Q3 2022 Loandepot Inc Earnings Call

In addition to our HELOC launch, we're also making progress against our stated goal of building a purpose driven origination business.

One important demonstration is our recent partnership with National Home Corp, at Georgia based homebuilder specializing in affordable single family homes.

Together, we launched an agency mortgage which is loan depots 10th joint venture partnership.

We believe that this venture will advance our stated goal of increasing our purpose driven lending and providing credit to underserved communities.

Our joint venture channel is a unique and differentiated business that generates high quality customers and we're going to continue to aggressively invest in this channel.

In addition to driving profitable growth and returning to run rate profitability low depot is also making important and significant investments in our quality.

Delivery compliance and risk management capabilities.

In this regard we recently completed the process of bringing virtually all of our loan servicing portfolios onto our in house platform, which is expected to drive higher levels of customer satisfaction and lower costs.

In addition, we added Joe grassy as our Chief risk Officer, and Gregory Smallwood as our Chief legal officer to continue to help optimize our organizational structure and increase the effectiveness of our quality and compliance initiatives.

Both executives have extensive industry and professional experience and are already making their remarks as valuable additions to our senior management team.

I want to conclude my prepared remarks today by thanking the loan depot team and our other key stakeholders for their support.

For the past six months have been challenging no doubt.

But they've also been a very important period of change and progress for the company.

Against the backdrop of one of the most challenging housing market and a generation we are significantly reset our cost structure.

Which has resulted in a substantial narrowing of our operating losses. We are also.

Aggressively shifted our revenue profile towards purchase transactions developed an innovative digital HELOC solution and launched our 10th to JV.

With $114 billion of cash on hand, approximately $400 million and run rate cost reductions identified so far.

Several new growth vectors in flight, we believe we are increasingly positioned to navigate through the market downturn this year and next.

With that I'll now turn the call over to Pat plan again, who will take you through our financial results in more detail.

Thanks, Frank and good afternoon, everyone. During the third quarter loan origination volume was $10 billion a decrease of 38% from the second quarter of 2022. This was near the high end of the guidance that we issued last quarter between five five and $10 5 billion.

Third quarter volume consisted of $7 billion in purchase loan originations and $3 billion in refinance loan originations primarily cash out refinances.

Our strategy to emphasize less interest rate sensitive mortgage products as resulted in an increase in the proportion of purchase transactions from 34% a year ago to 70% in the third quarter as well as increasing the total cash out and purchase transactions from 71% to 98% during the same period.

Our pull through weighted rate lock volume of 9 billion for the third quarter resulted in total revenue of 274 million, which represented an 11% decrease from the second quarter. Great Lock volume also came in within the guidance, we issued last quarter between $5 5 billion to $10 5 billion.

The decrease in revenue as a result of lower volume driven by increasingly volatile interest rates. The average 30 year mortgage rate increased 100 basis points during the third quarter from five 7% to six 7% for context, we began 2022 with the average mortgage rate at three 2%.

Our cultural weighted gain on sale margin for the third quarter came in at 203 basis points also within the guidance we provided.

Turning now to our servicing portfolio customer retention and revenue diversification remain key areas of focus.

The unpaid principal balance of our servicing portfolio decreased to 140 billion as of September 32022, compared to 155 billion as of June 32022. This decrease was primarily due to the sale of $19 billion unpaid balances during the quarter.

As of the end of the third quarter, we service substantially all of our portfolio in house compared to 87% at the end of the second quarter, achieving our goal to bring all of our agency and Ginnie Mae servicing in house before the end of the year.

By leveraging our in house infrastructure for this highly scalable business, we can directly engage with their customers throughout the entire homeownership journey better anticipate their needs for additional products and services and continue to lower our expenses.

As a result of the smaller portfolio servicing fee income decreased from $117 million in the second quarter of 2000 $22 million to $114 million in the third quarter of 2022.

We hedge our servicing portfolio. So we do not record the full impact of the increase in fair value in a rising rate environment and the results of our operations. We believe this strategy protect against volatility in our earnings and liquidity our strategy for hedging the servicing portfolio is dynamic and we adjust our hedge positions in reaction to changing interest rate.

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We believe our servicing portfolio is well protected against potential rising defaults in the marketplace as of the end of October the average loan age was only 17 months. The average loan amount was 317000, the weighted average FICO was $740 and the weighted average loan to value at origination was 71%.

These characteristics should result in low delinquency and default rates and generate reliable revenue during these uncertain economic times.

A major component of our vision 2025 plan was to align our expense base with our expectations for a lower origination volume and create efficiencies. We believe will result in improved operating leverage and financial performance over time as Frank said, we believe that the mortgage market will total approximately one five trillion in 2023 and we have been.

Shrinking our expense base for this much smaller market.

Our total expenses for the third quarter of 2022 decreased by $126 million or 22% from the prior quarter, driven primarily by lower personnel expenses, including both salaries and volume based commissions and lower marketing expenses. The vision 2025 planned is demonstrating success as lower.

<unk> has more than offset lower revenues significantly reducing our loss quarter over quarter.

Our total expense reduction for the quarter included $69 million of non volume related expense savings and $57 million of volume related expenses in the form of lower commissions and direct origination expenses one of the goals of the vision 2025 plan was to reduce non volume related expenses by an annualized three <unk>.

Third $75 million to $400 million for the second half of 2022, we have realized $276 million annualized or 75% during the quarter.

Based on the actions that we already have taken or have identified we expect to achieve at least $400 million of run rate expense reductions by the end of 2022.

The third quarter included vision, 2025 related charges totaling $37 million, including $21 million of lease and asset impairment charges $9 million of severance charges and $7 million of vision 2025 related professional service fees vision 2025 expenses incurred in the second quarter of 2022.

Totaled $55 million, we expect to incur at least $20 million of vision 2025 related charges in the fourth quarter, including personnel related and additional asset impairment charges. We.

We continue to aggressively reduce our cost structure to appropriately size the company for our expectations of the smaller mortgage market, we've reduced our head count from approximately 11000 at year end.

<unk> 21 to approximately 6100 at the end of the third quarter well below our stated goal of 6500, we plan to achieve our cost reduction goal by further reducing head count consolidating redundant operational functions and reducing marketing expenditures real estate costs and other third party charges.

We also continue to evaluate all aspects of our business for potential additional expense reductions as the market continues to evolve based on our projections. We believe that we will continue to reduce expenses in the fourth quarter of 2022, continuing to narrow our loss.

The plan is being executed against the backdrop of the strong balance sheet with $1 1 billion of tangible equity ample liquidity with over $1 1 billion of unrestricted cash and what we believe are excellent relationships in the support of our financing partners the agencies and other investors looked.

Looking ahead to the fourth quarter, we expect origination volume of between 4% and $7 billion.

We expect pull through weighted lock volume of between $3 6 billion, reflecting current market conditions and the seasonality weighing in on demand.

We expect fourth quarter pull through weighted gain on sale margin to increase to between 210, and 270 basis points, reflecting the impact from exiting wholesale and the contribution from higher margin products.

With that we're ready to turn it back over to the operator for questions operator.

Yes.

Thank you at this time I would like to remind everyone.

To ask a question press star followed by the number one on your telephone keypad.

We'll pause for just a moment to compile the Q&A roster.

Your first question comes from the line of Doug Harter with Credit Suisse. Your line is open.

Thanks can you talk about.

Your outlook for.

Cash and liquidity.

Set up the past couple of quarters.

Are you thinking about MSR sales going forward, how are you thinking about debt pay downs.

Just kind.

Okay, that's on that that would be great.

Sure. Thanks, Doug.

And as noted we have a very strong liquidity position, which we believe is helpful. As we.

Worked through.

The resizing of the company and return to profitability and we think that the.

Remains a lot of Optionality too.

Both invest and continuing to invest in the pillars of vision 2025.

And it also allows us the opportunity to really optimize the capital structure at this point, we're not anticipating.

Selling any bulk MSR is in the fourth quarter, we think that the the mix of servicing sales at time of origination and retention are appropriate to maintain.

An exceptional amount of liquidity and allow us to take <unk>.

Advantage of any opportunities that present us in the market going forward.

And as you mentioned sort of as you look to.

Work on the capital structure any thoughts about.

Trying to repurchase some of the outstanding unsecured notes.

That.

It remains an option for us as I said, there is a lot of opportunity for us to manage the balance sheet.

We are.

Yes.

<unk> focused on maintaining.

A substantial amount of liquidity.

As we as we work through the restructuring, but we'll take a look as we always do at at.

The right the right construct and the liability side of the management of the balance sheet.

Okay. Thank you.

Again, if you would like to ask a question press star one on your telephone keypad.

Next question comes from the line of James Faucette with Morgan Stanley . Your line is open.

Hi, This is Blake matter on the line for James Thanks for taking my questions. Thanks.

So starting off with their new HELOC product as you all know fixed income investors have been looking for some pretty decent spreads relative to a year ago.

Im wondering is how much demand is there for HELOC origination today, and what kind of volumes do you think you can do and if spreads tightening would that increase your ability to originate more.

Yes, Hi, this is Jeff Walsh.

Yes, we see HELOC as a significant opportunity in 2023.

Based on a couple of factors just as far as what we know from our already.

Spent dollars on leads purchased through first mortgage origination.

And kind of sizing of the market.

In general so yes of course.

Narrowing would always help.

In terms of volume, but we do see it as a significant opportunity in 2023.

Okay.

Got it thanks.

Max.

Looking at your MSR portfolio, how should we think about the sensitivity of your services to rising rates. It looks like you had a negative fair value mark during the quarter and I'm. Just wondering if you could talk about some of the drivers behind that.

Okay.

Jonathan I think.

Yes. This is Jeff <unk>.

With there.

Rising rates and given the age of the portfolio and the coupon on the portfolio Theres not a lot of sensitivity.

Right now in terms of price moves for given moves in rates.

And so.

I think that's going to be recurring theme until.

We are able to add more originations at the current rate levels to the book.

Got it thank you.

And I think Theres, a markup in the fair value in the fourth quarter not a markdown.

Okay. Thanks, sorry, Im sorry in the third quarter excuse me in the third quarter.

Thanks, Brian .

Okay.

Okay.

Your final question comes from the line of.

Trevor Cranston with JMP Securities. Your line is open.

Okay. Thanks.

Follow up question on the HELOC opportunity.

Yes, I think about 30% of your volume in <unk>.

And you said most of that was cash out.

I guess.

Mortgage rates have moved up to today.

Do you expect sort of that cash out refi business too.

To be sticky or should we sort of think about that is <unk>.

<unk> that likely moves or potentially towards the newer if you will.

And I guess, the second part of that.

Could you give us any sort of sense. So.

Kind of roughly where you would expect.

Margins to come down as you start forgetting.

Product.

Thanks.

We don't expect the first mortgage business to be materially impacted by the HELOC. It is.

Although a similar customer a different customer.

From a from a credit standpoint, and others. So there is still.

Significant opportunity for a cash out refinance business in the market as well as <unk>, we see that we have HELOC opportunity in the market that we're missing today. So we know that that's that's out there exclusive of our first mortgage business. So.

Well it might impact a small amount, we don't see that significant.

In terms of margins pattern.

Yes on margins, we're still looking at the market and we're early days in that and as we.

We expected gain on sale margins overall to increase in the fourth quarter, mostly due to focusing on higher margin products Nx thing wholesales as we mentioned, let's say the big determinant, we think that HELOC expands the conversion of our marketing dollars spent on that generally smaller loan balances and the need for smaller amounts.

Cash out so we look at it as net as a net gain not cannibalizing.

Cannibalizing the first mortgage side.

Okay got it thank you.

Your next question comes from Kyle Joseph with Jefferies. Your line is open.

Hey, guys. Thanks for having me on.

Thank you just kind of answered my question, but I was looking at your guidance and yes.

At the midpoint, it looks like Youre expecting margins to be even higher than they were in the on the retail side in the quarter. So is it just a mix shift and then the complete exit of correspondent.

Driving that improved outlook.

Yes, that's generally its a mixed shift and exiting of wholesale.

Alright, that's it for me thanks for answering my questions.

Your next question comes from Doug Harter with Credit Suisse. Your line is open.

Okay.

Doug Harter your line is open.

Yes.

Okay.

There are no further questions at this time I will now turn the call back over to Mr. Frank Martell.

Great.

Thanks, Brett just one quick comment on HELOC I think.

We do expect it to be a significant contributor and a profit generator for us and 2023.

We're excited about the initial reaction we were having the market I would just stress, it's a let's say.

A digital solution. It's we think it's unique.

First of all.

The engagement with the customer.

And we think the turnaround times are very fast with the access to capital is quicker than most of the competition in the market. So we are we're excited about that that product.

Is it contributed to our financial results in 2023.

I just want to close todays call by reiterating that our our vision 2025 plan is having its intended effect.

We made tremendous progress both structurally and from an operational point of view.

Our goal is to continue to narrow our operating losses through the reduction of expenses, but also importantly, and increasingly investing in Rev.

Revenue generative and diversification strategies.

Please get the overall lending.

After the company toward a purpose driven.

Where we can access.

The groups of homebuyers that will be the future of home buying is it a more diverse.

And a younger set of cohorts that will be coming in and being the primary buyers in the future. So we think we are we are going to develop the products and services that fit.

Their usage patterns as we go forward.

We will continue to drive the company forward and leverage our financial strength.

We have plenty of cash.

To see us through the challenging time period of that over the next 12 to 18 months and we think we're well positioned for the future.

Okay.

And so I wanted to just thank everybody on behalf of Pat and the rest of the team and we look forward to keep continue to keep everybody up to date on our progress both in the short term and the longer term as we drive shareholder value.

Ladies and gentlemen, thank you for participating.

Includes today's call you may now disconnect.

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