) apply to the 2028 Senior Notes. Items (9) and (10) apply to the 2029 and 2031 Senior Notes, which have investment grade covenants. Subsequent to September 30, 2021, the Company amended certain provisions of the 2028 Senior Notes Indenture with the consent of the holders of the 2028 Senior Notes following a previously announced Tender Offer and Consent Solicitation. The Company eliminated substantially all of the restrictive covenants related to the 2028 Senior Notes Indenture.

Rocket Companies, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements (Continued)

(In Thousands, Except Shares and Per Share Amounts)

Funding Facilities


Facility Type	Collateral	Maturity	Line Amount		Committed Line Amount		Outstanding Balance September 30, 2021		Outstanding Balance December 31, 2020
MRA funding:
1) Master Repurchase Agreement (1)(7)	Mortgage loans held for sale (6)	10/22/2021	$	2,000,000	$	100,000	$	1,499,791	$	999,752
2) Master Repurchase Agreement (7)	Mortgage loans held for sale (6)	12/2/2021	1,500,000		500,000		1,456,449		1,320,484
3) Master Repurchase Agreement (7)	Mortgage loans held for sale (6)	4/21/2023	2,750,000		1,000,000		1,331,022		2,407,156
4) Master Repurchase Agreement (2)(7)	Mortgage loans held for sale (6)	7/26/2022	1,700,000		1,400,000		1,647,400		1,953,949
5) Master Repurchase Agreement (7)	Mortgage loans held for sale (6)	4/20/2023	3,000,000		500,000		2,413,175		2,004,707
6) Master Repurchase Agreement (7)	Mortgage loans held for sale (6)	9/22/2023	2,000,000		500,000		496,864		1,780,902
7) Master Repurchase Agreement (7)	Mortgage loans held for sale (6)	9/15/2023	1,200,000		500,000		477,108		1,343,130
8) Master Repurchase Agreement (7)	Mortgage loans held for sale (6)	6/10/2022	500,000		—		348,655		219,786
9) Master Repurchase Agreement (7)	Mortgage loans held for sale (6)	9/22/2023	1,500,000		500,000		506,022		983,126
10) Master Repurchase Agreement (7)	Mortgage loans held for sale (6)	8/16/2023	750,000		100,000		690,565		480,544
11) Master Repurchase Agreement (3)(7)	Mortgage loans held for sale (6)	12/17/2021	1,000,000		500,000		501,660		765,432
			$	17,900,000	$	5,600,000	$	11,368,711	$	14,258,968
Early Funding:
12) Early Funding Facility (4)(7)	Mortgage loans held for sale (6)	(4)	$	4,000,000	$	—	$	3,891,608	$	2,514,193
13) Early Funding Facility (5)(7)	Mortgage loans held for sale (6)	(5)	3,000,000		—		1,362,712		969,412
			7,000,000		—		5,254,320		3,483,605
Total			$	24,900,000	$	5,600,000	$	16,623,031	$	17,742,573

(1) Subsequent to September 30, 2021, this facility was renewed and the maturity date was extended to October 20, 2023.

(2) This facility has a 12-month initial term, which can be extended for 3-months at each subsequent 3-month anniversary from the initial start date.

(3) Subsequent to September 30, 2021, this facility was amended to decrease the committed amount to $250,000.

(4) This facility is an evergreen agreement with no stated termination or expiration date. This agreement can be terminated by either party upon written notice.

(5) This facility has an overall line size of $3,000,000, which is reviewed every 90 days. This facility is an evergreen agreement with no stated termination or expiration date. This agreement can be terminated by either party upon written notice.

(6) The Company has multiple borrowing facilities in the form of asset sales under agreements to repurchase. These borrowing facilities are secured by mortgage loans held for sale at fair value as the first priority security interest.

(7) The interest rates charged by lenders on the funding facilities included the applicable base rate plus a spread ranging from 1.00% to 2.25% for the nine months ended September 30, 2021, and the applicable base rate plus a spread ranging from 0.40% to 2.30% for the year ended December 31, 2020.

Rocket Companies, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements (Continued)

(In Thousands, Except Shares and Per Share Amounts)

Other Financing Facilities


Facility Type	Collateral	Maturity	Line Amount		Committed Line Amount		Outstanding Balance September 30, 2021		Outstanding Balance December 31, 2020
Line of Credit Financing Facilities
1) Unsecured line of credit (1)	—	7/27/2025	$	2,000,000	$	—	$	—	$	—
2) Unsecured line of credit (1)	—	7/31/2025	100,000		—		—		—
3) Revolving credit facility (4)	—	8/10/2024	1,000,000		1,000,000		—		300,000
4) MSRs line of credit (2)(4)	MSRs	10/22/2021	200,000		—		—		—
5) MSRs line of credit (3)(4)	MSRs	(3)	200,000		200,000		75,000		75,000
			$	3,500,000	$	1,200,000	$	75,000	$	375,000
Early Buy out Financing Facility
6) Early buy out facility (4)	Loans/ Advances	3/13/2023	$	2,600,000	$	—	$	2,219,319	$	330,266

(1) Refer to Note 6, Transactions with Related Parties for additional details regarding this unsecured line of credit.

(2) Subsequent to September 30, 2021 this facility was renewed and the maturity date was extended to October 20, 2023.

(3) This MSRs facility can be drawn upon for corporate purposes and is collateralized by GSE MSRs within our servicing portfolio. This facility has a 5-year total commitment comprised of a 3-year revolving period that expires on April 30, 2022 followed by a 2-year amortization period that expires on April 30, 2024.

(4) The interest rates charged by lenders on the other funding facilities included the applicable base rate, plus a spread ranging from 1.45% to 4.00% for the nine months ended September 30, 2021, and the applicable base rate plus a spread ranging from 1.75% to 4.00% for the year ended December 31, 2020.

Unsecured Senior Notes


Facility Type	Maturity	Interest Rate		Outstanding Balance September 30, 2021			Outstanding Balance December 31, 2020

Unsecured Senior Notes (1)	1/15/2028	5.250	%	$	1,010,000		$	1,010,000
Unsecured Senior Notes (2)	3/1/2029	3.625	%	750,000			750,000
Unsecured Senior Notes (3)	3/1/2031	3.875	%	1,250,000			1,250,000

Total Senior Notes				$	3,010,000		$	3,010,000

Weighted Average Interest Rate				4.27		%	4.27		%

(1) The 2028 Senior Notes are unsecured obligation notes with no asset required to pledge for this borrowing. Unamortized debt issuance costs and discounts are presented net against the Senior Notes reducing the $1,010,000 carrying amount on the Condensed Consolidated Balance Sheets by $7,308 and $6,080 as of September 30, 2021, respectively, and $8,197 and $6,817, as of December 31, 2020, respectively. Subsequent to September 30, 2021, $948,015 of the outstanding principal of the 2028 Senior Notes was redeemed at a price above par plus accrued and unpaid interest for a total cash payment of $1,032,364.

(2) The 2029 Senior Notes are unsecured obligation notes with no asset required to pledge for this borrowing. Unamortized debt issuance costs and discounts are presented net against the Senior Notes reducing the $750,000 carrying amount on the Condensed Consolidated Balance Sheets by $7,301 and $8,053 as of September 30, 2021 and December 31, 2020, respectively.

Rocket Companies, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements (Continued)

(In Thousands, Except Shares and Per Share Amounts)

(3) The 2031 Senior Notes are unsecured obligation notes with no asset required to pledge for this borrowing. Unamortized debt issuance costs and discounts are presented net against the Senior Notes reducing the $1,250,000 carrying amount on the Condensed Consolidated Balance Sheets by $12,872 and $13,887 as of September 30, 2021 and December 31, 2020, respectively.

Subsequent to September 30, 2021, Rocket Mortgage closed a private offering of $1,150,000 aggregate principal amount of 2.875% Senior Notes due 2026 and $850,000 aggregate principal amount of 4.000% Senior Notes due 2033. The 2026 and 2033 Senior Notes are unsecured obligation notes with no asset required to pledge for this borrowing.

Refer to Note 2, Fair Value Measurements for information pertaining to the fair value of the Company’s debt as of September 30, 2021 and December 31, 2020.

6. Transactions with Related Parties

The Company has entered into various transactions and agreements with RHI, its subsidiaries, certain other affiliates and related parties (collectively, “Related Parties”). These transactions include providing financing and services as well as obtaining financing and services from these Related Parties.

Financing Arrangements

On June 9, 2017, Rocket Mortgage and RHI entered into an unsecured line of credit, as further amended and restated on September 16, 2021 (“RHI Line of Credit”), pursuant to which Rocket Mortgage has a borrowing capacity of $2,000,000. The RHI Line of Credit matures on July 27, 2025. Borrowings under the line of credit bear interest at a rate per annum of one month LIBOR plus 1.25%. The line of credit is uncommitted and RHI has sole discretion over advances. The RHI Line of Credit also contains negative covenants which restrict the ability of the Company to incur debt and create liens on certain assets. It also requires Rocket Mortgage to maintain a quarterly consolidated net income before taxes if adjusted tangible net worth meets certain requirements. As of September 30, 2021 and December 31, 2020, there were no outstanding principal amounts due to RHI pursuant to the RHI Line of Credit. As of September 30, 2021 and December 31, 2020, there was outstanding interest due to RHI pursuant to the RHI Line of Credit of $250 and zero, respectively.

RHI and ATI are parties to a surplus debenture, effective as of December 28, 2015, and as further amended and restated on December 31, 2019 (the “RHI/ATI Debenture”), pursuant to which ATI is indebted to RHI for an aggregate principal amount of $21,500. The RHI/ATI Debenture matures on December 31, 2030. Interest under the RHI/ATI Debenture accrues at an annual rate of 8%. Principal and interest under the RHI/ATI Debenture are due and payable quarterly, in each case subject to ATI achieving a certain amount of surplus and payments of all interest before principal payments begin. Any unpaid amounts of principal and interest shall be due and payable upon the maturity of the RHI/ATI Debenture.

On July 31, 2020, Holdings and RHI entered into an agreement for an uncommitted, unsecured revolving line of credit ("RHI 2nd Line of Credit’’), which will provide for financing from RHI to the Company of up to $100,000. The RHI 2nd Line of Credit matures on July 31, 2025. Borrowings under the line of credit will bear interest at a rate per annum of one month LIBOR plus 1.25%. The negative covenants of the line of credit restrict the ability of the Company to incur debt and create liens on certain assets. The line of credit also contains customary events of default. As of September 30, 2021 and December 31, 2020 there were no amounts outstanding pursuant to the RHI 2nd line of credit.

Rocket Companies, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements (Continued)

(In Thousands, Except Shares and Per Share Amounts)

The amounts receivable from and payable to Related Parties consisted of the following as of:


	September 30, 2021				December 31, 2020
	Principal		Interest Rate		Principal		Interest Rate
Included in Notes receivable and due from affiliates on the Condensed Consolidated Balance Sheets
Affiliated receivables and other notes	$	9,671	—	%	$	22,172	—	%
Notes receivable and due from affiliates	$	9,671			$	22,172

Included in Notes payable and due to affiliates on the Condensed Consolidated Balance Sheets
RHI/ATI Debenture	$	21,500	8.00	%	$	21,500	8.00	%
Affiliated payables	8,392		—	%	52,396		—	%
Notes payable and due to affiliates	$	29,892			$	73,896

Services, Products and Other Transactions

We have entered into transactions and agreements to provide certain services to RHI, its subsidiaries and certain other affiliates of our majority shareholder. We recognized revenue of $3,494 and $4,067 for the three months ended September 30, 2021 and 2020, respectively and $10,592 and $9,761 for the nine months ended September 30, 2021 and 2020 respectively, for the performance of these services, which was included in Other income. We have also entered into transactions and agreements to purchase certain services, products and other transactions from certain subsidiaries of RHI and affiliates of our majority shareholder. We incurred expenses of $48,861 and $64,330 for the three months ended September 30, 2021 and 2020, respectively and $121,599 and $164,260 for the nine months ended September 30, 2021 and 2020 respectively, for these products, services and other transactions, which are included in General and administrative expenses.

The Company has also entered into a Tax Receivable Agreement with RHI and Dan Gilbert, our founder and Chairman (our "Chairman") as described further in Note 8, Income Taxes. The Company has also guaranteed the debt of a related party as described further in Note 10, Commitments, Contingencies, and Guarantees.

Promotional Sponsorships

The Company incurred marketing and advertising costs related to the Rocket Mortgage Field House Naming Rights Contract and other promotional sponsorships, which are related parties. The company incurred expenses of $2,180 and $2,373 for the three months ended September 30, 2021 and 2020, respectively and $6,850 and $7,018 for the nine months ended September 30, 2021 and 2020, respectively, related to these arrangements.

Lease Transactions with Related Parties

The Company is a party to lease agreements for certain offices, including our headquarters in Detroit, with various affiliates of Bedrock Management Services LLC (“Bedrock”), a related party, and other related parties of the Company. The Company incurred expenses of $16,189 and $18,069 for the three months ended September 30, 2021 and 2020, respectively and $51,001 and $52,221 for the nine months ended September 30, 2021 and 2020, respectively, related to these arrangements.

Rocket Companies, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements (Continued)

(In Thousands, Except Shares and Per Share Amounts)

7. Other Assets

Other assets consist of the following:


	September 30, 2021		December 31, 2020
Mortgage production related receivables	$	353,722	$	307,282
Disbursement funds advanced	209,014		80,877
Prepaid expenses	129,895		98,529
Non-production-related receivables	101,617		76,595
Goodwill and other intangible assets	44,151		47,230
Ginnie Mae buyouts	25,490		40,681
Other real estate owned	564		1,131
Margin call receivable from counterparty	—		247,604
Other	77,390		41,548
Total other assets	$	941,843	$	941,477

8. Income Taxes

The Company has income tax expense of $32,830 and $61,683 on Income before income taxes of $1,425,689 and $3,057,066 for the three months ended September 30, 2021 and 2020, respectively. The Company has income tax expense of $122,709 and $84,363 on Income before income taxes of $5,329,556 and $6,642,875 for the nine months ended September 30, 2021 and 2020, respectively.

The Company’s income tax expense varies from the expense that would be expected based on statutory rates due principally to its organizational structure. Prior to the IPO in 2020, the Company was owned by RHI which has elected S corporation status. When owned by RHI, Rocket Mortgage, Amrock and several other wholly owned corporations had elected to be treated as qualified subchapter S subsidiaries. The shareholders of RHI, as shareholders of an S corporation, are responsible for the federal income tax liabilities. A provision for state income taxes is required for certain jurisdictions that tax S corporations and their qualified Subchapter S subsidiaries and for states where the Company is taxed as a C Corporation.

During 2020, in a series of transactions occurring along with the IPO, subsidiaries of the Company were contributed to Holdings by RHI. Several of these subsidiaries, such as Rocket Mortgage, Amrock and other subsidiaries, are no longer qualified Subchapter S corporations and are single member LLC entities owned by Holdings. As single member LLCs of Holdings, all taxable income or loss generated by these subsidiaries will pass through and be included in the income or loss of Holdings. Other contributed subsidiaries of Holdings, such as Amrock Title Insurance Co., LMB Mortgage Services and others, are treated as C Corporations and will separately file and pay taxes apart from Holdings in various jurisdictions including U.S. federal, state, local and Canada.

As part of the IPO, Rocket Companies acquired a portion of the units of Holdings, which is treated as a partnership for U.S. federal tax purposes and in most applicable jurisdictions for state and local income tax purposes. The remaining portion of Holdings is owned by RHI and our Chairman ("LLC Members"). As a partnership, Holdings is not subject to U.S. federal and certain state and local income taxes. Any taxable income or loss generated by Holdings after Rocket Companies acquisition of its portion of Holdings is passed through and included in the taxable income or loss of its members, including Rocket Companies, in accordance with the terms of the operating agreement of Holdings (the "Holdings Operating Agreement"). Rocket Companies is a C Corporation and is subject to U.S. federal, state, and local income taxes with respect to its allocable share of any taxable income of Holdings.

Tax Receivable Agreement

The Company expects to obtain an increase in its share of the tax basis in the net assets of Holdings when Holdings Units are redeemed from or exchanged by the LLC Members. The Company intends to treat any redemptions and exchanges of Holdings Units as direct purchases of Holdings Units for U.S. federal income tax purposes. These increases in tax basis may reduce the amounts that the Company would otherwise pay in the future to various tax authorities. They may also decrease gains (or increase losses) on future dispositions of certain capital assets to the extent tax basis is allocated to those capital assets.

Rocket Companies, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements (Continued)

(In Thousands, Except Shares and Per Share Amounts)

In connection with the IPO, the Company entered into the Tax Receivable Agreement with the LLC Members. The Tax Receivable Agreement provides for the payment by Rocket Companies of 90% of the amount of any cash tax benefits that Rocket Companies actually realizes, or in some cases is deemed to realize, as a result of (i) certain increases in Rocket Companies allocable share of the tax basis in Holdings’ assets resulting from (a) the purchases of Holdings Units (along with the corresponding shares of our Class D common stock or Class C common stock) from the LLC Members (or their transferees of Holdings Units or other assignees) using the net proceeds from our initial public offering or in any future offering, (b) exchanges by the LLC Members (or their transferees of Holdings Units or other assignees) of Holdings Units (along with the corresponding shares of our Class D common stock or Class C common stock) for cash or shares of our Class B common stock or Class A common stock, as applicable, or (c) payments under the Tax Receivable Agreement; (ii) tax benefits related to imputed interest deemed arising as a result of payments made under the Tax Receivable Agreement and (iii) disproportionate allocations (if any) of tax benefits to Holdings as a result of section 704(c) of the Code that relate to the reorganization transactions. The Company expects to benefit from the remaining 10% of any cash savings, if any, that it realizes.

Effective on March 31, 2021, the Company and RHI exchanged 20,200,000 shares of Class A common stock for the equivalent number of Paired Interests (in this instance, Holdings Units together with a corresponding number of shares of Class D common stock) which resulted in an increase in the tax basis of assets of Holdings and would be subject to the provisions of the Tax Receivable Agreement. The Company recorded an increase in its deferred tax asset on investment in partnership of $123,587, an increase in the valuation allowance of $3,146, and an increase in the Tax receivable agreement liability of $119,456 with the net offsetting amount of $985 recorded to Additional Paid-in Capital in the Change in controlling interest of investment, net in the Condensed Consolidated Statements of Changes in Equity.

During the year ended December 31, 2020, the Company acquired an aggregate of 115,000,000 Holdings Units valued at $2,070,000 in connection with the exchange of those Holdings Units by the LLC Members, which resulted in an increase in the tax basis of the assets of Holdings and would be subject to the provisions of the Tax Receivable Agreement.

The amounts payable under the Tax Receivable Agreement will vary depending upon a number of factors, including the amount, character, and timing of the taxable income of Rocket Companies in the future. Any such changes in these factors or changes in the Company’s determination of the need for a valuation allowance related to the tax benefits acquired under the Tax Receivable Agreement could adjust the Tax receivable agreement liability recognized and recorded within earnings in future periods.

Tax Distributions

The holders of Holdings’ Units, including Rocket Companies Inc., incur U.S. federal, state and local income taxes on their share of any taxable income of Holdings. The Holdings Operating Agreement provides for pro rata cash distributions (“tax distributions”) to the holders of the Holdings Units in an amount generally calculated to provide each holder of Holdings Units with sufficient cash to cover its tax liability in respect of the Holdings Units. In general, these tax distributions are computed based on Holdings’ estimated taxable income, multiplied by an assumed tax rate as set forth in the Holdings Operating Agreement.

For the three and nine months ended September 30, 2021, Holdings paid tax distributions totaling $395,057 and $1,801,756, respectively, to holders of Holdings Units other than Rocket Companies. For the three and nine months ended September 30, 2020, Holdings paid tax distributions totaling $5,670, to holders of Holdings Units other than Rocket Companies.

Rocket Companies, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements (Continued)

(In Thousands, Except Shares and Per Share Amounts)

9. Derivative Financial Instruments

The Company enters into interest rate lock commitments ("IRLCs"), forward commitments to sell mortgage loans and forward commitments to purchase loans, which are considered derivative financial instruments. These items are accounted for as free-standing derivatives and are included in the Condensed Consolidated Balance Sheets at fair value. The Company treats all of its derivative instruments as economic hedges; therefore, none of its derivative instruments qualify for designation as accounting hedges. Changes in the fair value of the IRLCs and forward commitments to sell mortgage loans are recorded in current period earnings and are included in Gain on sale of loans, net in the Condensed Consolidated Statements of Income and Comprehensive Income. Forward commitments to purchase mortgage loans are recognized in current period earnings and are included in Gain on sale of loans, net in the Condensed Consolidated Statements of Income and Comprehensive Income.

The Company enters into IRLCs to fund residential mortgage loans with its potential borrowers. These commitments are binding agreements to lend funds to these potential borrowers at specified interest rates within specified periods of time.

The fair value of IRLCs is derived from the fair value of similar mortgage loans or bonds, which is based on observable market data. Changes to the fair value of IRLCs are recognized based on changes in interest rates, changes in the probability that the commitment will be exercised, and the passage of time. The expected net future cash flows related to the associated servicing of the loan are included in the fair value measurement of rate locks.

IRLCs and uncommitted mortgage loans held for sale expose the Company to the risk that the value of the mortgage loans held and mortgage loans underlying the commitments may decline due to increases in mortgage interest rates during the life of the commitments. To protect against this risk, the Company uses forward loan sale commitments to economically hedge the risk of potential changes in the value of the loans. These derivative instruments are recorded at fair value. The Company expects that the changes in fair value of these derivative financial instruments will either fully or partially offset the changes in fair value of the IRLCs and uncommitted mortgage loans held for sale. The changes in the fair value of these derivatives are recorded in Gain on sale of loans, net.

MSRs assets (including the MSRs value associated with outstanding IRLCs) that the Company plans to sell expose the Company to the risk that the value of the MSRs asset may decline due to decreases in mortgage interest rates prior to the sale of these assets. To protect against this risk, the Company uses forward loan purchase commitments to economically hedge the risk of potential changes in the value of MSRs assets that have been identified for sale. These derivative instruments are recorded at fair value. The Company expects that the changes in fair value of these derivative financial instruments will either fully or partially offset the changes in fair value of the MSRs assets the Company intends to sell. The changes in fair value of these derivatives are recorded in the Change in fair value of MSRs.

Forward commitments include To-Be-Announced ("TBA") mortgage-backed securities that have been aggregated at the counterparty level for presentation and disclosure purposes. Counterparty agreements contain a legal right to offset amounts due to and from the same counterparty under legally enforceable master netting agreements to settle with the same counterparty, on a net basis, as well as the right to obtain cash collateral. Forward commitments also include commitments to sell loans to counterparties and to purchase loans from counterparties at determined prices.

The Company uses forward commitments in hedging the interest rate risk exposure on its fixed and adjustable rate commitments. Utilization of forward commitments involves some degree of basis risk. Basis risk is defined as the risk that the hedged instrument’s price does not move in parallel with the increase or decrease in the market price of the hedged financial instrument. The Company calculates an expected hedge ratio to mitigate a portion of this risk. The Company’s derivative instruments are not designated as accounting hedging instruments, and therefore, changes in fair value are recorded in current period earnings. Hedging gains and losses are included in Gain on sale of loans, net in the Condensed Consolidated Statements of Income and Comprehensive Income.

Net hedging gains and losses were as follows:


	Three Months Ended September 30,				Nine Months Ended September 30,
	2021		2020		2021		2020
Hedging gains (losses) (1)	$	652,337	$	(776,086)	$	2,020,328	$	(2,283,874)

(1) Includes the change in fair value related to derivatives economically hedging MSRs identified for sale.

Rocket Companies, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements (Continued)

(In Thousands, Except Shares and Per Share Amounts)

Refer to Note 2, Fair Value Measurements, for additional information on the fair value of derivative financial instruments.

Notional and Fair Value

The notional and fair values of derivative financial instruments not designated as hedging instruments were as follows:


	Notional Value		Derivative Asset		Derivative Liability
Balance at September 30, 2021:
IRLCs, net of loan funding probability (1)	$	30,537,502	$	794,258	$	—
Forward commitments (2)	$	45,033,900	$	253,200	$	35,795

Balance at December 31, 2020:
IRLCs, net of loan funding probability (1)	$	40,560,544	$	1,897,194	$	—
Forward commitments (2)	$	59,041,900	$	20,584	$	506,071

(1) IRLCs are also discussed in Note 10, Commitments, Contingencies, and Guarantees.

(2) Includes the fair value and net notional value related to derivatives economically hedging MSRs identified for sale.

Counterparty agreements for forward commitments contain master netting agreements. The table below presents the gross amounts of recognized assets and liabilities subject to master netting agreements. The Company had zero and $247,604 of cash pledged to counterparties related to these forward commitments at September 30, 2021 and December 31, 2020, respectively, classified in Other assets in the Condensed Consolidated Balance Sheets. As of September 30, 2021 and December 31, 2020, the Company had $266,603 and zero, respectively, of cash pledged from counterparties related to these forward commitments. Margins received by the Company are classified in Other liabilities in the Condensed Consolidated Balance Sheets.


	Gross Amount of Recognized Assets or Liabilities		Gross Amounts Offset in the Condensed Consolidated Balance Sheets		Net Amounts Presented in the Condensed Consolidated Balance Sheets
Offsetting of Derivative Assets
Balance at September 30, 2021:
Forward commitments	$	404,896	$	(151,696)	$	253,200
Balance at December 31, 2020:
Forward commitments	$	35,746	$	(15,162)	$	20,584

Offsetting of Derivative Liabilities
Balance at September 30, 2021:
Forward commitments	$	(64,225)	$	28,430	$	(35,795)
Balance at December 31, 2020:
Forward commitments	$	(715,671)	$	209,600	$	(506,071)

Counterparty Credit Risk

Credit risk is defined as the possibility that a loss may occur from the failure of another party to perform in accordance with the terms of the contract, which exceeds the value of existing collateral, if any. The Company attempts to limit its credit risk by dealing with creditworthy counterparties and obtaining collateral where appropriate.

Rocket Companies, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements (Continued)

(In Thousands, Except Shares and Per Share Amounts)

The Company is exposed to credit loss in the event of contractual nonperformance by its trading counterparties and counterparties to its various over-the-counter derivative financial instruments noted in the above Notional and Fair Value discussion. The Company manages this credit risk by selecting only counterparties that it believes to be financially strong, spreading the credit risk among many such counterparties, placing contractual limits on the amount of unsecured credit extended to any single counterparty, and entering into netting agreements with the counterparties as appropriate.

Certain counterparties have master netting agreements. The master netting agreements contain a legal right to offset amounts due to and from the same counterparty. Derivative assets in the Condensed Consolidated Balance Sheets represent derivative contracts in a gain position, net of loss positions with the same counterparty and, therefore, also represent the Company’s maximum counterparty credit risk. The Company incurred no credit losses due to nonperformance of any of its counterparties during the three and nine months ended September 30, 2021 and 2020.

10. Commitments, Contingencies, and Guarantees

Interest Rate Lock Commitments

IRLCs are agreements to lend to a client as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. The Company evaluates each client’s creditworthiness on a case-by-case basis.

The number of days from the date of the IRLC to expiration of fixed and variable rate lock commitments outstanding at September 30, 2021 and December 31, 2020 was approximately 43 days on average.

The UPB of IRLCs was as follows:


	September 30, 2021				December 31, 2020
	Fixed Rate		Variable Rate		Fixed Rate		Variable Rate
IRLCs	$	37,296,375	$	1,919,846	$	53,736,717	$	1,065,936

Commitments to Sell Mortgage Loans

In the ordinary course of business, the Company enters into contracts to sell existing mortgage loans held for sale into the secondary market at specified future dates. The amount of commitments to sell existing loans at September 30, 2021 and December 31, 2020 was $5,717,997 and $3,139,816, respectively.

Commitments to Sell Loans with Servicing Released

In the ordinary course of business, the Company enters into contracts to sell the MSRs of certain newly originated loans on a servicing released basis. In the event that a forward commitment is not filled and there has been an unfavorable market shift from the date of commitment to the date of settlement, the Company is contractually obligated to pay a pair-off fee on the undelivered balance. There were $734,370 and $280,502 in UPB of loans committed to be sold servicing released at September 30, 2021 and December 31, 2020, respectively.

Investor Reserves

The following presents the activity in the investor reserves:


	Three Months Ended September 30,				Nine Months Ended September 30,
	2021		2020		2021		2020
Balance at beginning of period	$	74,202	$	63,012	$	87,191	$	54,387
Provision for (benefit from) investor reserves	6,327		(3,665)		(7,642)		5,698
Premium recapture and indemnification losses paid	(208)		(2,329)		772		(3,067)
Balance at end of period	$	80,321	$	57,018	$	80,321	$	57,018

Rocket Companies, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements (Continued)

(In Thousands, Except Shares and Per Share Amounts)

The maximum exposure under the Company’s representations and warranties would be the outstanding principal balance and any premium received on all loans ever sold by the Company, less (i) loans that have already been paid in full by the mortgagee, (ii) loans that have defaulted without a breach of representations and warranties, (iii) loans that have been indemnified via settlement or make-whole, or (iv) loans that have been repurchased. Additionally, the Company may receive relief of certain representation and warranty obligations on loans sold to Fannie Mae or Freddie Mac on or after January 1, 2013 if Fannie Mae or Freddie Mac satisfactorily concludes a quality control loan file review or if the borrower meets certain acceptable payment history requirements within 12 or 36 months after the loan is sold to Fannie Mae or Freddie Mac.

Property Taxes, Insurance, and Principal and Interest Payable

As a service to its clients, the Company administers escrow deposits representing undisbursed amounts received for payment of property taxes, insurance and principal, and interest on mortgage loans held for sale. Cash held by the Company for property taxes and insurance was $5,247,722 and $3,551,400, and for principal and interest was $9,915,371 and $13,065,549 at September 30, 2021 and December 31, 2020, respectively. These amounts are not considered assets of the Company and, therefore, are excluded from the Condensed Consolidated Balance Sheets. The Company remains contingently liable for the disposition of these deposits.

Guarantees

As of September 30, 2021 and December 31, 2020, the Company guaranteed the debt of a related party consisting of three separate guarantees totaling $5,356 and $15,000, respectively. As of September 30, 2021 and December 31, 2020, the Company did not record a liability on the Condensed Consolidated Balance Sheets for these guarantees because it was not probable that the Company would be required to make payments under these guarantees.

Trademark License

The Company has a perpetual trademark license agreement with a third-party entity. This agreement requires annual payments by the Company based upon the income from the sale of loans generated under the Quicken Loans brand. Total licensing fees incurred and paid were zero and $1,875 for the three months ended September 30, 2021 and 2020 respectively, and $625 and $3,750 for the nine months ended September 30, 2021 and 2020, respectively, which is classified in Other expenses in the Condensed Consolidated Statements of Income and Comprehensive Income. The Company has entered into an agreement with Intuit that, among other things, gives the Company full ownership of the “Quicken Loans” brand in 2022 in exchange for certain agreements, subject to the satisfaction of certain conditions. We have fulfilled our payment obligations pertaining to the licensing agreement with Intuit in 2021 and no further expenses are expected.

Tax Receivable Agreement

As indicated in Note 8, Income Taxes, the Company is party to a Tax Receivable Agreement.

Legal

Rocket Companies' subsidiaries, among other things, engage in mortgage lending, title and settlement services, and other financial technology services. Rocket Companies and its subsidiaries operate in highly regulated industries and are routinely subject to various legal and administrative proceedings concerning matters that arise in the normal and ordinary course of business, including inquiries, complaints, subpoenas, audits, examinations, investigations and potential enforcement actions from regulatory agencies and state attorney generals; state and federal lawsuits and putative class actions; and other litigation. Periodically, we assess our potential liabilities and contingencies in connection with outstanding legal and administrative proceedings utilizing the latest information available. While it is not possible to predict the outcome of any of these matters, based on our assessment of the facts and circumstances, we do not believe any of these matters, individually or in the aggregate, will have a material adverse effect on our financial position, results of operations or cash flows. However, actual outcomes may differ from those expected and could have a material effect on our financial position, results of operations, or cash flows in a future period. Rocket Companies accrues for losses when they are probable to occur and such losses are reasonably estimable. Legal costs are expensed as they are incurred.

Rocket Companies, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements (Continued)

(In Thousands, Except Shares and Per Share Amounts)

As of September 30, 2021 and December 31, 2020, we recorded reserves related to potential damages in connection with any legal proceedings of $15,000 and zero, respectively. The ultimate outcome of these or other actions or proceedings, including any monetary awards against us, is uncertain and there can be no assurance as to the amount of any such potential awards. Rocket Companies will incur defense costs and other expenses in connection with the lawsuits. Plus, if a judgment for money that exceeds specified thresholds is rendered against us and we fail to timely pay, discharge, bond or obtain a stay of execution of such judgment, it is possible that we could be deemed in default of loan funding facilities and other agreements governing indebtedness. If the final resolution of any such litigation is unfavorable in one or more of these actions, it could have a material adverse effect on our business, liquidity, financial condition, cash flows and results of operations.

11. Minimum Net Worth Requirements

Certain secondary market investors and state regulators require the Company to maintain minimum net worth and capital requirements. To the extent that these requirements are not met, secondary market investors and/or the state regulators may utilize a range of remedies including sanctions, and/or suspension or termination of selling and servicing agreements, which may prohibit the Company from originating, securitizing or servicing these specific types of mortgage loans.

Rocket Mortgage is subject to the following minimum net worth, minimum capital ratio and minimum liquidity requirements established by the Federal Housing Finance Agency (“FHFA”) for Fannie Mae and Freddie Mac Seller/Servicers, and Ginnie Mae for single family issuers. Furthermore, refer to Note 5, Borrowings for additional information regarding compliance with all covenant requirements.

Minimum Net Worth

The minimum net worth requirement for Fannie Mae and Freddie Mac is defined as follows:

• Base of $2,500 plus 25 basis points of outstanding UPB for total loans serviced.

• Adjusted/Tangible Net Worth is defined as total equity less goodwill, intangible assets, affiliate receivables and certain pledged assets.

The minimum net worth requirement for Ginnie Mae is defined as follows:

• Base of $2,500 plus 35 basis points of the Ginnie Mae total single-family effective outstanding obligations.

• Adjusted/Tangible Net Worth is defined as total equity less goodwill, intangible assets, affiliate receivables and certain pledged assets. Effective for fiscal year 2020, under the Ginnie Mae MBS Guide, the issuers will no longer be permitted to include deferred tax assets when computing the minimum net worth requirements.

Minimum Capital Ratio

• For Fannie Mae, Freddie Mac and Ginnie Mae, the Company is also required to hold a ratio of Adjusted/Tangible Net Worth to Total Assets greater than 6%.

Minimum Liquidity

The minimum liquidity requirement for Fannie Mae and Freddie Mac is defined as follows:

• 3.5 basis points of total Agency servicing.

• Incremental 200 basis points of total nonperforming Agency, measured as 90+ delinquencies, servicing in excess of 6% of the total Agency servicing UPB.

• Allowable assets for liquidity may include cash and cash equivalents (unrestricted) and available for sale or held for trading investment grade securities (e.g., Agency MBS, Obligations of GSEs, US Treasury Obligations).

Rocket Companies, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements (Continued)

(In Thousands, Except Shares and Per Share Amounts)

The minimum liquidity requirement for Ginnie Mae is defined as follows:

• Maintain liquid assets equal to the greater of $1,000 or 10 basis points of our outstanding single-family MBS.

The most restrictive of the minimum net worth and capital requirements require the Company to maintain a minimum adjusted net worth balance of $2,063,446 and $2,175,968 as of September 30, 2021 and December 31, 2020, respectively. As of September 30, 2021 and December 31, 2020, the Company was in compliance with this requirement.

12. Segments

The Company’s Chief Executive Officer, who has been identified as its Chief Operating Decision Maker (“CODM”), has evaluated how the Company views and measures its performance. ASC 280, Segment Reporting establishes the standards for reporting information about segments in financial statements. In applying the criteria set forth in that guidance, the Company has determined that it has two reportable segments — Direct to Consumer and Partner Network. The key factors used to identify these reportable segments are the organization and alignment of the Company’s internal operations and the nature of its marketing channels, which drive client acquisition into the mortgage platform. This determination reflects how its CODM monitors performance, allocates capital and makes strategic and operational decisions. The Company’s segments are described as follows:

Direct to Consumer

In the Direct to Consumer segment, clients have the ability to interact with Rocket Mortgage online and/or with the Company’s mortgage bankers. The Company markets to potential clients in this segment through various brand campaigns and performance marketing channels. The Direct to Consumer segment derives revenue from originating, closing, selling and servicing predominantly agency-conforming loans, which are pooled and sold to the secondary market. The segment also includes title insurance, appraisals and settlement services complementing the Company’s end-to-end mortgage origination experience. Servicing activities are fully allocated to the Direct to Consumer segment and are viewed as an extension of the client experience. Servicing enables Rocket Mortgage to establish and maintain long term relationships with our clients, through multiple touchpoints at regular engagement intervals.

Revenues in the Direct to Consumer segment are generated primarily from the gain on sale of loans, which includes loan origination fees, revenues from sales of loans into the secondary market, as well as the fair value of originated MSRs and hedging gains and losses. Loan servicing (loss) income, net consists of the contractual fees earned for servicing loans and other ancillary servicing fees, as well as changes in the fair value of MSRs due to changes in valuation assumptions and realization of cash flows.

Partner Network

The Rocket Professional platform supports our Partner Network segment, where we leverage our superior client service and widely recognized brand to grow marketing and influencer relationships, and our mortgage broker partnerships through Rocket Pro TPO. Our marketing partnerships consist of well-known consumer-focused companies that find value in our award-winning client experience and want to offer their clients mortgage solutions with our trusted, widely recognized brand. These organizations connect their clients directly to us through marketing channels and a referral process. Our influencer partnerships are typically with companies that employ licensed mortgage professionals that find value in our client experience, technology and efficient mortgage process, where mortgages may not be their primary offering. We also enable clients to start the mortgage process through the Rocket platform in the way that works best for them, including through a local mortgage broker.

Revenues in the Partner Network segment are generated primarily from the gain on sale of loans, which includes loan origination fees, revenues from sales of loans into the secondary market, as well as the fair value of originated MSRs and hedging gains and losses.

Rocket Companies, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements (Continued)

(In Thousands, Except Shares and Per Share Amounts)

Other Information About Our Segments

The Company measures the performance of the segments primarily on a contribution margin basis. The accounting policies applied by our segments are the same as those described in Note 1, Business, Basis of Presentation and Accounting Policies and the decrease in MSRs due to valuation assumptions is consistent with the changes described in Note 3, Mortgage Servicing Rights. Directly attributable expenses include Salaries, commissions and team member benefits, General and administrative expenses and Other expenses, such as servicing costs and origination costs.

The Company does not allocate assets to its reportable segments as they are not included in the review performed by the CODM for purposes of assessing segment performance and allocating resources. The balance sheet is managed on a consolidated basis and is not used in the context of segment reporting.

The Company also reports an “All Other” category that includes operations from Rocket Homes, Rock Connections, Rocket Auto, Core Digital Media, Rocket Loans, and includes professional service fee revenues from related parties. These operations are neither significant individually nor in aggregate and therefore do not constitute a reportable segment.

Key operating data for our business segments for the three and nine months ended:


Three Months Ended September 30, 2021	Direct to Consumer		Partner Network		Segments Total		All Other		Total
Revenues
Gain on sale	$	2,241,633	$	402,649	$	2,644,282	$	9,931	$	2,654,213
Interest income	77,112		51,815		128,927		1,036		129,963
Interest expense on funding facilities	(43,528)		(29,248)		(72,776)		(2)		(72,778)
Servicing fee income	333,653		—		333,653		695		334,348
Changes in fair value of MSRs	(341,361)		—		(341,361)		—		(341,361)
Other income	234,381		31,301		265,682		144,663		410,345
Total U.S. GAAP Revenue, net	2,501,890		456,517		2,958,407		156,323		3,114,730
Plus: Decrease in MSRs due to valuation assumptions (net of hedges)	47,514		—		47,514		—		47,514
Adjusted revenue	2,549,404		456,517		3,005,921		156,323		3,162,244
Directly attributable expenses	927,897		176,246		1,104,143		67,892		1,172,035
Contribution margin	$	1,621,507	$	280,271	$	1,901,778	$	88,431	$	1,990,209


Nine Months Ended September 30, 2021	Direct to Consumer		Partner Network		Segments Total		All Other		Total
Revenues
Gain on sale	$	7,155,872	$	1,374,729	$	8,530,601	$	17,543	$	8,548,144
Interest income	188,269		121,097		309,366		2,487		311,853
Interest expense on funding facilities	(124,942)		(80,010)		(204,952)		(48)		(205,000)
Servicing fee income	967,993		—		967,993		2,065		970,058
Changes in fair value of MSRs	(556,201)		—		(556,201)		—		(556,201)
Other income	769,152		82,306		851,458		401,387		1,252,845
Total U.S. GAAP Revenue, net	8,400,143		1,498,122		9,898,265		423,434		10,321,699
Less: Increase in MSRs due to valuation assumptions (net of hedges)	(329,608)		—		(329,608)		—		(329,608)
Adjusted revenue	8,070,535		1,498,122		9,568,657		423,434		9,992,091
Directly attributable expenses	2,808,340		532,087		3,340,427		196,805		3,537,232
Contribution margin	$	5,262,195	$	966,035	$	6,228,230	$	226,629	$	6,454,859

Rocket Companies, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements (Continued)

(In Thousands, Except Shares and Per Share Amounts)


Three Months Ended September 30, 2020	Direct to Consumer		Partner Network		Segments Total		All Other		Total
Revenues
Gain on sale	$	3,128,695	$	1,151,071	$	4,279,766	$	676	$	4,280,442
Interest income	53,764		25,691		79,455		435		79,890
Interest expense on funding facilities	(46,936)		(22,428)		(69,364)		—		(69,364)
Servicing fee income	271,254		—		271,254		904		272,158
Changes in fair value of MSRs	(392,688)		—		(392,688)		—		(392,688)
Other income	237,855		47,858		285,713		160,044		445,757
Total U.S. GAAP Revenue, net	3,251,944		1,202,192		4,454,136		162,059		4,616,195
Plus: Decrease in MSRs due to valuation assumptions (net of hedges)	126,977		—		126,977		—		126,977
Adjusted revenue	3,378,921		1,202,192		4,581,113		162,059		4,743,172
Directly attributable expenses	930,227		141,214		1,071,441		113,464		1,184,905
Contribution margin	$	2,448,694	$	1,060,978	$	3,509,672	$	48,595	$	3,558,267


Nine Months Ended September 30, 2020	Direct to Consumer		Partner Network		Segments Total		All Other		Total
Revenues
Gain on sale	$	8,759,914	$	2,089,285	$	10,849,199	$	6,936	$	10,856,135
Interest income	152,087		77,638		229,725		2,246		231,971
Interest expense on funding facilities	(107,718)		(54,451)		(162,169)		(411)		(162,580)
Servicing fee income	776,117		—		776,117		2,976		779,093
Changes in fair value of MSRs	(1,985,545)		—		(1,985,545)		—		(1,985,545)
Other income	589,415		107,328		696,743		553,738		1,250,481
Total U.S. GAAP Revenue, net	8,184,270		2,219,800		10,404,070		565,485		10,969,555
Plus: Decrease in MSRs due to valuation assumptions (net of hedges)	1,193,442		—		1,193,442		—		1,193,442
Adjusted revenue	9,377,712		2,219,800		11,597,512		565,485		12,162,997
Directly attributable expenses	2,611,044		372,337		2,983,381		282,379		3,265,760
Contribution margin	$	6,766,668	$	1,847,463	$	8,614,131	$	283,106	$	8,897,237

Rocket Companies, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements (Continued)

(In Thousands, Except Shares and Per Share Amounts)

The following table represents a reconciliation of segment contribution margin to consolidated U.S. GAAP income before taxes for the three and nine months ended:


	Three Months Ended September 30,				Nine Months Ended September 30,
	2021		2020		2021		2020
Contribution margin, excluding change in MSRs due to valuation assumptions	$	1,990,209	$	3,558,267	$	6,454,859	$	8,897,237
(Decrease) increase in MSRs due to valuation assumptions (net of hedges)	(47,514)		(126,977)		329,608		(1,193,442)
Contribution margin, including change in MSRs due to valuation assumptions	1,942,695		3,431,290		6,784,467		7,703,795
Less expenses not allocated to segments:
Salaries, commissions and team member benefits	237,410		198,482		694,421		602,832
General and administrative expenses	224,597		122,137		595,283		310,711
Depreciation and amortization	19,577		15,329		55,470		47,633
Interest and amortization expense on non-funding debt	34,163		38,016		104,772		104,291
Other expenses	1,259		260		4,965		(4,547)
Income before income taxes	$	1,425,689	$	3,057,066	$	5,329,556	$	6,642,875

13. Variable Interest Entities

Rocket Companies, Inc. is the sole managing member of Holdings with 100% of the management and voting power in Holdings. In its capacity as managing member, Rocket Companies, Inc. has the sole authority to make decisions on behalf of Holdings and bind Holdings to signed agreements. Further, Holdings maintains separate capital accounts for its investors as a mechanism for tracking earnings and subsequent distribution rights. Accordingly, management concluded that Holdings is a limited partnership or similar legal entity as contemplated in ASC 810, Consolidation.

Furthermore, management concluded that Rocket Companies, Inc. is Holdings’ primary beneficiary. As the primary beneficiary, Rocket Companies, Inc. consolidates the results and operations of Holdings for financial reporting purposes under the variable interest consolidation model guidance in ASC 810.

Rocket Companies, Inc.'s relationship with Holdings results in no recourse to the general credit of Rocket Companies, Inc. Holdings and its consolidated subsidiaries represents Rocket Companies, Inc.'s sole investment. Rocket Companies, Inc. shares in the income and losses of Holdings in direct proportion to Rocket Companies, Inc.'s ownership percentage. Further, Rocket Companies, Inc. has no contractual requirement to provide financial support to Holdings.

Rocket Companies, Inc.’s financial position, performance and cash flows effectively represent those of Holdings and its subsidiaries as of and for the period ended September 30, 2021. Prior to the reorganization and IPO, Rocket Companies, Inc. was not impacted by Holdings.

Rocket Companies, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements (Continued)

(In Thousands, Except Shares and Per Share Amounts)

14. Non-controlling Interests

The non-controlling interest balance represents the economic interest in Holdings held by our Chairman and RHI. The following table summarizes the ownership of Holdings Units in Holdings as of September 30, 2021 and December 31, 2020:


	September 30, 2021			December 31, 2020
	Holdings Units	Ownership Percentage		Holdings Units	Ownership Percentage
Rocket Companies, Inc.'s ownership of Holdings Units	137,367,428	6.91	%	115,372,565	5.81	%
Holdings Units held by our Chairman	1,101,822	0.06	%	1,101,822	0.06	%
Holdings Units held by RHI	1,847,777,661	93.03	%	1,867,977,661	94.13	%
Balance at end of period	1,986,246,911	100.00	%	1,984,452,048	100.00	%

The non-controlling interest holders have the right to exchange Holdings Units, together with a corresponding number of shares of our Class D common stock or Class C common stock (together referred to as “Paired Interests”), for, at our option, (i) shares of our Class B common stock or Class A common stock or (ii) cash from a substantially concurrent public offering or private sale (based on the price of our Class A common stock). As such, future exchanges of Paired Interests by non-controlling interest holders will result in a change in ownership and reduce or increase the amount recorded as non-controlling interest and increase or decrease additional paid-in-capital when Holdings has positive or negative net assets, respectively. As of September 30, 2021, our Chairman has not exchanged any Paired Interests. As of December 31, 2020, neither our Chairman or RHI had exchanged any Paired Interests.

15. Share-based Compensation

The Company grants various types of share-based awards, both equity and cash awards, to various team members and directors of the Company and its affiliates. Included in share-based compensation expense for the Company are RKT and RHI denominated awards. Share-based compensation expense is included in Salaries, commissions and team member benefits on the Condensed Consolidated Statements of Income and Comprehensive Income. In connection with the IPO, equity-based awards were issued under the Rocket Companies, Inc. 2020 Omnibus Incentive Plan including restricted stock units and stock options to purchase shares of our Class A common stock at an exercise price equal to the price to the public in the initial public offering. Share-based compensation expense is recognized on a straight-line basis over the requisite service period based on the fair value of the award on the date of grant.

Team Member Stock Purchase Plan

The Team Member Stock Purchase Plan ("TMSPP") was initiated in December 2020, with the first offering period beginning in January 2021. Under the TMSPP, the Company is authorized to issue up to 10,526,316 shares of its common stock to qualifying team members. Eligible team members may direct the Company, during each three-month option period, to withhold up to 15% of their gross pay, the proceeds from which are used to purchase shares of common stock at a price equal to 85% of the closing market price on the exercise date. Under ASC 718, the TMSPP is a liability classified compensatory plan and the Company recognizes compensation expense over the offering period based on the fair value of the purchase discount. There were 947,358 shares purchased by team members during the three months ended September 30, 2021 and 1,844,059 shares purchased for the nine months ended September 30, 2021 under the TMSPP.

Rocket Companies, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements (Continued)

(In Thousands, Except Shares and Per Share Amounts)

Share-based Compensation Expense

A summary of share-based compensation expense recognized during the three and nine months ended September 30, 2021 and September 30, 2020 related to RKT-denominated awards is as follows:


	Three Months Ended September 30,				Nine Months Ended September 30,
	2021		2020		2021		2020
RKT restricted stock units	$	26,615	$	18,590	$	81,179	$	18,590
RKT stock options	10,257		6,620		30,155		6,620
RKT Team Member Stock Purchase Plan	2,354		—		7,638		—
RKT denominated share-based compensation expense	$	39,226	$	25,210	$	118,972	$	25,210

A summary of share-based compensation expense recognized during the three and nine months ended September 30, 2021 and September 30, 2020 related to RHI-denominated awards is as follows:


	Three Months Ended September 30,				Nine Months Ended September 30,
	2021		2020		2021		2020
RHI restricted stock units	$	1,372	$	7,992	$	4,117	$	68,177
RHI stock options	—		—		—		32
RHI cash settled awards	—		—		—		26,421
RHI denominated share-based compensation expense	$	1,372	$	7,992	$	4,117	$	94,630

Including subsidiary share-based compensation plans, total share-based compensation expense for the three months ended September 30, 2021 and 2020, was $40,879 and $33,252, respectively and $123,900 and $119,986 for the nine months ended September 30, 2021 and 2020, respectively.

16. Earnings Per Share

The Company applies the two-class method for calculating and presenting earnings per share by separately presenting earnings per share for Class A common stock and Class B common stock. In applying the two-class method, the Company allocates undistributed earnings equally on a per share basis between Class A and Class B common stock. According to the Company’s certificate of incorporation, the holders of the Class A and Class B common stock are entitled to participate in earnings equally on a per-share basis, as if all shares of common stock were of a single class, and in dividends as may be declared by the board of directors. Holders of the Class A and Class B common stock also have equal priority in liquidation. Shares of Class C and Class D common stock do not participate in earnings of Rocket Companies, Inc. As a result, the shares of Class C and Class D common stock are not considered participating securities and are not included in the weighted-average shares outstanding for purposes of earnings per share. Restricted stock units awarded as part of the Company’s compensation program are included in the weighted-average Class A shares outstanding in the calculation of basic earnings per share ("EPS") once the units are fully vested.

Basic earnings per share of Class A common stock is computed by dividing Net income attributable to Rocket Companies by the weighted-average number of shares of Class A common stock outstanding during the period. Diluted earnings per share of Class A common stock is computed by dividing Net income attributable to Rocket Companies by the weighted-average number of shares of Class A common stock outstanding adjusted to give effect to potentially dilutive securities. There was no Class B common stock outstanding as of September 30, 2021. The basic and diluted earnings per share period for the three and nine months ended September 30, 2020, represents only the period from August 6, 2020 to September 30, 2020, which represents the period wherein the Company had outstanding Class A common stock. There was no Class B common stock outstanding as of September 30, 2020. See Note 14, Non-controlling Interests for a description of Paired Interests and their potential impact on Class A and Class B share ownership.

Rocket Companies, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements (Continued)

(In Thousands, Except Shares and Per Share Amounts)

The following table sets for the calculation of the basic and diluted earnings per share for the period:


	Three Months Ended September 30,				Nine Months Ended September 30,
	2021		2020		2021		2020
Net income	$	1,392,859	$	2,995,383	$	5,206,847	$	6,558,512
Net income attributable to non-controlling interest	(1,317,522)		(2,937,480)		(4,946,688)		(6,500,609)
Net income attributable to Rocket Companies	75,337		57,903		260,159		57,903
Add: Reallocation of Net income attributable to vested, undelivered stock awards	39		—		141		—
Net income attributable to common shareholders	$	75,376	$	57,903	$	260,300	$	57,903

Numerator:
Net income attributable to Class A common shareholders - basic	$	75,376	$	57,903	$	260,300	$	57,903
Add: Reallocation of net income attributable to dilutive impact of pro-forma conversion of Class D shares to Class A shares (1)	991,852		—		—		—
Add: Reallocation of net income attributable to dilutive impact of share-based compensation awards (2)	2,294		—		10,254		—
Net income attributable to Class A common shareholders - diluted	$	1,069,522	$	57,903	$	270,554	$	57,903
Denominator:
Weighted average shares of Class A common stock outstanding - basic	137,664,471		106,265,422		129,902,253		106,265,422
Add: Dilutive impact of conversion of Class D shares to Class A shares	1,848,879,483		—		—		—
Add: Dilutive impact of share-based compensation awards (3)	4,284,397		—		5,490,417		—
Weighted average shares of Class A common stock outstanding - diluted	1,990,828,351		106,265,422		135,392,670		106,265,422

Earnings per share of Class A common stock outstanding - basic	$	0.55	$	0.54	$	2.00	$	0.54
Earnings per share of Class A common stock outstanding - diluted	$	0.54	$	0.54	$	2.00	$	0.54

(1) Net income calculated using the estimated annual effective tax rate of Rocket Companies, Inc.

(2) Reallocation of net income attributable to dilutive impact of share-based compensation awards for the three months ended September 30, 2021 and 2020 comprised of $2,223 and zero related to restricted stock units, none related to stock options and $71 and zero related to TMSPP. Reallocation of net income attributable to dilutive impact of share-based compensation awards for the nine months ended September 30, 2021 and 2020 comprised of $10,027 and zero related to restricted stock units, none related to stock options and $227 and zero related to TMSPP.

Rocket Companies, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements (Continued)

(In Thousands, Except Shares and Per Share Amounts)

(3) Dilutive impact of share-based compensation awards for the three months ended September 30, 2021 and 2020 comprised of 4,151,765 and zero related to restricted stock units, none related to stock options and 132,632 and zero related to TMSPP. Dilutive impact of share-based compensation awards for the nine months ended September 30, 2021 and 2020 comprised of 5,369,320 and zero related to restricted stock units, none related to stock options and 121,097 and zero related to TMSPP.

For the period from January 1, 2021 to September 30, 2021, 1,855,464,831 Holdings Units, each weighted for the portion of the period for which they were outstanding, together with a corresponding number of shares of our Class D common stock, were exchangeable, at our option, for shares of our Class A common stock. After evaluating the potential dilutive effect under the if-converted method, the outstanding Holdings Units for the assumed exchange of non-controlling interests were determined to be anti-dilutive and thus were excluded from the computation of diluted earnings per share.

For the period from August 6, 2020 to September 30, 2020, 1,878,058,054 Holdings Units, each weighted for the portion of the period for which they were outstanding, together with a corresponding number of shares of our Class D common stock, were exchangeable, at our option, for shares of our Class A common stock. After evaluating the potential dilutive effect under the if-converted method, the outstanding Holdings Units for the assumed exchange of noncontrolling interests were determined to be anti-dilutive and thus were excluded from the computation of diluted earnings per share.

For the period from August 6, 2020 to September 30, 2020, 16,601,433 RSUs, each weighted for the portion of the period for which they were outstanding, were excluded from the computation of diluted earnings per share as the effect was determined to be anti-dilutive.

For the period from August 6, 2020 to September 30, 2020, 26,235,912 stock options, each weighted for the portion of the period for which they were outstanding, were excluded from the computation of diluted earnings per share as the effect was determined to be anti-dilutive.

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

The following management’s discussion and analysis of our financial condition and results of operations should be read in conjunction with, and is qualified in its entirety by reference to, our unaudited condensed consolidated financial statements and the related notes and other information included elsewhere in this Quarterly Report on Form 10-Q (the “Form 10-Q”) and our audited consolidated financial statements included in our Annual Report on Form 10-K (the "Form 10-K") filed with the Securities and Exchange Commission (the “SEC”). This discussion and analysis contains forward-looking statements that involve risks and uncertainties which could cause our actual results to differ materially from those anticipated in these forward-looking statements, including, but not limited to, risks and uncertainties discussed under the heading “Special Note Regarding Forward-Looking Statements,” and in Part II. Item 1A. “Risk Factors” and elsewhere in this Form 10-Q and in our Form 10-K.

Special Note Regarding Forward-Looking Statements

This Form 10-Q contains forward-looking statements, which involve risks and uncertainties. These forward-looking statements are generally identified by the use of forward-looking terminology, including the terms “anticipate,” “believe,” “could,” “estimate,” “expect,” “intend,” “may,” “plan,” “potential,” “predict,” “project,” “should,” “target,” “will,” “would” and, in each case, their negative or other various or comparable terminology. All statements other than statements of historical facts contained in this Form 10-Q, including statements regarding our strategy, future operations, future financial position, future revenue, projected costs, prospects, plans, objectives of management and expected market growth are forward-looking statements. As you read this Form 10-Q, you should understand that these statements are not guarantees of performance or results. They involve known and unknown risks, uncertainties and assumptions, including those described under the heading “Risk Factors” in this Form 10-Q. Although we believe that these forward-looking statements are based upon reasonable assumptions, you should be aware that many factors, including those described under the heading “Risk Factors” in this Form 10-Q, could affect our actual financial results or results of operations and could cause actual results to differ materially from those in the forward-looking statements.

Our forward-looking statements made herein are made only as of the date of this Form 10-Q. We expressly disclaim any intent, obligation or undertaking to update or revise any forward-looking statements made herein to reflect any change in our expectations with regard thereto or any change in events, conditions or circumstances on which any such statements are based. All subsequent written and oral forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by the cautionary statements contained in this Form 10-Q.

Executive Summary

Quicken Loans, LLC, changed its name to “Rocket Mortgage, LLC.”, effective as of July 31, 2021, pursuant to the filing of a Certificate of Amendment to the Articles of Organization with the Michigan Department of Licensing and Regulatory Affairs, Corporations, Securities & Commercial Licensing Bureau.

Recent Developments

Business Update in Response to COVID-19 Impact

As of September 30, 2021, 37,558 clients, or 1.5% of the total serviced portfolio, were in forbearance plans related to COVID-19. Since quarter end, we’ve seen positive developments in the number of clients entering into forbearance and as of October 31, 2021, the total number of clients in forbearance plans related to COVID-19 was 27,798 or 1.1% of the portfolio.

Share Repurchase Program

As of October 31, 2021, Rocket Companies repurchased 5.7 million shares at a weighted average price of $16.42. Cumulatively, we have returned $94 million to shareholders under the $1 billion Share Repurchase Program authorized in November 2020.

Three months ended September 30, 2021 summary

For the three months ended September 30, 2021, we originated $88.0 billion in residential mortgage loans, which was an $0.9 billion, or 1.1%, decrease from the three months ended September 30, 2020. Our Net income was $1.4 billion for the three months ended September 30, 2021, compared to Net income of $3.0 billion for the three months ended September 30, 2020. We generated $1.6 billion of Adjusted EBITDA for the three months ended September 30, 2021, which was a decrease of $1.7 billion, or 52.1%, compared to $3.3 billion for the three months ended September 30, 2020. For more information on Adjusted EBITDA, please see “Non-GAAP Financial Measures” below.

The decrease in Net income was primarily driven by a decrease of $1.6 billion, or 38.0% in Gain on sale of loans, net which was driven primarily by the decrease in gain on sale margin, as well as a decrease in origination volume in the three months ended September 30, 2021 noted above. Gain on sale margin during the three months ended September 30, 2021 reflects a tighter spread between primary and secondary mortgage rates as compared to the three months ended September 30, 2020. The primary mortgage rate is the rate at which lenders originate loans with borrowers and the secondary mortgage rate is the rate at which lenders securitize those loans into mortgage backed securities. The change in Loan servicing loss, net was $113.5 million, or 94.2%, which was primarily due to the increase in the change in fair value of MSRs. During the period expenses increased $129.9 million, or 8.3%, which was associated with an increase in team members to increase the level of talent through hiring in key areas such as technology and product strategy, as well as an increase in marketing and advertising expenses in the three months ended September 30, 2021 as compared to the three months ended September 30, 2020. Marketing and advertising expenses increased $65.9 million, or 26.3%, due to the Company's increased investment in brand marketing from new national campaigns with the reintroduction of many sporting and other live events that were cancelled in 2020 due to the COVID-19 pandemic. Also, in 2021 the Company’s performance marketing spend increased as compared to the prior period supporting our increase in loan origination volume during 2021.

As of September 30, 2021, our servicing portfolio, including loans subserviced for others, included approximately $521.3 billion of UPB and 2.4 million client loans. The portfolio primarily consists of high quality performing GSE and government (FHA and VA) loans. Our delinquent loans (defined as 60-plus days past-due) were 2.15% of our total portfolio. Excluding clients in COVID-19 related forbearance plans, our delinquent loans (defined as 60-plus days past-due) were 0.83% as of September 30, 2021. We monitor the MSR portfolio on a regular basis seeking to optimize our portfolio by evaluating the risk and return profile of the portfolio. As part of these efforts we sold the servicing on approximately 152,000 loans with $58 billion in UPB during the three months ended September 30, 2021. These sales were more than offset by new loans that were added to the MSR portfolio organically during the period.

Nine months ended September 30, 2021 summary

For the nine months ended September 30, 2021, we originated $275.3 billion in residential mortgage loans, which was a $62.3 billion, or 29.3%, increase from the nine months ended September 30, 2020. Our Net income was $5.2 billion for the nine months ended September 30, 2021, compared to Net income of $6.6 billion for the nine months ended September 30, 2020. We generated $5.3 billion of Adjusted EBITDA for the nine months ended September 30, 2021, which was a decrease of $2.8 billion, or 34.4%, compared to $8.1 billion for the nine months ended September 30, 2020. For more information on Adjusted EBITDA, please see “Non-GAAP Financial Measures” below.

The decrease in Net income was primarily driven by a decrease in Gain on sale of loans, net of $2.3 billion, or 21.3% which was driven primarily by the decrease in gain on sale margin, partially offset by an increase in origination volume in the nine months ended September 30, 2021. Loan servicing (loss) income, net, increased $1.6 billion, which was primarily due to the increase in the change in fair value of MSRs. The increase in production led to an increase in Salaries, commissions and team member benefits of $198.7 million, or 8.4%, primarily due to an increase in team members to increase the level of talent through hiring in key areas such as technology and product strategy. General and administrative expenses also increased by $103.7 million, or 13.6%, during the nine months ended September 30, 2021 as compared to the nine months ended September 30, 2020 driven primarily by increased third party technology spend. Marketing and advertising expenses increased by $273.3 million, or 40.7%, in the nine months ended September 30, 2021 as compared to the nine months ended September 30, 2020 driven by brand marketing spend increasing from new national campaigns with the reintroduction of many sporting and other live events that were cancelled in 2020 due to the COVID-19 pandemic. Other expenses also increased due to an increase in payoff interest expense that resulted from an increase in the volume of loans paid in full prior to their scheduled maturity from our servicing portfolio in the nine months ended September 30, 2021. When individual loans are paid off, we are required to remit interest for an entire month regardless of the date of payoff; however, clients are only responsible for interest accrued up to the date of payoff. The difference between the interest we are required to remit to investors and the interest we collect from the client as a result of an early payoff is referred to as “payoff interest expense”.

Non-GAAP Financial Measures

To provide investors with information in addition to our results as determined by GAAP, we disclose Adjusted Revenue, Adjusted Net Income, Adjusted Diluted EPS and Adjusted EBITDA as non-GAAP measures which management believes provide useful information to investors. These measures are not financial measures calculated in accordance with GAAP and should not be considered as a substitute for revenue, net income, or any other operating performance measure calculated in accordance with GAAP, and may not be comparable to a similarly titled measure reported by other companies.

In first quarter of 2021, we revised our definition of Adjusted Net income and Adjusted EBITDA to exclude a litigation accrual that does not directly affect what we consider to be our core operating performance. Excluding this cost did not impact Adjusted Net income or Adjusted EBITDA for the comparative periods presented. In the third quarter of 2021, we revised our definition of Adjusted Revenue, Adjusted Net income and Adjusted EBITDA to exclude the effects of contractual prepayment protection associated with sales of MSRs as this does not directly affect what we consider to be our core operating performance. Excluding these costs impacted Adjusted Revenue, Adjusted Net income, Adjusted Diluted EPS and Adjusted EBITDA for the comparative periods presented. From time to time in the future, we may exclude other items if we believe that doing so is consistent with the goal of providing useful information to investors.

We define “Adjusted Revenue” as total revenues net of the change in fair value of mortgage servicing rights (“MSRs”) due to valuation assumptions (net of hedges). We define “Adjusted Net Income” as tax-effected earnings before share-based compensation expense, the change in fair value of MSRs due to valuation assumptions (net of hedges), and a litigation accrual, and the tax effects of those adjustments. We define “Adjusted Diluted EPS” as Adjusted Net Income divided by the diluted weighted average number of Class A common stock outstanding for the applicable period, which assumes the pro forma exchange and conversion of all outstanding Class D common stock for Class A common stock. We define “Adjusted EBITDA” as earnings before interest and amortization expense on non-funding debt, income tax, and depreciation and amortization, net of the change in fair value of MSRs due to valuation assumptions (net of hedges), share-based compensation expense, and a litigation accrual. We exclude from each of these non-GAAP revenues the change in fair value of MSRs due to valuation assumptions (net of hedges) as this represents a non-cash non-realized adjustment to our total revenues, reflecting changes in assumptions including discount rates and prepayment speed assumptions, mostly due to changes in market interest rates, which is not indicative of our performance or results of operation. We also exclude effects of contractual prepayment protection associated with sales of MSRs. Adjusted EBITDA includes interest expense on funding facilities, which are recorded as a component of “Interest income, net”, as these expenses are a direct cost driven by loan origination volume. By contrast, interest and amortization expense on non-funding debt is a function of our capital structure and is therefore excluded from Adjusted EBITDA.

We believe that the presentation of Adjusted Revenue, Adjusted Net Income, Adjusted Diluted EPS and Adjusted EBITDA provides useful information to investors regarding our results of operations because each measure assists both investors and management in analyzing and benchmarking the performance and value of our business. Adjusted Revenue, Adjusted Net Income, Adjusted Diluted EPS and Adjusted EBITDA provide indicators of performance that are not affected by fluctuations in certain costs or other items. Accordingly, management believes that these measurements are useful for comparing general operating performance from period to period, and management relies on these measures for planning and forecasting of future periods. Additionally, these measures allow management to compare our results with those of other companies that have different financing and capital structures. However, other companies may define Adjusted Revenue, Adjusted Net Income, Adjusted Diluted EPS and Adjusted EBITDA differently, and as a result, our measures of Adjusted Revenue, Adjusted Net Income, Adjusted Diluted EPS and Adjusted EBITDA may not be directly comparable to those of other companies.

Although we use Adjusted Revenue, Adjusted Net Income, Adjusted Diluted EPS and Adjusted EBITDA as financial measures to assess the performance of our business, such use is limited because they do not include certain material costs necessary to operate our business. Additionally, our definitions of each of Adjusted Revenue, Adjusted Net Income, Adjusted Diluted EPS and Adjusted EBITDA allows us to add back certain non-cash charges and deduct certain gains that are included in calculating total revenues, net, net income attributable to Rocket Companies or net income (loss). However, these expenses and gains vary greatly, and are difficult to predict. They can represent the effect of long-term strategies as opposed to short-term results. Adjusted Revenue, Adjusted Net Income, Adjusted Diluted EPS and Adjusted EBITDA should be considered in addition to, and not as a substitute for, total revenues, net income attributable to Rocket Companies and net income (loss) in accordance with U.S. GAAP as measures of performance. Our presentation of Adjusted Revenue, Adjusted Net Income, Adjusted Diluted EPS and Adjusted EBITDA should not be construed as an indication that our future results will be unaffected by unusual or nonrecurring items.

Adjusted Revenue, Adjusted Net Income, Adjusted Diluted EPS and Adjusted EBITDA have limitations as analytical tools, and you should not consider them in isolation or as a substitute for analysis of our results as reported under U.S. GAAP. Some of these limitations are:

(a) they do not reflect every cash expenditure, future requirements for capital expenditures or contractual commitments;

(b) Adjusted EBITDA does not reflect the significant interest expense or the cash requirements necessary to service interest or principal payment on our debt;

(c) although depreciation and amortization are non-cash charges, the assets being depreciated and amortized will often have to be replaced or require improvements in the future, and Adjusted Revenue, Adjusted Net Income and Adjusted EBITDA do not reflect any cash requirement for such replacements or improvements; and

(d) they are not adjusted for all non-cash income or expense items that are reflected in our Condensed Consolidated Statements of Cash Flows.

Because of these limitations, Adjusted Revenue, Adjusted Net Income, Adjusted Diluted EPS and Adjusted EBITDA are not intended as alternatives to total revenue, net income attributable to Rocket Companies or net income (loss) as an indicator of our operating performance and should not be considered as measures of discretionary cash available to us to invest in the growth of our business or as measures of cash that will be available to us to meet our obligations. We compensate for these limitations by using Adjusted Revenue, Adjusted Net Income, Adjusted Diluted EPS and Adjusted EBITDA along with other comparative tools, together with U.S. GAAP measurements, to assist in the evaluation of operating performance. See below for reconciliation of these non-GAAP measures to their most comparable U.S. GAAP measures. Additionally, our U.S. GAAP-based measures can be found in the condensed consolidated financial statements and related notes included elsewhere in this Form 10-Q.

Reconciliation of Adjusted Revenue to Total Revenue, net


	Three Months Ended September 30,				Nine Months Ended September 30,
($ in thousands)	2021		2020		2021		2020
Total Revenue, net	$	3,114,730	$	4,616,195	$	10,321,699	$	10,969,555
Change in fair value of MSRs due to valuation assumptions (net of hedges) (1)	47,514		126,977		(329,608)		1,193,442
Adjusted Revenue	$	3,162,244	$	4,743,172	$	9,992,091	$	12,162,997

(1) Reflects changes in assumptions including discount rates and prepayment speed assumptions, mostly due to changes in market interest rates, and the effects of contractual prepayment protection associated with sales of MSRs.

Reconciliation of Adjusted Net Income to Net Income Attributable to Rocket Companies


	Three Months Ended September 30,				Nine Months Ended September 30,
($ in thousands)	2021		2020		2021		2020
Net income attributable to Rocket Companies	$	75,337	$	57,903	$	260,159	$	57,903
Net income impact from pro forma conversion of Class D common shares to Class A common shares (1)	1,318,062		2,937,961		4,948,428		6,501,965
Adjustment to the provision for income tax (2)	(321,873)		(697,200)		(1,203,184)		(1,564,735)
Tax-effected net income (2)	$	1,071,526	$	2,298,664	$	4,005,403	$	4,995,133
Non-cash share-based compensation expense	40,871		33,252		123,873		93,564
Change in fair value of MSRs due to valuation assumptions (net of hedges) (3)	47,514		126,977		(329,608)		1,193,442
Litigation accrual (4)	—		—		15,000		—
Tax impact of adjustments (5)	(21,982)		(39,769)		47,435		(319,435)
Other tax adjustments (6)	1,009		2,157		2,767		2,157
Adjusted Net Income	$	1,138,938	$	2,421,281	$	3,864,870	$	5,964,861

(1) Reflects net income to Class A common stock from pro forma exchange and conversion of corresponding shares of our Class D common shares held by non-controlling interest holders as of September 30, 2021 and 2020.

(2) Rocket Companies will be subject to U.S. Federal income taxes, in addition to state, local and Canadian taxes with respect to its allocable share of any net taxable income of Holdings. The adjustment to the provision for income tax reflects the effective tax rates below, assuming the Issuer owns 100% of the non-voting common interest units of Holdings.


	September 30,
	2021		2020
Statutory U.S. Federal Income Tax Rate	21.00	%	21.00	%
Canadian taxes	0.01	%	0.01	%
State and Local Income Taxes (net of federal benefit)	3.86	%	3.81	%
Effective Income Tax Rate for Adjusted Net Income	24.87	%	24.82	%

(3) Reflects changes in assumptions including discount rates and prepayment speed assumptions, mostly due to changes in market interest rates, and the effects of contractual prepayment protection associated with sales of MSRs.

(4) Reflects legal accrual related to a specific legal matter.

(5) Tax impact of adjustments gives effect to the income tax related to non-cash share-based compensation expense, change in fair value of MSRs due to valuation assumptions, and litigation accrual at the above described effective tax rates for each period.

(6) Represents tax benefits due to the amortization of intangible assets and other tax attributes resulting from the purchase of Holdings units, net of payment obligations under Tax Receivable Agreement.

Reconciliation of Adjusted Diluted Weighted Average Shares Outstanding to Diluted Weighted Average Shares Outstanding


	Three Months Ended September 30,				Nine Months Ended September 30,
($ in thousands, except shares and per share)	2021		2020		2021		2020
Diluted weighted average Class A Common shares outstanding	1,990,828,351		106,265,422		135,392,670		106,265,422
Assumed pro forma conversion of Class D shares (1)	—		1,878,058,054		1,855,464,831		1,878,058,054
Adjusted diluted weighted average shares outstanding	1,990,828,351		1,984,323,476		1,990,857,501		1,984,323,476

Adjusted Net Income	$	1,138,938	$	2,421,281	$	3,864,870	$	5,964,861
Adjusted Diluted EPS	$	0.57	$	1.22	$	1.94	$	3.01

(1) Reflects the pro forma exchange and conversion of non-dilutive Class D common stock to Class A common stock.

Reconciliation of Adjusted EBITDA to Net Income


	Three Months Ended September 30,				Nine Months Ended September 30,
($ in thousands)	2021		2020		2021		2020
Net income	$	1,392,859	$	2,995,383	$	5,206,847	$	6,558,512
Interest and amortization expense on non-funding debt	34,163		38,016		104,772		104,291
Income tax provision	32,830		61,683		122,709		84,363
Depreciation and amortization	19,577		15,329		55,470		47,633
Non-cash share-based compensation expense	40,871		33,252		123,873		93,564
Change in fair value of MSRs due to valuation assumptions (net of hedges) (1)	47,514		126,977		(329,608)		1,193,442
Litigation accrual (2)	—		—		15,000		—
Adjusted EBITDA	$	1,567,814	$	3,270,640	$	5,299,063	$	8,081,805

(2) Reflects legal accrual related to a specific legal matter.

Key Performance Indicators

We monitor a number of key performance indicators to evaluate the performance of our business operations. Our loan production key performance indicators enable us to monitor our ability to generate gain on sale revenue as well as understand how our performance compares to the total mortgage origination market. Our servicing portfolio key performance indicators enable us to monitor the overall size of our servicing portfolio of business, the related value of our mortgage servicing rights, and the health of the business as measured by the average MSRs delinquency rate. Other key performance indicators for other Rocket Companies, besides Rocket Mortgage ("Other Rocket Companies"), allow us to monitor both revenues and unit sales generated by these businesses. We also include Rockethomes.com average unique monthly visitors, as we believe traffic on the site is an indicator of consumer interest.

The following summarizes key performance indicators of the business:


	Three Months Ended September 30,						Nine Months Ended September 30,
(Units and $ in thousands)	2021			2020			2021			2020
Rocket Mortgage (1)
Loan Production Data
Closed loan origination volume	$	88,046,623		$	88,981,702		$	275,336,000		$	213,009,515
Direct to Consumer origination volume	$	48,077,894		$	54,598,909		$	154,733,543		$	132,151,006
Partner Network origination volume	$	39,968,729		$	34,382,793		$	120,602,457		$	80,858,509

Gain on sale margin (2)	3.05		%	4.52		%	3.21		%	4.48		%

	September 30,
	2021						2020
Servicing Portfolio Data
Total serviced UPB (includes subserviced)	$	521,300,240					$	400,277,887
MSRs UPB of loans serviced	$	454,666,840					$	368,243,032
UPB of loans subserviced and temporarily serviced	$	66,633,400					$	32,034,855
Total loans serviced (includes subserviced)	2,433.6						2,007.5
Number of MSRs loans serviced	2,239.0						1,896.6
Number of loans subserviced and temporarily serviced	194.6						110.9
MSRs fair value multiple (3)	3.61						2.25
Total serviced delinquency rate, excluding loans in forbearance (60+)	0.83					%	0.71					%
Total serviced MSRs delinquency rate (60+)	2.15					%	4.01					%
Net client retention rate (trailing twelve months)	91					%	92					%

	Three Months Ended September 30,						Nine Months Ended September 30,
	2021			2020			2021			2020
Other Rocket Companies

Amrock closings (units)	261.5			286.3			870.6			692.6

Rocket Homes real estate transactions	9.1			7.7			24.0			20.7
Rockethomes.com average unique monthly visitors (4)	2,398.4			485.1			1,769.9			372.9

Rocket Loans closed (units) (5)	4.9			1.7			12.1			7.2


Rocket Auto car sales (units) (6)	15.1			8.0			44.3			22.7

Core Digital Media client inquiries generated	2,004.3			1,102.6			5,609.1			3,779.9
Total Other Rocket Companies gross revenue	$	532,766		$	510,103		$	1,601,190		$	1,439,306
Total Other Rocket Companies net revenue (7)	$	403,384		$	440,093		$	1,236,675		$	1,219,744

(1) Rocket Mortgage origination volume and gain on sale margins exclude all reverse mortgage activity.

(2) Gain on sale margin is the gain on sale of loans, net divided by net rate lock volume for the period, excluding all reverse mortgage activity. Gain on sale of loans, net includes the net gain on sale of loans, fair value of originated MSRs, and fair value adjustment on loans held for sale, divided by the UPB of loans subject to IRLC’s during the applicable period.

(3) MSRs fair market value multiple is a metric used to determine the relative value of the MSRs asset in relation to the annualized retained servicing fee, which is the cash that the holder of the MSRs asset would receive from the portfolio as of such date. It is calculated as the quotient of (a) the MSRs fair market value as of a specified date divided by (b) the weighted average annualized retained servicing fee for our MSRs portfolio as of such date. The weighted average annualized retained servicing fee for our MSRs portfolio was 0.29% and 0.31% for the three months ended September 30, 2021 and 2020, respectively, and 0.29% and 0.31% for the nine months ended September 30, 2021 and 2020, respectively. The vast majority of our portfolio consists of originated MSRs and consequently, the impact of purchased MSRs does not have a material impact on our weighted average service fee.

(4) Rockethomes.com average unique monthly visitors is calculated by a third party service that monitors website activity. This metric doesn't necessarily have a direct correlation to revenues and is used primarily to monitor consumer interest in the Rockethomes.com site.

(5) During the three and nine months ended September 30, 2021, we processed approximately 0.4 million and 3.5 million unique loan recommendations through the economic injury disaster loans program offered by the Small Business Administration.

(6) Rocket Auto's Gross Merchandise Value, which represents the vehicle and other vehicle-related sales during the period, was $533 and $1,377 for the three and nine months ended September 30, 2021, respectively.

(7) Net revenue presented above is calculated as gross revenues less intercompany revenue eliminations. A portion of the Other Rocket Companies revenues is generated through intercompany transactions. These intercompany transactions take place with entities that are part of our platform. Consequently, we view gross revenue of individual Other Rocket Companies as a key performance indicator, and we consider net revenue of Other Rocket Companies on a combined basis.

Description of Certain Components of Financial Data

Components of Revenue

Our sources of revenue include Gain on sale of loans, net, Loan servicing (loss) income, net, Interest income, net, and Other income.

Gain on sale of loans, net

Gain on sale of loans, net includes all components related to the origination and sale of mortgage loans, including (1) net gain on sale of loans, which represents the premium we receive in excess of the loan principal amount and certain fees charged by investors upon sale of loans into the secondary market, (2) loan origination fees, credits, points and certain costs, (3) provision for or benefit from investor reserves, (4) the change in fair value of interest rate locks (“IRLCs” or “rate lock”) and loans held for sale, (5) the gain or loss on forward commitments hedging loans held for sale and IRLCs, and (6) the fair value of originated MSRs.

An estimate of the gain on sale of loans, net is recognized at the time an IRLC is issued, net of an estimated pull-through factor. The pull-through factor is a key assumption and estimates the loan funding probability, as not all loans that reach IRLC status will result in a closed loan. Subsequent changes in the fair value of IRLCs and mortgage loans held for sale are recognized in current period earnings. When the mortgage loan is sold into the secondary market, any difference between the proceeds received and the current fair value of the loan is recognized in current period earnings in gain on sale of loans.

Loan origination fees generally include underwriting and processing fees. Loan origination costs include lender paid mortgage insurance, recording taxes, investor fees and other related expenses. Net loan origination fees and costs related to the origination of mortgage loans are recognized as a component of the fair value of IRLCs.

We establish reserves for our estimated liabilities associated with the potential repurchase or indemnity of purchasers of loans previously sold due to representation and warranty claims by investors. Additionally, the reserves are established for the estimated liabilities from the need to repay, where applicable, a portion of the premium received from investors on the sale of certain loans if such loans are repaid in their entirety within a specified time period after the sale of the loans. The provision for or benefit from investor reserves is recognized in current period earnings in gain on sale of loans.

We enter into derivative transactions to protect against the risk of adverse interest rate movements that could impact the fair value of certain assets, including IRLCs and loans held for sale. We primarily use forward loan sales commitments to hedge our interest rate risk exposure. Changes in the value of these derivatives, or hedging gains and losses, are included in gain on sale of loans.

Included in gain on sale of loans, net is also the fair value of originated MSRs, which represents the estimated fair value of MSRs related to loans which we have sold and retained the right to service.

Loan servicing (loss) income, net

The value of newly originated MSRs is recognized as a component of the gain on sale of loans, net when loans are sold and the associated servicing rights are retained. Loan servicing fee income consists of the contractual fees earned for servicing the loans and includes ancillary revenue such as late fees and modification incentives. Loan servicing fee income is recorded to income as earned, which is upon collection of payments from borrowers. We have elected to subsequently measure the MSRs at fair value on a recurring basis. Changes in fair value of MSRs, net primarily due to the realization of expected cash flows and/or changes in valuation inputs and estimates, are recognized in current period earnings. Furthermore, we also include in Loan servicing (loss) income, net the gains and losses related to MSRs collateral for financing liability and MSRs financing liability.

We regularly perform a comprehensive analysis of the MSRs portfolio in order to identify and sell certain MSRs that do not align with our strategy for retaining MSRs. To hedge against interest rate exposure on these assets, we enter into forward loan purchase commitments. Changes in the value of derivatives designed to protect against MSRs value fluctuations, or MSRs hedging gains and losses, are included as a component of servicing fee loss, net.

Interest income, net

Interest income, net is interest earned on mortgage loans held for sale net of the interest expense paid on our loan funding facilities.

Other income

Other income includes revenues generated from Amrock (title insurance services, property valuation, and settlement services), Rocket Homes (real estate network referral fees), Rocket Auto (auto sales business revenues), Core Digital Media (third party lead generation revenues), Rock Connections (third party sales and support revenues), Rocket Loans (personal loans) and professional service fees. The professional service fees represent amounts received in exchange for professional services provided to affiliated companies. Services are provided primarily in connection with technology, facilities, human resources, accounting, training, and security functions. For additional information on such fees, see Note 6, Transactions with Related Parties in the notes to the unaudited condensed consolidated financial statements included elsewhere in this Form 10-Q. Other income also includes revenues from investment interest income.

Components of operating expenses

Our operating expenses as presented in the statement of operations data include Salaries, commissions and team member benefits, General and administrative expenses, Marketing and advertising expenses, Other expenses, and Provision for income taxes.

Salaries, commissions and team member benefits

Salaries, commissions and team member benefits include all payroll, benefits, and share-based compensation expenses for our team members.

General and administrative expenses

General and administrative expenses primarily include occupancy costs, professional services, loan processing expenses on loans that do not close or that are not charged to clients on closed loans, commitment fees, fees on loan funding facilities, license fees, office expenses and other operating expenses.

Marketing and advertising expenses

Marketing and advertising expenses are primarily related to performance and brand marketing.

Interest and amortization expense on non-funding debt

Interest and amortization expense on non-funding debt primarily related to expenses in connections with the issuance of our Senior Notes.

Other expenses

Other expenses primarily consist of depreciation and amortization on property and equipment, and mortgage servicing related expenses.

Provision for income taxes

In calculating the provision for interim income taxes, in accordance with ASC Topic 740 Income Taxes, we apply an estimated annual effective tax rate to year-to-date ordinary income. At the end of each interim period, we estimate the effective tax rate expected to be applicable for the full year. Tax-effects of significant, unusual or infrequently occurring items are excluded from the estimated annual effective tax rate calculation and recognized in the interim period in which they occur.

Tax Receivable Agreement

In connection with the reorganization completed prior to our IPO in 2020, we entered into a Tax Receivable Agreement with RHI and our Chairman that will obligate us to make payments to RHI and our Chairman generally equal to 90% of the applicable cash tax savings that we actually realize or in some cases are deemed to realize as a result of the tax attributes generated by (i) certain increases in our allocable share of the tax basis in Holdings’ assets resulting from (a) the purchases of Holdings Units (along with the corresponding shares of our Class D common stock or Class C common stock) from RHI and our Chairman (or their transferees of Holdings Units or other assignees) using the net proceeds from our initial public offering or in any future offering, (b) exchanges by RHI and our Chairman (or their transferees of Holdings Units or other assignees) of Holdings Units (along with the corresponding shares of our Class D common stock or Class C common stock) for cash or shares of our Class B common stock or Class A common stock, as applicable, or (c) payments under the Tax Receivable Agreement; (ii) tax benefits related to imputed interest deemed arising as a result of payments made under the Tax Receivable Agreement and (iii) disproportionate allocations (if any) of tax benefits to Holdings as a result of section 704(c) of the Code that relate to the reorganization transactions. We will retain the benefit of the remaining 10% of these tax savings.

Share-based compensation

Share-based compensation is comprised of both equity and liability awards and is measured and expensed accordingly under Accounting Standards Codification (“ASC”) 718 Compensation—Stock Compensation. As indicated above, share-based compensation expense is included as part of salaries, benefits and team member benefits.

Non-controlling interest

We are the sole managing member of Holdings and consolidate the financial results of Holdings. Therefore, we report a non-controlling interest based on the Holdings Units of Holdings held by our Chairman and RHI on our Condensed Consolidated Balance Sheets. Income or loss is attributed to the non-controlling interests based on the weighted average Holdings Units outstanding during the period and is presented on the Condensed Consolidated Statements of Income and Comprehensive Income. Refer to Note 14, Non-controlling Interests for more information on non-controlling interests.

Results of Operations for the Three and Nine Months Ended September 30, 2021 and 2020

Summary of Operations


Condensed Statement of Operations Data	Three Months Ended September 30,				Nine Months Ended September 30,
($ in thousands)	2021		2020		2021		2020
Revenue
Gain on sale of loans, net	$	2,654,213	$	4,280,442	$	8,548,144	$	10,856,135
Servicing fee income	334,348		272,158		970,058		779,093
Change in fair value of MSRs	(341,361)		(392,688)		(556,201)		(1,985,545)
Interest income, net	57,185		10,526		106,853		69,391
Other income	410,345		445,757		1,252,845		1,250,481
Total revenue, net	$	3,114,730	$	4,616,195	$	10,321,699	$	10,969,555
Expenses
Salaries, commissions and team member benefits	870,010		816,408		2,552,679		2,354,021
General and administrative expenses	313,405		280,705		867,639		763,962
Marketing and advertising expenses	316,471		250,558		943,999		670,749
Interest and amortization expense on non-funding-debt	34,163		38,016		104,772		104,291
Other expenses	154,992		173,442		523,054		433,657
Total expenses	$	1,689,041	$	1,559,129	$	4,992,143	$	4,326,680
Income before income taxes	1,425,689		3,057,066		5,329,556		6,642,875
Provision for income taxes	(32,830)		(61,683)		(122,709)		(84,363)
Net income	1,392,859		2,995,383		5,206,847		6,558,512
Net income attributable to non-controlling interest	(1,317,522)		(2,937,480)		(4,946,688)		(6,500,609)
Net income attributable to Rocket Companies	$	75,337	$	57,903	$	260,159	$	57,903

Gain on sale of loans, net

The components of gain on sale of loans for the periods presented were as follows:


	Three Months Ended September 30,				Nine Months Ended September 30,
($ in thousands)	2021		2020		2021		2020
Net gain on sale of loans (1)	$	1,947,251	$	3,864,480	$	6,238,821	$	8,363,614
Fair value of originated MSRs	907,242		836,557		2,937,517		2,041,899
Benefit from (provision for) investor reserves	(6,327)		3,665		7,642		(5,698)
Fair value adjustment on loans held for sale and IRLCs	(192,529)		316,159		(1,719,448)		2,710,026
Revaluation loss from forward commitments economically hedging loans held for sale and IRLCs	(1,424)		(740,419)		1,083,612		(2,253,706)
Gain on sale of loans, net	$	2,654,213	$	4,280,442	$	8,548,144	$	10,856,135

(1) Net gain on sale of loans represents the premium received in excess of the UPB, plus net origination fees.

The table below provides details of the characteristics of our mortgage loan production for each of the periods presented:


($ in thousands)	Three Months Ended September 30,						Nine Months Ended September 30,
Loan origination volume by type	2021			2020			2021			2020
Conventional Conforming	$	69,296,358		$	77,278,429		$	214,257,003		$	174,131,609
FHA/VA	12,860,367			10,168,614			44,253,311			31,972,293
Non-Agency	5,889,898			1,534,659			16,825,686			6,905,613
Total mortgage loan origination volume	$	88,046,623		$	88,981,702		$	275,336,000		$	213,009,515
Portfolio metrics
Average loan amount	$	286		$	282		$	281		$	278
Weighted average loan-to-value ratio	67.73		%	68.52		%	67.80		%	70.31		%
Weighted average credit score	746			760			750			755
Weighted average loan rate	2.79		%	2.92		%	2.78		%	3.18		%
Percentage of loans sold
To GSEs and government	91.22		%	97.85		%	94.84		%	95.06		%
To other counterparties	8.78		%	2.15		%	5.16		%	4.94		%
Servicing-retained	91.84		%	98.01		%	95.99		%	96.64		%
Servicing-released	8.16		%	1.99		%	4.01		%	3.36		%
Net rate lock volume (1)	$	86,710,232		$	94,667,962		$	265,412,457		$	242,695,565
Gain on sale margin (2)	3.05		%	4.52		%	3.21		%	4.48		%

(1) Net rate lock volume includes the UPB of loans subject to IRLCs, net of the pull-through factor as described in the “Description of Certain Components of Financial Data” section above.

(2) Gain on sale margin is a ratio of gain on sale of loans, net to the net rate lock volume for the period as described above. Gain on sale of loans, net includes the net gain on sale of loans, fair value of originated MSRs, fair value adjustment gain on loans held for sale and IRLC’s, and revaluation loss from forward commitments economically hedging loans held for sale and IRLCs. This metric is a measure of profitability for our on-going mortgage business and therefore excludes revenues from Other Rocket Companies and reverse mortgage activity. See the table above for each of the components of gain on sale of loans, net.

Gain on sale of loans, net was $2.7 billion for the three months ended September 30, 2021, a decrease of $1.6 billion, or 38.0%, as compared with $4.3 billion for the three months ended September 30, 2020. The decrease in Gain on sale of loans, net was primarily driven by a decrease in gain on sale margin to 3.05% from 4.52%, as well as a decrease in mortgage loan origination volume of $0.9 billion, or 1.1%, for the three months ended September 30, 2021 and 2020, respectively. The decrease in gain on sale margin during the three months ended September 30, 2021 reflects a tighter spread between primary and secondary mortgage rates and an increase in mix of our Partner Network as a percentage of our total originations. The primary mortgage rate is the rate at which lenders originate loans with borrowers and the secondary mortgage rate is the rate at which lenders securitize those loans into mortgage backed securities.

Gain on sale of loans, net was $8.5 billion for the nine months ended September 30, 2021, a decrease of $2.3 billion, or 21.3%, as compared with $10.9 billion for the nine months ended September 30, 2020. The decrease in gain on sale of loans, net was primarily driven by a decrease in gain on sale margin to 3.21% from 4.48%, partially offset by an increase in mortgage loan origination volume of $62.3 billion, or 29.3%, for the nine months ended September 30, 2021 and 2020, respectively. The decrease in gain on sale margin in 2021 reflects a tighter spread between primary and secondary mortgage rates and an increase in mix of our Partner Network as a percentage of our total originations. The primary mortgage rate is the rate at which lenders originate loans with borrowers and the secondary mortgage rate is the rate at which lenders securitize those loans into mortgage backed securities.

Net gain on sales of loans decreased $1.9 billion, or 49.6%, to $1.9 billion in the three months ended September 30, 2021 compared to $3.9 billion in the three months ended September 30, 2020. This was driven by a decrease in gain on sale margin, as well as a decrease in mortgage loan origination volume, noted above.

Net gain on sales of loans decreased $2.1 billion, or 25.4%, to $6.2 billion in the nine months ended September 30, 2021 compared to $8.4 billion in the nine months ended September 30, 2020. This was driven by a decrease in gain on sale margin, partially offset by an increase in mortgage loan origination volume, noted above.

The fair value of MSRs originated was $907.2 million for the three months ended September 30, 2021, an increase of $70.7 million, or 8.4%, as compared with $836.6 million during the three months ended September 30, 2020. The increase was primarily due to an increase to sold loan volume of $4.1 billion, or 4.9%, from $83.1 billion for the three months ended September 30, 2020 to $87.2 billion for the three months ended September 30, 2021. MSR assets are created at the time Mortgage Loans Held for Sale are securitized and sold to investors for cash, while the Company retains the MSR.

The fair value of MSRs originated was $2.9 billion for the nine months ended September 30, 2021, an increase of $895.6 million, or 43.9%, as compared with $2.0 billion during the nine months ended September 30, 2020. The increase was primarily due to an increase in sold loan volume of $71.4 billion, or 35.6%, from $200.6 billion for the nine months ended September 30, 2020 to $272.0 billion for the nine months ended September 30, 2021. The increase was also impacted by an increase in the MSRs fair value multiple, which increased in 2021 from 2.53 at December 31, 2020 to 3.61 at September 30, 2021. By contrast the MSRs fair value multiple decreased in 2020 from 3.01 at December 31, 2019 to 2.25 at September 30, 2020. The MSRs fair market value multiple is a metric used to determine the relative value of the MSRs in relation to the annualized retained servicing fee, which is the cash that the holder of the MSRs asset would receive from the portfolio as of such date.

Loan servicing (loss) income, net

For the periods presented, Loan servicing (loss) income, net consisted of the following:


	Three Months Ended September 30,				Nine Months Ended September 30,
($ in thousands)	2021		2020		2021		2020
Retained servicing fee	$	326,077	$	264,276	$	945,180	$	756,003
Subservicing income	2,038		2,432		7,032		5,987
Ancillary income	6,233		5,450		17,846		17,103
Servicing fee income	334,348		272,158		970,058		779,093
Change in valuation model inputs or assumptions (1)	(51,431)		(131,470)		344,787		(1,258,654)
Change in fair value of MSRs hedge	3,917		4,493		(15,179)		65,212
Collection / realization of cash flows	(293,847)		(265,711)		(885,809)		(792,103)
Change in fair value of MSRs	(341,361)		(392,688)		(556,201)		(1,985,545)
Loan servicing (loss) income, net	$	(7,013)	$	(120,530)	$	413,857	$	(1,206,452)

(1) Includes the effect of contractual prepayment protection resulting from sales of MSRs prepayment protection


	September 30,
($ in thousands)	2021		2020
MSRs UPB of loans serviced	$	454,666,840	$	368,243,032
Number of MSRs loans serviced	2,238,947		1,896,611
UPB of loans subserviced and temporarily serviced	$	66,633,400	$	32,034,855
Number of loans subserviced and temporarily serviced	194,637		110,932
Total serviced UPB	$	521,300,240	$	400,277,887
Total loans serviced	2,433,584		2,007,543
MSRs fair value	$	4,701,045	$	2,606,149
Total serviced delinquency rate, excluding loans in forbearance (60+)	0.83%		0.71%
Total serviced delinquency count (60+) as % of total	2.15%		4.01%
Weighted average credit score	738		737
Weighted average LTV	70.80%		73.58%

Weighted average service fee	0.29%		0.31%

Loan servicing loss, net was $7.0 million for the three months ended September 30, 2021, which compares to Loan servicing loss, net of $120.5 million for the three months ended September 30, 2020. The reduction of the loss was driven primarily by a smaller loss in changes in valuation model inputs or assumptions to $51.4 million for the three months ended September 30, 2021 as compared to a loss of $131.5 million the three months ended September 30, 2020, as a result of the decrease in prepayment speed valuation assumptions during the period.

Loan servicing income, net was $413.9 million for the nine months ended September 30, 2021, which compares to Loan servicing loss, net of $1,206.5 million for the nine months ended September 30, 2020. The increase was driven primarily by a reduction in fair market value of MSRs of $556.2 million during the nine months ended September 30, 2021 as compared to a reduction in fair market value of MSRs of $1,985.5 million during the nine months ended September 30, 2020.

The change in MSRs fair value was a net decrease of $341.4 million for the three months ended September 30, 2021, as compared with a net decrease of $392.7 million for the three months ended September 30, 2020. The change in fair value during the three months ended September 30, 2021 was primarily driven by $293.8 million of loss due to collection/realization of cash flows. The decrease in fair value during the three months ended September 30, 2020 included $265.7 million of loss due to collection/realization of cash flows and a decrease in fair value due to changes in valuation model inputs or assumptions (net of hedges) of $127.0 million. The overall prepayment assumptions decreased from 19.2% at June 30, 2020 to 17.9% at September 30, 2020, driven primarily by MSR new adds during the quarter. Excluding the addition of new MSRs, the prepayment speeds increased at September 30, 2020 relative to June 30, 2020 resulting in the decrease in fair value due to changes in valuation assumptions noted above.

The change in MSRs fair value was a net loss of $556.2 million for the nine months ended September 30, 2021, as compared with a net loss of $2.0 billion for the nine months ended September 30, 2020. The change in fair value during the nine months ended September 30, 2021 included $885.8 million of loss due to collection/realization of cash flows and an increase in fair value due to change in valuation assumptions (net of hedges) of $329.6 million primarily driven by a decrease in prepayment speeds from 15.8% at December 31, 2020 to 9.8% at September 30, 2021. The decrease in fair value during the nine months ended September 30, 2020 included $792.1 million of loss due to collection/realization of cash flows and a decrease in fair value due to changes in valuation model inputs or assumptions (net of hedges) of $1.2 billion primarily driven by an increase in prepayment speeds from 14.5% at December 31, 2019 to 17.9% at September 30, 2020.

Interest income, net

The components of Interest income, net for the periods presented were as follows:


	Three Months Ended September 30,				Nine Months Ended September 30,
($ in thousands)	2021		2020		2021		2020
Interest income	$	129,963	$	79,890	$	311,853	$	231,971
Interest expense on funding facilities	(72,778)		(69,364)		(205,000)		(162,580)
Interest income, net	$	57,185	$	10,526	$	106,853	$	69,391

Interest income, net was $57.2 million for the three months ended September 30, 2021, an increase of $46.7 million, or 443.3%, as compared to $10.5 million for the three months ended September 30, 2020. The increase was driven primarily by an increase in mortgage interest rates during the three months ended September 30, 2021 compared to the three months ended September 30, 2020, partially offset by a decrease in origination volume.

Interest income, net was $106.9 million for the nine months ended September 30, 2021, an increase of $37.5 million, or 54.0%, as compared to $69.4 million for the nine months ended September 30, 2020. The increase was primarily driven by an increase in mortgage interest rates, as well as an increase in origination volume for the nine months ended September 30, 2021 compared to the nine months ended September 30, 2020.

Other income

Other income decreased $35.4 million, or 7.9%, to $410.3 million for the three months ended September 30, 2021 as compared to $445.8 million for the three months ended September 30, 2020. The decrease was driven by a decrease in revenues generated from Rocket Loans loan recommendations through the economic injury disaster loans program offered by the Small Business Administration.

Other income increased $2.4 million, or 0.2%, to $1.3 billion for the nine months ended September 30, 2021 as compared to $1.3 billion for the nine months ended September 30, 2020. The increase was driven by revenues generated from Amrock's title insurance services, property valuation and settlement services that were also driven by the increase in origination volume noted above, partially offset by the decrease in revenues generated from Rocket Loans loan recommendations through the economic injury disaster loans program offered by the Small Business Administration.

Expenses

Expenses for the periods presented were as follows:


	Three Months Ended September 30,				Nine Months Ended September 30,
($ in thousands)	2021		2020		2021		2020
Salaries, commissions and team member benefits	$	870,010	$	816,408	$	2,552,679	$	2,354,021
General and administrative expenses	313,405		280,705		867,639		763,962
Marketing and advertising expenses	316,471		250,558		943,999		670,749
Interest and amortization expense on non-funding debt	34,163		38,016		104,772		104,291
Other expenses	154,992		173,442		523,054		433,657
Total expenses	$	1,689,041	$	1,559,129	$	4,992,143	$	4,326,680

Total expenses were $1.7 billion for the three months ended September 30, 2021, an increase of $129.9 million or 8.3%, as compared with $1.6 billion for the three months ended September 30, 2020. This was driven primarily by an increase in salaries, commissions and team member benefits, general and administrative expenses, marketing and advertising expenses, partially offset by decreases in other expenses as described below.

Total expenses were $5.0 billion for the nine months ended September 30, 2021, an increase of $665.5 million or 15.4%, as compared with $4.3 billion for the nine months ended September 30, 2020. This was driven primarily by increases in salaries, commissions and team member benefits, general and administrative expenses, marketing and advertising, and other expenses as described below.

Salaries, commissions and team member benefits were $870.0 million for the three months ended September 30, 2021, an increase of $53.6 million, or 6.6%, as compared with $816.4 million for the three months ended September 30, 2020. The increase is primarily due to hiring in production roles to support the increased volume levels, as well as hiring of key talent on the technology and product strategy teams.

Salaries, commissions and team member benefits were $2.6 billion for the nine months ended September 30, 2021, an increase of $198.7 million, or 8.4%, as compared with $2.4 billion for the nine months ended September 30, 2020. The increase is primarily due to hiring in production roles to support the increased volume levels, as well as hiring of key talent on the technology and product strategy teams.

General and administrative expenses were $313.4 million for the three months ended September 30, 2021, an increase of $32.7 million, or 11.6%, as compared with $280.7 million for the three months ended September 30, 2020. The increased expense was driven primarily by increased third party technology spend..

General and administrative expenses were $867.6 million for the nine months ended September 30, 2021, an increase of $103.7 million, or 13.6%, as compared with $764.0 million for the nine months ended September 30, 2020. The increased expense was driven primarily by increased by increased third party technology spend..

Marketing and advertising expenses were $316.5 million for the three months ended September 30, 2021, an increase of $65.9 million, or 26.3% as compared with $250.6 million for the three months ended September 30, 2020. In 2021, the Company’s brand marketing spend increased from new national campaigns with the reintroduction of many sporting and other live events that were cancelled in 2020 due to the COVID-19 pandemic. Also, in 2021 the Company’s performance marketing spend increased as compared to the prior period supporting our increase in loan origination volume.

Marketing and advertising expenses were $944.0 million for the nine months ended September 30, 2021, an increase of $273.3 million, or 40.7% as compared with $670.7 million for the nine months ended September 30, 2020. In 2021, the Company’s brand marketing spend increased from new national campaigns with the reintroduction of many sporting and other live events that were cancelled in 2020 due to the COVID-19 pandemic. Also, in 2021 the Company’s performance marketing spend increased as compared to the prior period supporting our increase in loan origination volume.

Other expenses were $155.0 million for the three months ended September 30, 2021, a decrease of $18.5 million, or 10.6%, as compared with $173.4 million for the three months ended September 30, 2020. The decrease was due to a decrease in expenses incurred from servicing payoff expenses.

Other expenses were $523.1 million for the nine months ended September 30, 2021, an increase of $89.4 million, or 20.6%, as compared with $433.7 million for the nine months ended September 30, 2020. The increased expense was driven primarily by an increase in expenses incurred to support the higher level of title insurance services, property valuation and settlement services due to the increased origination volumes noted above, and an increase in payoff interest expense.

Summary Results by Segment for the Three and Nine Months Ended September 30, 2021 and 2020

Our operations are organized by distinct marketing channels which promote client acquisition into our platform and include two reportable segments: Direct to Consumer and Partner Network. In the Direct to Consumer segment, clients have the ability to interact with the Rocket Mortgage app and/or with our Rocket Cloud Force, consisting of sales team members across our platform. We market to potential clients in this segment through various performance marketing channels. The Direct to Consumer segment derives revenue from originating, closing, selling and servicing predominantly agency-conforming loans, which are pooled and sold to the secondary market. This also includes providing title insurance services, appraisals and settlement services to these clients as part of our end-to-end mortgage origination experience. Servicing activities are fully allocated to the Direct to Consumer segment as they are viewed as an extension of the client experience with the primary objective to establish and maintain positive, regular touchpoints with our clients, which positions us to have high retention and recapture the clients’ next refinance, purchase, personal loan, and auto sales transactions. These activities position us to be the natural choice for clients’ next refinance or purchase transaction.

We measure the performance of the segments primarily on a contribution margin basis. Contribution margin is intended to measure the direct profitability of each segment and is calculated as Adjusted Revenue less directly attributable expenses. Adjusted Revenue is a non-GAAP financial measure described above. Directly attributable expenses include Salaries, commissions and team member benefits, Marketing and advertising expenses, General and administrative expenses and Other expenses, such as direct servicing costs and origination costs. For segments, we measure gain on sale margin of sold loans and refer to this metric as ‘Sold Loan Gain on Sale Margin’. A loan is considered sold when it is sold to investors in the secondary market. In previous disclosures, ‘sold loans’ were referred to as ‘funded loans’. Sold loan gain on sale margin represents revenues on loans that have been sold divided by the sold UPB amount. Sold loan gain on sale margin is used specifically in the context of measuring the gain on sale margins of our Direct to Consumer and Partner Network segments. Sold loan gain on sale margin is an important metric in evaluating the revenue generating performance of our segments as it allows us to measure this metric at a segment level with a high degree of precision. By contrast, ‘gain on sale margin’, which we use outside of the segment discussion, measures the gain on sale revenue generation of our combined mortgage business. See below for our overview and discussion of segment results for the three and nine months ended September 30, 2021 and 2020. For additional discussion, see Note 12, Segments of the notes to the unaudited condensed consolidated financial statements of this Form 10-Q.

Direct to Consumer Results


	Three Months Ended September 30,						Nine Months Ended September 30,
($ in thousands)	2021			2020			2021			2020
Sold Loan Volume	$	49,556,034		$	53,548,777		$	163,496,557		$	132,016,371
Sold Loan Gain on Sale Margin	4.47		%	5.78		%	4.88		%	5.36		%
Revenue
Gain on sale	$	2,241,633		$	3,128,695		$	7,155,872		$	8,759,914
Interest income	77,112			53,764			188,269			152,087
Interest expense on funding facilities	(43,528)			(46,936)			(124,942)			(107,718)
Service fee income	333,653			271,254			967,993			776,117
Changes in fair value of MSRs	(341,361)			(392,688)			(556,201)			(1,985,545)
Other income	234,381			237,855			769,152			589,415
Total Revenue, net	$	2,501,890		$	3,251,944		$	8,400,143		$	8,184,270
Decrease (increase) in MSRs due to valuation assumptions (net of hedges)	47,514			126,977			(329,608)			1,193,442
Adjusted Revenue	$	2,549,404		$	3,378,921		$	8,070,535		$	9,377,712
Less: Directly Attributable Expenses (1)	927,897			930,227			2,808,340			2,611,044
Contribution Margin	$	1,621,507		$	2,448,694		$	5,262,195		$	6,766,668

(1) Direct expenses attributable to operating segments exclude corporate overhead, depreciation and amortization, and interest and amortization expense on non-funding debt.

For the three months ended September 30, 2021, Direct to Consumer Adjusted Revenue decreased $0.8 billion, or 24.5% to $2.5 billion from $3.4 billion for the three months ended September 30, 2020. The decrease was driven by a decline in Direct to Consumer gain on sale margins resulting in a decrease in Gain on sale revenue of $0.9 billion, or 28.4%, during the three months September 30, 2021. On a sold loan basis, the Direct to Consumer segment generated $49.6 billion in sold loan volume during the three months ended September 30, 2021, a decrease of $4.0 billion, or 7.5% as compared to the three months ended September 30, 2020. In addition, sold loan gain on sale margin was 4.47% during the three months ended September 30, 2021 as compared to 5.78% during the three months ended September 30, 2020, driven primarily by a compression in primary-secondary spreads which led to margin suppression during the three months ended September 30, 2021 as compared to the three months ended September 30, 2020.

For the three months ended September 30, 2021, Direct to Consumer Directly Attributable Expenses decreased $2.3 million, or 0.3%, to $927.9 million during the three months ended September 30, 2021 compared to $930.2 million during the three months ended September 30, 2020. The decrease was primarily due to a decrease in variable compensation and loan processing costs, offset by an increase in team members in production roles.

For the three months ended September 30, 2021, Direct to Consumer Contribution Margin decreased $0.8 billion, or 33.8%, to $1.6 billion, compared to $2.4 billion during the three months ended September 30, 2020. The decrease in Contribution Margin was driven primarily by the decrease in Direct to Consumer sold loan volume and gain on sale margins noted above.

For the nine months ended September 30, 2021, Direct to Consumer Adjusted Revenue decreased $1.3 billion, or 13.9% to $8.1 billion from $9.4 billion for the nine months ended September 30, 2020. The decrease was driven by a decline in Direct to Consumer sold loan gain on sale margins, partially offset by higher sold loan volumes. On a sold loan basis, the Direct to Consumer segment generated $163.5 billion in volume for the nine months ended September 30, 2021, an increase of $31.5 billion, or 23.8% as compared to the nine months ended September 30, 2020. In addition, sold loan gain on sale margin was 4.88% for the nine months ended September 30, 2021 as compared to 5.36% for the nine months ended September 30, 2020.

For the nine months ended September 30, 2021, Direct to Consumer Directly Attributable Expenses increased $0.2 billion, or 7.6%, to $2.8 billion, compared to $2.6 billion for the nine months ended September 30, 2020. The increase was primarily due to an increase in team members in production roles needed to support growth and an increase in higher marketing lead generation costs.

For the nine months ended September 30, 2021, Direct to Consumer Contribution Margin decreased $1.5 billion, or 22.2%, to $5.3 billion, compared to $6.8 billion for the nine months ended September 30, 2020. The decrease in Contribution Margin was driven primarily by a decrease in sold loan gain on sale margins.

Partner Network Results


	Three Months Ended September 30,						Nine Months Ended September 30,
($ in thousands)	2021			2020			2021			2020
Sold Loan Volume	$	37,665,745		$	29,568,576		$	108,514,309		$	68,632,837
Sold Loan Gain on Sale Margin	0.78		%	2.70		%	1.32		%	1.98		%
Revenue
Gain on sale	$	402,649		$	1,151,071		$	1,374,729		$	2,089,285
Interest income	51,815			25,691			121,097			77,638
Interest expense on funding facilities	(29,248)			(22,428)			(80,010)			(54,451)
Other income	31,301			47,858			82,306			107,328
Total Revenue, net	$	456,517		$	1,202,192		$	1,498,122		$	2,219,800
Decrease (increase) in MSRs due to valuation assumptions (net of hedges)	—			—			—			—
Adjusted Revenue	$	456,517		$	1,202,192		$	1,498,122		$	2,219,800
Less: Directly Attributable Expenses	176,246			141,214			532,087			372,337
Total Contribution Margin	$	280,271		$	1,060,978		$	966,035		$	1,847,463

For the three months ended September 30, 2021, Partner Network Adjusted Revenue decreased $745.7 million, or 62.0% to $456.5 million, from $1.2 billion for the three months ended September 30, 2020. The decrease was driven by lower Partner Network sold loan gain on sale margins, partially offset by higher sold loan volumes, resulting in a decrease in gain on sale revenue of $748.4 million, or 65.0%, for the three months ended September 30, 2021. On a sold loan basis, the Partner Network segment generated $37.7 billion in sold loan volume for the three months ended September 30, 2021, an increase of $8.1 billion, or 27.4% as compared to the three months ended September 30, 2020. In addition, sold loan gain on sale margin was 0.78% in 2021 as compared to 2.70% in 2020.

For the three months ended September 30, 2021, Partner Network Directly Attributable Expenses increased $35.0 million, or 24.8%, to $176.2 million in the three months ended September 30, 2021 compared to $141.2 million for the three months ended September 30, 2020. The increase was primarily due to an increase in team members in production roles needed to support growth.

For the three months ended September 30, 2021, Partner Network Contribution Margin decreased $780.7 million, or 73.6%, to $280.3 million in the three months ended September 30, 2021 compared to $1.1 billion for the three months ended September 30, 2020. The decrease in Contribution Margin was driven primarily by the decrease in Partner Network sold loan gain on sale margin noted above, partially offset by an increase in Partner Network sold loan volume.

For the nine months ended September 30, 2021, Partner Network Adjusted Revenue decreased $721.7 million, or 32.5% to $1.5 billion, from $2.2 billion for the nine months ended September 30, 2020. The decrease was driven by lower net rate lock gain on sale margin resulting in a decrease in gain on sale revenue of $714.6 million, or 34.2%, for the nine months ended September 30, 2021. On a sold loan basis, the Partner Network segment generated $108.5 billion in sold loan volume for the nine months ended September 30, 2021, an increase of $39.9 billion, or 58.1% as compared to the nine months ended September 30, 2020. In addition, sold loan gain on sale margin was 1.32% for the nine months ended September 30, 2021 as compared to 1.98% for the nine months ended September 30, 2020.

For the nine months ended September 30, 2021, Partner Network Directly Attributable Expenses increased $159.8 million, or 42.9%, to $532.1 million for the nine months ended September 30, 2021 compared to $372.3 million for the nine months ended September 30, 2020. The increase was primarily due to an increase in team members in production roles needed to support growth.

For the nine months ended September 30, 2021, Partner Network Contribution Margin decreased $881.4 million, or 47.7%, to $966.0 million for the nine months ended September 30, 2021 compared to $1.8 billion for the nine months ended September 30, 2020. The decrease in Contribution Margin was driven primarily by a decrease in net rate lock gain on sale margin and an increase in Partner Network Directly Attributable Expenses.

Liquidity and Capital Resources

Historically, our primary sources of liquidity have included:

• borrowings, including under our loan funding facilities and other secured and unsecured financing facilities;

• cash flow from our operations, including:

• sale of whole loans into the secondary market;

• sale of mortgage servicing rights into the secondary market;

• loan origination fees;

• servicing fee income; and

• interest income on loans held for sale; and

• cash and marketable securities on hand.

Historically, our primary uses of funds have included:

• origination of loans;

• payment of interest expense;

• prepayment of debt;

• payment of operating expenses; and

• distributions to RHI including those to fund distributions for payment of taxes by its ultimate shareholders.

We are also subject to contingencies which may have a significant impact on the use of our cash.

In order to originate and aggregate loans for sale into the secondary market, we use our own working capital and borrow or obtain money on a short-term basis primarily through committed and uncommitted loan funding facilities established with large global banks.

Our loan funding facilities are primarily in the form of master repurchase agreements. We also have loan funding facilities directly with the GSEs. Loans financed under these facilities are generally financed at approximately 97% to 99% of the principal balance of the loan (although certain types of loans are financed at lower percentages of the principal balance of the loan), which requires us to fund the balance from cash generated from operations. Once closed, the underlying residential mortgage loan that is held for sale is pledged as collateral for the borrowing or advance that was made under these loan funding facilities. In most cases, the loans will remain in one of the loan funding facilities for only a short time, generally less than one month, until the loans are pooled and sold. During the time the loans are held for sale, we earn interest income from the borrower on the underlying mortgage loan. This income is partially offset by the interest and fees we have to pay under the loan funding facilities.

When we sell a pool of loans in the secondary market, the proceeds received from the sale of the loans are used to pay back the amounts we owe on the loan funding facilities. We rely on the cash generated from the sale of loans to fund future loans and repay borrowings under our loan funding facilities. Delays or failures to sell loans in the secondary market could have an adverse effect on our liquidity position.

As discussed in Note 5, Borrowings, of the notes to the unaudited condensed consolidated financial statements included in this Form 10-Q, as of September 30, 2021, we had 19 different funding facilities in different amounts and with various maturities together with the Senior Notes. Furthermore, in October 2021, Rocket Mortgage closed a private offering of $1,150,000 2.875% Senior Notes and $850,000 4.000% Senior Notes. A portion of these proceeds were used to repurchase $948,015 of the 5.250% Senior Notes with an outstanding principal amount of $1,010,000 as of September 30, 2021. At September 30, 2021, the aggregate available amount under our facilities was $31.0 billion, with combined outstanding balances of $18.9 billion and unutilized capacity of $12.1 billion.

The amount of financing actually advanced on each individual loan under our loan funding facilities, as determined by agreed upon advance rates, may be less than the stated advance rate depending, in part, on the market value of the mortgage loans securing the financings. Each of our loan funding facilities allows the bank providing the funds to evaluate the market value of the loans that are serving as collateral for the borrowings or advances being made. If the bank determines that the value of the collateral has decreased, the bank can require us to provide additional collateral or reduce the amount outstanding with respect to those loans (e.g., initiate a margin call). Our inability or unwillingness to satisfy the request could result in the termination of the facilities and possible default under our other loan funding facilities. In addition, a large unanticipated margin call could have a material adverse effect on our liquidity.

The amount owed and outstanding on our loan funding facilities fluctuates significantly based on our origination volume, the amount of time it takes us to sell the loans it originates, and the amount of loans being self-funded with cash. We may from time to time use surplus cash to “buy-down” the effective interest rate of certain loan funding facilities or to self-fund a portion of our loan originations. As of September 30, 2021, $3.4 billion of our cash was used to buy-down our funding facilities and self-fund, $500.7 million of which are buy-down funds that are included in Cash and cash equivalents on the Condensed Consolidated Balance Sheets and an estimated $2.9 billion of which is discretionary self-funding that reduces Cash and cash equivalents on the Condensed Consolidated Balance Sheets. We have the ability to withdraw the $500.7 million at any time, unless a margin call has been made or a default has occurred under the relevant facilities. The Company has an estimated $2.9 billion of discretionary self-funded loans, of which a portion can be transferred to a warehouse line or the early buy out line, provided that such loans meet the eligibility criteria to be placed on such lines. The remaining portion will be funded in normal course over a short period of time, generally less than one month. In addition to the $2.9 billion of corporate cash used for discretionary self-funding of loans as of September 30, 2021, we had an additional $2.2 billion of cash on-hand, for a total of $5.1 billion of available cash.

Our loan funding facilities, early buy out facilities, MSRs facility and unsecured lines of credit also generally require us to comply with certain operating and financial covenants and the availability of funds under these facilities is subject to, among other conditions, our continued compliance with these covenants. These financial covenants include, but are not limited to, maintaining (1) a certain minimum tangible net worth, (2) minimum liquidity, (3) a maximum ratio of total liabilities or total debt to tangible net worth and (4) pre-tax net income requirements. A breach of these covenants can result in an event of default under these facilities and as such allows the lenders to pursue certain remedies. In addition, each of these facilities, as well as our unsecured lines of credit, includes cross default or cross acceleration provisions that could result in all facilities terminating if an event of default or acceleration of maturity occurs under any facility. We were in compliance with all covenants as of September 30, 2021 and 2020.

September 30, 2021 compared to September 30, 2020

Cash Flows

Our Cash and cash equivalents and Restricted cash were $2.4 billion at September 30, 2021, a decrease of $1.2 billion, or 33.4%, compared to $3.6 billion at September 30, 2020. The decrease was primarily driven by distributions made to Class A shareholders of the Company and to unit holders (members) of Holdings, partially offset by net increase from earnings.

Equity

Equity was $9.2 billion as of September 30, 2021, an increase of $2.8 billion, or 44.4%, as compared to $6.4 billion as of September 30, 2020. The change was primarily the result of net income of $8.0 billion and share-based compensation of $191.5 million. The increase was partially offset by distributions made to Class A shareholders of the Company and to unit holders (members) of Holdings.

Distributions

In addition to the $2.2 billion Special Dividend, we had $1.8 billion in tax distributions, for a total of $4.0 billion of distributions during the nine months ended September 30, 2021. During the nine months ended September 30, 2020, we had net transfers to the parent company of $3.8 billion. Except for tax distributions, these distributions are at the discretion of our board of directors.

Contractual Obligations, Commercial Commitments, and Other Contingencies

There were no material changes outside the ordinary course of business to our outstanding contractual obligations as of September 30, 2021 from information and amounts previously disclosed as of December 31, 2020 in our Annual Report on Form 10-K under the caption “Contractual Obligations, Commercial Commitments, and Other Contingencies”. Refer to Notes 5, Borrowings, and 10, Commitments, Contingencies and Guarantees, of the notes to the condensed consolidated financial statements for further discussion of contractual obligations, commercial commitments, and other contingencies, including legal contingencies.

New Accounting Pronouncements Not Yet Effective

See Note 1, Business, Basis of Presentation and Accounting Policies of the notes to the unaudited condensed consolidated financial statements for details of recently issued accounting pronouncements and their expected impact on our condensed consolidated financial statements.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

There have been no material changes to the Company's exposure to market risks since what was disclosed in the Company's December 31, 2020 Annual Report on Form 10-K.

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

Our management, with the participation of our CEO and CFO, has evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), as of the end of the period covered by this Form 10-Q. Based on such evaluation, our CEO and CFO have concluded that as of September 30, 2021, our disclosure controls and procedures are designed at a reasonable assurance level and are effective to provide reasonable assurance that information we are required to disclose in reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the rules and forms of the SEC, and that such information is accumulated and communicated to our management, including our CEO and CFO, as appropriate, to allow timely decisions regarding required disclosure.

Changes in Internal Control over Financial Reporting

There were no changes in our internal control over financial reporting identified in our management’s evaluation pursuant to Rules 13a-15(d) and 15d-15(d) of the Exchange Act during the period covered by this Form 10-Q that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Limitations on Effectiveness of Controls and Procedures

In designing and evaluating the disclosure controls and procedures and internal control over financial reporting, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. Because of inherent limitations, internal controls over financial reporting may not prevent or detect misstatements. In addition, the design of disclosure controls and procedures must reflect the fact that there are resource constraints and that management is required to apply judgment in evaluating the benefits of possible controls and procedures relative to their costs.

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

In the ordinary course of business, we may from time to time be involved in various pending or threatened legal actions. The litigation process is inherently uncertain and it is possible that the resolution of such matters might have a material adverse effect upon our financial condition and/or results of operations. However, in the opinion of our management, matters currently pending or threatened against us are not expected to have a material adverse effect on our business, financial condition and results of operations.

Item 1A. Risk Factors

There are certain risks and uncertainties in our business that could cause our actual results to differ materially from those anticipated. In “Part I – Item 1A. – Risk Factors” of our 2020 Form 10-K, as filed with the U.S. Securities and Exchange Commission on March 24, 2021, and available at www.sec.gov or at www.rocketcompanies.com, we included a detailed discussion of our risk factors. Our risk factors have not changed significantly from those disclosed in our 2020 Form 10-K. These risk factors should be read carefully in connection with evaluating our business and in connection with the forward-looking statements and other information contained in this Quarterly Report on Form 10-Q. Any of the risks described in our 2020 Form 10-K could materially affect our business, condensed consolidated financial condition or future results and the actual outcome of matters as to which forward-looking statements are made. The risk factors described in our 2020 Form 10-K are not the only risks we face. Additional risks and uncertainties not currently known to us, or that we currently deem to be immaterial, also may materially adversely affect our business, condensed consolidated financial condition and/or future results.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

Share Repurchase Authorization

On November 10, 2020, our board of directors approved a share repurchase program of up to $1.0 billion of our Common Stock, including both Class A and Class D, which repurchases may be made, from time to time, in privately negotiated transactions or in the open market, in accordance with applicable securities laws (the “Share Repurchase Program”). The Share Repurchase Program will remain in effect for a two-year period. The Share Repurchase Program authorizes but does not obligate the Company to make any repurchases at any specific time. The timing and extent to which the Company repurchases its shares will depend upon, among other things, market conditions, share price, liquidity targets, regulatory requirements and other factors.

The following table shows the Share Repurchase Program activity during the three months ended September 30, 2021:


Period	Number of Shares Repurchased	Average Repurchase Price Per Share		Total Repurchase Amount
7/1/2021 to 7/31/2021	—	$	—	$	—
8/1/2021 to 8/31/2021	888,541	17.69		15,714,312
9/1/2021 to 9/30/2021	1,178,800	16.85		19,857,495
Total for the three months ended September 30, 2021	2,067,341	$	17.21	$	35,571,807

As of September 30, 2021 approximately $956.1 million remains available under the Share Repurchase Program.

Item 6. Exhibits


Exhibit Number						Description
3.1						Amended and Restated Certificate of Incorporation of Rocket Companies, Inc. (incorporated herein by reference to Exhibit 3.1 to the Company’s Quarterly Report on Form 10-Q, filed on September 2, 2020)
3.2						Amended and Restated Bylaws of Rocket Companies, Inc. (incorporated herein by reference to Exhibit 3.2 to the Company’s Quarterly Report on Form 10-Q, filed on September 2, 2020)
10.1*						Nineteenth Amendment to Master Repurchase Agreement, dated August 25, 2021, by and among JPMorgan Chase Bank, N.A., as buyer and administrative agent for the buyers, the other Buyers from time to time party thereto, and Rocket Mortgage, LLC, as seller
10.2*						Amendment Number Five to Master Repurchase Agreement, dated September 16, 2021, by and among Morgan Stanley Bank, N.A., as buyer, Morgan Stanley Mortgage Capital Holdings LLC, as agent, and Rocket Mortgage, LLC (f/k/a Quicken Loans, LLC), as seller
10.3*						Amendment Number Two to Master Repurchase Agreement, dated September 24, 2021, by and between Citibank, N.A., as buyer, and Rocket Mortgage, LLC (f/k/a Quicken Loans, LLC), as seller
10.4*						Amendment No. 1 to Master Repurchase Agreement, dated as of September 24, 2021, by and between Barclays Bank PLC, as buyer, and Rocket Mortgage, LLC (formerly known as Quicken Loans, LLC) as seller
10.5*						Amendment Number Three to the Master Repurchase Agreement, date d as of September 4, 2019, between Rocket Mortgage, LLC (f/k/a Quicken Loans, LLC), as seller and Citibank, N.A., as Buyer
10.6*#						Fourth Amendment to Lease, dated as of December 30, 2020, by and between AGP One North Central Owner LLC, as landlord, and Quicken Loans, LLC, as tenant
10.7*#						Third Amendment to Amended and Restated Lease, dated as of July 16, 2021, by and between Webward LLC, as landlord, and Rocket Mortgage, LLC (f/k/a Quicken Loans, LLC), as tenant
31.1*						Certification of CEO, pursuant to SEC Rule 13a-14(a) and 15d-14(a)
31.2*						Certification of CFO, pursuant to SEC Rule 13a-14(a) and 15d-14(a)
32.1*						Certification by the CEO, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2*						Certification by the CFO, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101.INS						Inline XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document
101.SCH						Inline XBRL Taxonomy Extension Schema Document
101.CAL						Inline XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF						Inline XBRL Taxonomy Extension Definition Linkbase Document
101.LAB						Inline XBRL Taxonomy Extension Label Linkbase Document
101.PRE						Inline XBRL Taxonomy Extension Presentation Linkbase Document
104						Cover Page Interactive Data File (formatted as inline XBRL and contained in Exhibit 101)

*						Filed herewith.
#						Certain portions of this exhibit have been redacted pursuant to Item 601(b)(10)(iv) of Regulation S-K. The Company agrees to furnish supplementally an unredacted copy of the exhibit to the Securities and Exchange Commission upon its request.

Signatures

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

Rocket Companies, Inc.

November 9, 2021

By:

/s/ Julie Booth

Date

Name: Julie Booth

Chief Financial Officer and Treasurer

(Principal Financial Officer)