Yes Before No: How Dan Gilbert Conquered Mortgage Lending - Neckar's Notes

Yes Before No: How Dan Gilbert Conquered Mortgage Lending - Neckar’s Notes 18/10/20, 5:43 pm
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Yes Before No: How Dan Gilbert Conquered

Mortgage Lending
What I learned about the history, success, and culture of Rocket Companies
Neckar
Aug 8 8
I’m fascinated when I come across a company that succeeded in a boring old industry by
slowly and steadily building a better mousetrap. Rocket Companies <ts this mold,
conquering the mortgage market with a unique culture, incremental innovations, and
relentless execution. It is a fascinating story that starts with Dan Gilbert as a part-time
real estate broker and ends with the IPO of America’s largest mortgage lender.
In this piece I will <rst walk through the history of Dan Gilbert and his company, then
take a look at some of the drivers behind their success. Finally, I will discuss the
collection of principles or “Isms” that anchor the company’s culture.
A quick note on names: the company was <rst called Rock Financial before becoming
Quicken Loans. Quicken Loans is now a subsidiary of the Rocket Companies (the
publicly traded company) which is a part of Gilbert’s “Rock family of companies” and
runs Rocket Mortgage - the digital mortgage platform. Got it?
Quotes are by Dan Gilbert unless otherwise noted.
Disclaimer: this is not investment advice and not an opinion on Rocket Companies or the
company’s securities. As such, I will not comment on the o>ering, valuation, or @nancials.
Always do your own work.
https://neckar.substack.com/p/yes-before-no-how-dan-gilbert-conquered Page 1 of 20
©Rocket Companies
Ready to Rock: The Story of Dan Gilbert

"There was no grand thesis. It was just sort of go in there and hustle for a little bit."
Dan had an early start as an entrepreneur. First, he sold candy to classmates, then he
came up with a pizza delivery business at age 12. He baked the pizzas in his mom’s
kitchen and recruited his younger brother Gary and friends for bike delivery. This
venture was eventually shut down by the health department.
"Some local pizza joint must have tipped o> the health department. It was my @rst exposure to
regulations."
As an undergrad at Michigan State, Gilbert ran a football betting ring with friends. As
the story goes, a kid who "couldn't cover his debts" called his father for help. The father
got the police involved who sent in an undercover cop wearing a wire posing as a dad.
Gilbert ended up with 100 hours of community service. According to the prosecutor "it
was a pretty sophisticated operation, way above average for what I knew of so-called
organized crime.”
Gilbert’s parents wanted him to be a lawyer and so he enrolled at Wayne State Law
School. His parents also had a Century 21 real estate brokerage where he started working
part-time. To attract customers, he put a "for sale" sign on his parents' lawn (the house
was not for sale). He would then show other homes to the prospects attracted by the sign.
"I don't know why I went to law school. I don't even know where my diploma is today."
Gilbert realized that he could make more money brokering mortgages. It was neither a
glamorous start nor driven by a big vision.
"I landed on mortgages through selling real estate part time, learning a little bit at a time. We
were 23, and we barely knew what a mortgage was.”
Together with his brother and two friends he started Rock Financial Mortgage in a
shared o\ce space with and $5,000. They called it "Rock" because "it sounded solid."
“I went into one of those shared oOce suites in the summer of 1985. Beige and grey and ugly.
Across the hall was a lie detector guy.”
At the time, mortgage brokers typically relied on relationships with realtors for leads.
But Gilbert was an outsider and didn’t care about the industry’s conventions. So what if
others didn’t advertise home loans. He asked his team: "why are we going through a
middleman, the realtors, to get to the customer? Why not get to the clients <rst?” For
example, the team bought cheap ad space in free real estate newspapers, a marketing
channel considered somewhat sketchy by established lenders.
"From the very beginning we could make the phones ring even if we didn't know what to do
once they rang."
Building a Better Process

“Mortgage lending in this country has always been localized and it’s fragmented. We made a
commitment. We’re gonna put a bunch of people in a room and get licensed in all 50 states.
And we’re gonna @gure out how 3,000 counties close loans across the United States. And do it
centralized, with technology. It’s not about money or capital, it’s not even about brains, it’s
about time. It’s about [being] willing to go through the process, the hell, of going through
this stuA.”
Gilbert realized how slow and cumbersome the mortgage process was for borrowers and
started to think about ways to streamline the experience. He called the mortgage
business "the worst in the world."
"Only 11% of mortgage customers say they'd recommend their lender to a friend."
Looking for new ideas, he thought about the 1-800 CONTACTS business model. If he
had a centralized call center, he could break down the underwriting process into steps
and distribute the work among teams of specialists. This would allow him to optimize
the process compared to having a team of local loan o\cers managing the entire
transaction. Loan o\cers in the call center would be assigned to speci<c regions,
becoming familiar with the local regulations and nuances.
The company opened its <rst call center in 1996. It developed the "Mortgage-In-A-Box"
- a loan application that could be <lled out at home rather than at a bank or broker’s
o\ce.
Picture via Kosta Baltzoglou
"We recognized early on that whoever's the most eOcient through technology is going to have
a lower cost structure. The company is far from the model of a traditional mortgage lender.
We try to run it with as little bureaucracy as possible and let the (employees) have a say."
In 1998, Gilbert took Rock Financial public. That same year he also recognized the
importance of the internet. The company launched rockloans.com to oeer mortgages
online.
With the bene<t of hindsight this may seem like a nobrainer. However, as Gilbert
explains, at the time there was still signi<cant doubt whether major transactions would
be done online.
“We did surveys with our clients. What percentage of you would put your @nancial
information into a computer. 96% said they’d never do it. So we closed all the branches and
started it anyway.”
He started closing branch o\ces and commented on the gains in e\ciency:
"A good loan processor of ours used to get 50 or 55 loans to the table every month, but now a
good one can get over 125, because the paperwork has been reduced so much.”
Quicken
At the height of the dot-com bubble in 1999, Rock Financial was acquired by Intuit for
$532 million. Intuit, the company behind TurboTax and Quicken sohware, wanted to
oeer <nancial products to its 25 million customers. It had already started its own
QuickenLoans oeering, including a QuickenMortgage website where visitors could
compare loans from dieerent lenders.
However, Intuit’s approach of generating leads for mortgage lenders had a major issue: it
wasn’t converting. Too few prospects ended up closing a loan.
Gilbert had a strong opinion on this approach:
“Multilender sites are not pro@table. They don’t work. They never will.”
As a result, Intuit talked to a dozen companies and decided to acquire Rock Financial.
Countrywide commented: "That's what drove Quicken to make the purchase of Rock.
There's a recognition that when people are online, they want to apply immediately-
make it happen as quickly as possible. Quicken needed to close the loop in the
transaction."
Gilbert’s emphasis on streamlining and speeding up the process was exactly what Intuit
had been looking for.
However, integrating the fast-moving Rock Financial into Intuit proved di\cult. In a
throwback to the days when sohware was shipped on CDs, Gilbert was told his oeering
would on the “2004/5 version.”
“That’s a century for me to wait, that’s like a lifetime.”
In 2002, Gilbert turned 40 and decided to step down and retire. To his surprise, Intuit’s
CEO lew to Detroit to attend the goodbye party. Aherwards, he oeered Gilbert to buy
back the company. Intuit wanted to focus on sohware exclusively. Gilbert agreed and
repurchased the mortgage business, together with a license for the Quicken name, for
just $64 million.
Since then, the company has continued to focus on streamlining and automating the
mortgage process. This culminated in the launch of Rocket Mortgage in 2015, the <rst
fully digital mortgage platform.
"We tie into payroll services and IRS for veri@cation, into every bank in the country for assets,
into appraisal databases to get values, into credit bureaus. Within eight minutes - we say it's
eight minutes because all the focus groups wouldn't believe it's one or two minutes, which it
is."
It seems the company also weathered the mortgage crisis fairly well, although I found
surprisingly little detail about that time. There was a wave of layoes and the decision
was made to exit any nonconforming mortgage business (loans not accepted by Fannie
Mae or Freddie Mac). As one executive said:
"It was the @rst Tuesday in August that all hell broke loose. Dan sent an e-mail: 'Get a war
room set up overnight and we'll be in here @rst thing tomorrow morning.'"
Quicken Vice Chairman Bill Emerson said that executives had stayed in the war room 18
hours a day for 8 weeks to <x the business:
"We turned this thing around in a week and went from some of the stu> that we were
originating to a 100 percent Fannie-Freddie shop."
Notably, the company entered mortgage servicing in 2010, a time when the industry was
decimated.
Quicken was also later accused of making errors in its pre-crisis underwriting. Gilbert
refused to settle and the case was dismissed in 2019 with the company agreeing to pay
$32.5 million.
Collecting Rocks
I’m not going to spend a lot of time on Gilbert’s other ventures, which include the
Cavaliers and other sports teams, real estate, venture investments, casinos, and non-
pro<ts.
His bet on Detroit is worth noting because it speaks to his passion and business savvy.
Aher realizing that promising young employees preferred working in cities to his
suburban locations, he began to sketch out a move to Detroit in 2007. The <rst batch of
1,400 employees moved in 2010 and today the company is headquartered there. At a time
when the city’s future looked bleak, Gilbert became a major investor in depressed real
estate and was later one of the chairs of the Blight Removal Task Force.
"We started losing job candidates from universities like U-M and Michigan State. People
would tell us, I love your company, but I want to go to Chicago or Boston or New York."
"It wasn't until my late 20s and early 30s, when I started traveling for business, to places like
New York City and Los Angeles, that I realized how much we were missing. As I started
visiting these great American cities, it hit me--man, how did we blow this so badly?"
This is a good overview of his more than $5 billion in investments in Detroit real estate
which include both landmark buildings and new developments. Gilbert is also involved
in a variety of companies with ties to the city.
"It's the opportunity to get in low and sell high. It's an untapped market from an intellectual
standpoint, and from a physical standpoint there are great buildings. The idea is to get to the
tipping point where companies start believing that they can't a>ord not to be in Detroit."
The NYT also pro<led his vision in 2013.
Gilbert’s web of companies, per Forbes:
Forbes, 2012
Quantifying Success
From Rocket Companies “Company Overview” (Form S-1)
“We are a Detroit-based company obsessed with helping our clients achieve the American
dream of home ownership and @nancial freedom. We are committed to providing an industry-
leading client experience powered by our award-winning culture and innovative technologies.
We believe our widely recognized "Rocket" brand is synonymous with providing simple, fast,
and trusted digital solutions for complex personal transactions.”
This captures all the key success factors that we’ve seen emerge in the company’s history.
Quotes in this section are from the S-1.
Client Experience
“Our superior client experience is evidenced by our net promoter score (NPS) score of 74, a
measure of consumer satisfaction, as compared to the average NPS of 16 for the mortgage
origination industry according to J.D. Power.”
Speed of Closing
“A majority of our loans close within approximately 32 days from our receipt of client
documents compared to approximately 43 days on average for the industry.”
Client Retention
The company built out its own servicing operation, again with metrics that indicate high
customer satisfaction. This creates an opportunity to retain the borrowers upon
re<nancing.
“In 2019 we achieved overall client retention levels of 63%, and reMnancing retention levels
of 76%, which is approximately 3.5 times higher than the industry average of 22%. We have
also been recognized with six consecutive J.D. Power awards for excellence in mortgage
servicing, winning the award in each year we have been eligible to participate.”
Culture
We’ll talk about this in the next section.
Innovation
This includes both consumer-facing technology, such as the Rocket Mortgage app, and
optimizing the back-end worklow.
“We are also more eOcient due to our investment in technology and unique workhow
processes. In 2019, we closed 6.7 loans per month per average production team member,
compared to the industry average of 2.3 according to the Mortgage Bankers Association.”
Marketing
Not unlike a money center bank, the national scale of the direct-to-consumer model
allows the company to invest heavily in its brand. In 2019, the company spent $900
million on marketing and advertising.
Following in Gilbert’s footsteps, the company has done creative marketing stunts like
the Quicken Loans Billion Dollar Bracket with Warren Bueett. But it also invests in
expensive high-pro<le ads such as at the Super Bowl. More recently, growth has been
driven by building marketing partnerships with large <nancial companies such as
American Express, Schwab, and, surprise, Intuit.
“Charles Schwab Bank – Home Loans Provided by QuickenLoans”
Direct to Consumer and Partner Network Originations Volume ($ in billions)
The longer-term question is whether it is possible to build a valuable brand for a

commodity lending product like a residential mortgage. Can you position the Rocket
Mortgage to stand for “mortgage online”? Or even “simple, fast, and trusted” for other
personal <nancial transactions? Would borrowers be willing to pay a premium or would
a strong brand just lower future customer acquisition cost?
As of right now, the heavy investment in marketing and partnerships with brand name
partners have driven signi<cant gains in market share.
Whether the company can sustain this edge will depend on continued execution and
innovation – on the talent and culture at the company. Which brings us to:
A Cultural Operating System: The 19 Isms

“It's who we are, which guides decision-making, your actions, your behaviors.”
“We probably prefer to hire people from outside of the mortgage business and train them in
our way. We try to really get them involved in the culture of the company.”
From Rocket Companies “Company Overview” (Form S-1):
“Dan Gilbert, our founder and Chairman, purposefully created a strong cultural foundation of
core principles, or "ISMs", as a cultural operating system to guide decision making by all of
our team members.”
I really like this framing of a “cultural operating system.” The Isms are a collection of
principles developed, or “discovered” as he says, by Gilbert over the course of 20 years.
You can <nd them on their website. The company also regularly puts out a 144-page
“Isms Book” with recent examples of the principles in action. It’s distributed to the
employees at dozens of companies that are part of the broader Rock family. I have a pdf
copy if you’re interested (email or DM for link).
The Isms cover a lot of ground, including action and execution, innovation and
experimentation, responsibility, and resourcefulness. It’s a really compelling collection
of ideas and will pick out a few that stood out to me.
"Core values, philosophy, culture... they drive every decision, action, behavior, and
prioritization."
Focus on product, not accounting:
“Numbers and money follow, they do not lead.”

“Money and numbers are a measurement of actions. They don't have value in themselves.
They are neither the ends nor the means. Chase the design, engineering and development of
the product. Those who are motivated by building, improving and developing unique ideas
and knowledge are the ones who acquire wealth.”
I don’t have much to add. A simple and powerful reminder to focus on building a great
business, not a pretty sequence of quarterly earnings beats.
On focus and a sense of urgency:
“Every second counts.”

“Time, not money, is the most valuable commodity of all. Time can never be replaced. Never
trade signi@cant amounts of time for small sums of money.”
“A penny saved is a penny.”

“Choose to value your time. Invest it chasing pennies, and you will @nd pennies – and pennies
never add up. Invest it in ideas, improving your skills, innovation, developing your talent,
design, marketing, and technology, and your return will be more than just pennies.”
I like the essentialist sentiment here. Our time and attention are limited and valuable.
Think carefully before committing to another goal.
On innovation, curiosity, and experimenting:
“Yes before no”

“Our bias is to the YES side of life. This is in stark contrast to the too common approach of
an automatic NO to any expression of an inquiring mind. Saying NO is easier, but the status
quo is not our favorite state. The only path to that place is through openness to the unknown.”
“Obsessed with Mnding a better way.”

“Finding a better way is not something we do on the side or when we get the time. Rather, it’s
a key priority for every one of our team members.”
“We'll Mgure it out."““We don’t need to have all the answers before we take on a project or
launch a new and innovative idea. We have faith that when it comes to some of the details,
we’ll @gure it out along the way.” “We know that building something new or creating
something special is messy, and that greatness doesn’t always come in nice, tidy packages.”
“You have to take the roast out of the oven.”

“Perfection is not the goal when it’s time to make a decision. Focus instead on constant
improvement and innovation. Over-analyzing can kill an idea and make you miss an
opportunity. Don’t fear failure.”
I like that this goes beyond generic statements that “innovation is important.” Instead, it
emphasizes the creation of conditions, of an environment that allows for innovation. By
acknowledging that new ideas are risky and naturally face resistance and inertia. Also by
removing any notion that new ideas have to be perfected before being tried out.
“If you try to be perfect before you make a decision or roll something out, in today's world
you're going to get killed. You can't be perfect and it's better to clean up a little bit than try
to be perfect and delay six months, a year, two years, and some competitor steals your
thunder. Perfectionism does not marry entrepreneurialism in a good way. Something has to
give and I prefer that the perfectionist side gives.”
As Michael Bloomberg said:
“My main job is to keep us from developing a structure that will preclude a kid we just hired
from walking through the door and saying 'Why not try this.'"
Or Jee Bezos:
“One of my jobs as the leader of Amazon is to encourage people to be bold. It’s incredibly hard
to get people to take bold bets. And you need to encourage that. Experiments are, by their very
nature, prone to failure but big successes – a few big successes compensate for dozens and
dozens of things that didn’t work.”
On customer service:
"Every client. Every time. No exceptions. No excuses."
Gilbert was once told that two prospects had complained that Quicken had not returned
their phone calls. He wrote another one of his company-wide emails, in all capital letters:
"WE RETURN PHONE CALLS TO EVERYONE EVERY TIME."
"Clients don't care how much you know until they know how much you care."
And Mnally, what other company quotes Al Pacino in its principles?
"The inches we need are everywhere around us."
Al Pacino best speech - Any Given Sunday - 1080p HD
“You Mnd out life’s this game of inches. So is football. Because in either game, life or football,
the margin for error is so small -- I mean one-half a step too late, or too early, and you don’t
quite make it. One-half second too slow, too fast, you don’t quite catch it. The inches we need
are everywhere around us. They’re in every break of the game, every minute, every second. On
this team, we @ght for that inch. Because we know when we add up all those inches that’s
gonna make the fuckin' di>erence between winning and losing.”
And the Rock/Gilbert version:
“But, if a company does thousands of little things better than anyone else, they become
nearly impossible to imitate. We call those thousands of little things “inches.” We’d never be
able to foresee all the things that should be noticed or improved. Instead, we drive a culture
that motivates our team members to @nd the inches we need all around us. We are all
empowered to @nd the opportunities to make an impact everywhere; one inch at a time, these
inches all add up to greatness.”
This one has it all: competitive spirit, resourcefulness, resilience, and teamwork. More
importantly, it emphasizes process over outcome. Remember that all the small decisions
add up, all the times when you push harder and stretch further.
Wrapping Up
With the bene<t of hindsight, the story of Rocket Companies looks straightforward. It’s
as if Gilbert and his team always had a sense of what was coming around the corner and
made the right call. Not only did the company aggressively move online, it was obsessed
with customer experience and shrinking the gap between intent and delivery.
But as CEO Jay Farner wrote in the prospectus, “building something great is messy.”
And I’m sure it was, not just when the mortgage crisis hit. As Charlie Songhurst recently
pointed out on Invest Like the Best, “managerial diseconomies of scale” can be a
tremendous obstacle when scaling up a company. And Rocket Companies has scaled to
20,000 employees.
"We're in the people, recruiting, and talent business. It's all about people. You can't spend
enough time @nding, recruiting, and developing your leaders."
"If you're gonna be an excellent company, who you have on your team is going to be the
di>erence."
In “Good to Great” Jim Collins called it putting the “who” before the “what.” The
importance of <rst assembling a world class team who can then tackle challenges, rather
than coming up with the strategy <rst, followed by hiring talent. From everything I’ve
seen, Dan Gilbert and his team have had remarkable success by focusing on culture and
talent, fostering innovation and execution. It’s a winning formula in any boring industry.
“Innovation is rewarded. Execution is worshipped.”
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Yes Before No: How Dan Gilbert Conquered Mortgage Lending - Neckar’s Notes 18/10/20, 5:43 pm

Neckar’s Notes Sign

Yes Before No: How Dan Gilbert Conquered

Quotes are by Dan Gilbert unless otherwise noted.

Ready to Rock: The Story of Dan Gilbert

once they rang."

Building a Better Process

Picture via Kosta Baltzoglou

He started closing branch o\ces and commented on the gains in e\ciency:

Gilbert had a strong opinion on this approach:

“That’s a century for me to wait, that’s like a lifetime.”

The NYT also pro<led his vision in 2013.

Gilbert’s web of companies, per Forbes:

We’ll talk about this in the next section.

optimizing the back-end worklow.

“Charles Schwab Bank – Home Loans Provided by QuickenLoans”

Direct to Consumer and Partner Network Originations Volume ($ in billions)

The longer-term question is whether it is possible to build a valuable brand for a

A Cultural Operating System: The 19 Isms

From Rocket Companies “Company Overview” (Form S-1):

Focus on product, not accounting:

“Numbers and money follow, they do not lead.”

On focus and a sense of urgency:

“Every second counts.”

“A penny saved is a penny.”

On innovation, curiosity, and experimenting:

“Yes before no”

“Obsessed with Mnding a better way.”

“You have to take the roast out of the oven.”

As Michael Bloomberg said:

"Every client. Every time. No exceptions. No excuses."

And Mnally, what other company quotes Al Pacino in its principles?

"The inches we need are everywhere around us."

Al Pacino best speech - Any Given Sunday - 1080p HD

And the Rock/Gilbert version:

“Innovation is rewarded. Execution is worshipped.”

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