Q4 2022 Loandepot Inc Earnings Call
Good afternoon, and welcome to loan depots year end and fourth quarter 2022 conference call. If you would like to ask a question today. Please press star one on your telephone keypad I would now like to turn the call over to your heart or Daily Senior Vice President Investor Relations. Please go ahead.
Thank you good afternoon, everyone and thank you for joining our call I'm get harder daily Investor Relations Officer at loan depot today, we will discuss loan depots year ended fourth quarter 2022 results.
Before we begin I would like to remind everyone that this conference call may include forward looking statements regarding the Companys operating and financial performance and future periods.
All statements other than statements of historical fact are statements that could be deemed forward looking statements, including but not limited to guidance to our pull through weighted rate lock volume origination volume pull through weighted gain on sale margin and expenses.
These statements are based on the company's current expectations and available information actual results for future periods may differ materially from these forward looking statements due to risks or other factors that are described in the risk factors section of our filings with the SEC.
A webcast and a transcript of this call will be posted on the company's Investor Relations website at investors start loan depot dot com under the events and presentations tab.
Today's call, we have loan depot, President and Chief Executive Officer, Frank Martell, and Chief Financial Officer, Patrick Flanagan to provide an overview of our quarter as well as our financial and operational results outlook and to answer your questions.
We are also joined by our Chief Investment Officer, Jeff degree and LTI mortgage President, Jeff Walsh to help address any questions you might have after our prepared remarks. Please note that we will not be taking any questions regarding Anthony shades submission of a nomination notice and with that I'll turn things over to Frank.
Get started right.
Thank you Gerhard and thank you all for joining us today.
I look forward to sharing my perspectives on market conditions, our results and our outlook.
As all of you know 2022 was a year of dramatic volatility and extreme challenge to the mortgage and broader housing markets.
Virtually no part of the housing ecosystem was left unaffected as participants in the housing market grappled.
Sample and rapid increases in home and the cost of home loans.
This was compounded by the cumulative impact of significant home price appreciation depreciation over the last four to five years, driven by structural supply demand imbalances as well as the depressive impact of high inflation unavailable household incomes.
The impact of this once in a generation Dallas, Yes was magnified by the fact that most industry participants has greatly expanded our operations to accommodate historically high levels of activity in 2000 22021.
Yeah.
To address the short to medium term impact of lower market activity as well as the position loan depot to capitalize on longer term opportunities inherent in shifting home buyer demographics technology enhancements and process optimization, we announced the launch of our vision 2025 strategic.
The plan in July of 2022.
As you May recall in 2025 had four pillars.
Hello, one focuses on transforming our origination business to drive purchase money transactions with expanded emphasis on first time homebuyers and servicing diverse.
Got it.
So like two calls for aggressively right sizing our cost structure in line with current and anticipated market conditions as well as to achieve internal operating performance targets.
So our three cover selectively investing in profitable growth generating initiatives as well as critical business platforms and processes to support operating leverage and exceptional quality and delivery.
And finally, our four relates to optimizing our organizational structure.
I intend to focus the balance of my prepared remarks today significant.
Excuse me significant progress, we've made and actually our vision 2025 pillars and 2022 as well as provide some comments on the market and our focus areas in 2023.
Pat will provide additional context on financial details in his remarks.
Regarding our revenues in 2025 focuses on creating long term shareholder value.
Through a unique purpose driven and durable mortgage origination footprint focused on first time homebuyers and servicing diverse communities.
We believe that a laser focus.
Ralph putting first time homebuyers into homes positions loan depot, maybe a customer's trusted resource, we're making key home ownership and other financial decisions.
We unified the leadership of our origination channels and continuing our centralized operational functions to sharpen our focus and accelerate the implementation of vision 2025.
In addition to centralizing and simplifying our organization. We are also focused on growing revenue generating opportunities, which fit the strategic imperatives outlined in vision 2025.
Examples of this include the launch of our new <unk> solution during the fourth quarter as well as the formation of our most recent builder joint venture.
Our joint venture channel is a unique business that generates very high quality customers are going to continue to invest in growing it.
During the fourth quarter, our JV team demonstrate the benefits of our investment in this differentiated channel by delivering strong year end volume.
In addition to driving profitable growth on depot also made important and significant investments in its quality delivery compliance and risk management capabilities over the course of 2022.
In this regard we recently completed the process of bringing our mortgage loan servicing portfolio onto our in house platform, which.
Which we expect to drive higher levels of customer satisfaction at lower cost.
We also announced our investment in a new loan origination platform, which we expect to deliver operational efficiency. The state of the art technology and workflow processes.
Finally, we added new leadership to help optimize our risk management capabilities and drive quality and compliance initiatives.
As I've mentioned at the start of my remarks, 2022 was a year of dramatic volatility and extreme changed the mortgage market.
Like every other participant all depot had to reset its cost structure.
When we announced vision 2025, we established the goal of reducing our expenses by an annualized amount of $375 million to $400 million.
Lower costs were expected to come from right sizing our staffing levels.
Drinking our real estate footprint, reducing marketing costs consolidating operations investing in operating efficiencies and realizing synergies from bringing our servicing portfolio in house.
The size of our targeted reductions and the bias for speed of implementation to reflect just how unique and sizable this market downturn is dead.
Today I can confirm that our team has over achieved against our vision 2025 expense reduction goal.
Pat will go over our results in more detail in a minute, but the non volume related expenses are down $130 million since the second quarter of 2022 or over $500 million annualized.
We believe that the mortgage market will remain challenged in 2023, and we must remain vigilant and respond quickly as conditions evolve.
We plan to continue to reduce our costs and optimize our operating model.
With a sizable cash balance we believe are well positioned to continue to invest in our people and our platforms as well as the benefit from ongoing industry consolidation.
I want to conclude my prepared remarks today by thanking team on depot and other key stakeholders for their support.
2022 was challenging no doubt and it was also very important period of change and progress for the company.
Against the backdrop of one of the most difficult housing market in a generation.
Very significantly and reset our cost structure, which has resulted in a progressive narrowing of our operating losses.
We have also aggressively shifted our revenue profile towards purchase transactions launched our HELOC solution and our most recent builder joint ventures.
With over $860 million in cash on hand.
Approximately $520 million of run rate cost reductions and identified so far.
Several new growth vectors in flight, we believe we're positioned to navigate through the current market downturn and emerge as a stronger and more valuable company.
With that I will turn the call over to Pat who will take us through the company's Q4 and full year financial results in more detail.
Thanks, Frank and good afternoon, everyone.
During the fourth quarter loan origination volume was <unk> 6 billion a decrease of 35% from the third quarter of 2022. This was near the high end of the guidance, we issued last quarter of between 4% and $7 billion.
Fourth quarter volume consisted of just under $5 billion in purchase transactions and $1 5 billion and refinanced loans, primarily cash out refinances.
Our pull through weighted rate lock volume of 4 billion for the fourth quarter resulted in total revenue of 170 billion, which represented a 38% decrease from the third quarter rate lock volume also came in within the guidance, we issued last quarter of $3 billion to $6 billion.
The decrease in revenue was primarily a result of lower pull through weighted rate lock volume quarter over quarter, driven by ongoing volatility in the interest rate markets year end seasonality and the completion of our decision to exit from the wholesale channel.
Our pull through weighted gain on sale margin for the fourth quarter came in at 221 basis points also within the guidance we provided.
Turning now to our servicing portfolio customer retention and revenue diversification remain key areas of focus.
As of last month, we achieved our goal to bring our portfolio of agency and Ginnie Mae loan servicing to our in house platform. This transition, which began in early 2021 enhances our operational efficiency and allows the company to diversify revenue streams with the transition complete we will continue to invest in our in house servicing business.
<unk>, our origination strategy to serve customers through the entire journey mortgage their entire mortgage journey.
This enables us to capture additional revenue opportunities over time by leveraging our marketing and customer acquisition expenses across a diverse set of products and services.
The unpaid principal balance of our servicing portfolio increased to 141 billion as of December 31, 2022, compared to $140 billion as of September 32022.
This increase was primarily due to net additions during the quarter. We did not have any both sales from the portfolio during the quarter.
Despite the larger portfolio servicing fee income decreased from $114 million in the third quarter of 2000 $22 million to $107 million in the fourth quarter of 2022. This was due to higher average balance of the portfolio during the third quarter compared to the fourth quarter. If you recall, we had a bulk sale of Msr's early in the third.
<unk> of last year.
We hedge our servicing portfolio. So we do not record the full impact of changes in fair value and the results of operations. We believe this strategy protects 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 environments.
We believe our servicing portfolio was well protected against potential rising defaults in the marketplace as of the end of December the average loan age was only 19 months. The average FICO score was thought through 737, the weighted average coupon was three 1% and a weighted average loan to value at.
<unk> was 71% these characteristics contributed to a low delinquency rate with only 80 basis points of the portfolio more than 90 days past due at year end and should generate reliable ongoing revenue during these uncertain economic times.
A major component of our vision 2025 plan was to align our expense base with our expectations for lower origination volume and create efficiencies. We believe will result in improved operating leverage and financial performance over time, we believe that the mortgage market will total approximately $1 five trillion in 2023.
And we've been shrinking our expense base, where this much smaller market.
Our total expenses for the fourth quarter of 2022 decreased by $91 million or 21% from the prior quarter, driven primarily by lower personnel expenses, including both salaries and volume based commissions lower G&A and lower marketing expenses.
Our total expense reduction since announcing vision 2025 consisted of $130 million of non volume related expenses and $87 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 them.
Annualized 375 to 400 million for the second half of 2022.
Thanks to the hard work of our entire team we exceeded that goal by reducing non volume related expenses by an annualized $519 million.
Fourth quarter included vision, 2025 related charges totaling $12 million, including $6 million in real estate exit costs $3 million of personnel related charges and $2 million of vision 2025 related professional fees vision 2025 expenses incurred in the third quarter of 2022 totaled $36 million.
While we achieved our vision 2025 expense reduction target, we will continue reducing expenses with some additional head count reductions primarily in the form of attrition and additional consolidation of redundant operational functions and reducing real estate costs and other third party charges.
Total expenses for the first quarter should continue to fall, primarily reflecting the full benefits of lower personnel cost due to our lower head count we expect the first quarter expenses will mark the low point for 2023, reflecting the full benefits of our expense reduction efforts of shrinking vision 2025 related expenses.
Looking forward past the first quarter, we expect increased expenses, primarily driven by higher volume related commissions and other origination expenses, reflecting the traditional seasonal increase in home buying activity.
Looking ahead to the first quarter volumes and margins, we expect origination volume of between three and 5 billion, we expect pull through weighted lock volume of between $4 6 billion and we expect our first quarter pull through weighted gain on sale margin of between 180 and 220 basis points.
In light of current market conditions, our balance sheet management strategy will keep in place our various forms of capital preserve cash until operating losses are reduced and industry wide gain on sale margins normalize.
We enter 2023 financially sound with $921 million of tangible equity $864 million of unrestricted cash and what we believe are excellent relationships in the support of our financing partners the agencies and our other investors.
With that we're ready to turn it back to the operator for questions and answers operator.
Thank you and once again, everyone. It is star one if you have a question today, we'll go first to Doug Harter credit Credit Suisse.
Thanks.
Talk a little bit.
What about your gain on sale margin.
The midpoint of around 200 basis points.
That's basically it all I'm sorry.
Lisa we're not able to hear the question.
Yes.
Just one moment ma'am I don't think he can hear after that gain on sale margins okay.
Mr harder Unfortunately, we cannot hear you.
Oh, sorry about that can you hear me now.
Yes, Sir yes.
So just hoping for more detail around the gain on sale margin.
Yeah, the midpoint around 200 basis points.
Yes.
Okay.
The wholesale I guess.
Yes, it seems like some peers in the retail are higher so I was hoping you could help put a little more context around that gain on sale margin.
And where that might ultimately settle out.
Thanks, Doug.
So I think.
That we think that our gain on sale margin reflects the activity in the market for that for that.
Or are they.
The loan origination profile of customers that were that were originating.
And.
And expect as we said that for that.
So it remains pretty steady in the first quarter I think.
The differences are largely origination mix in.
And geographic concentration of where others are in the marketplace.
Okay.
And then I think in your in your comments, you talked about kind of leaving the liquidity structure kind of in place.
Yes, I guess is that to mean that youre going to probably continue to run kind of high levels of cash.
Yes.
In the near term.
Yes, I think yes.
Our balance sheet management strategy will remain the same as it has been for the last few quarters.
Okay, and what about the thoughts around sales.
Additional MSR or now that you brought it all in house would you look to kind of try to grow that portfolio.
Portfolio.
Yes.
The MSR in the servicing business are important assets to us and we don't expect to.
Debt to reduce that portfolio and we'll look to selectively increase it as the economic the business allow us to do so.
Thank you.
Your next question comes from Kevin Barker Piper Sandler.
Hi, This is <unk> on for Kevin Barker. Thank you for taking my question.
Given the significant cost reduction.
Do you have a view on when you'll be able to achieve profitability and then.
Do you feel comfortable you'll be able to scale up on the other side of the cycle.
Yes. This is Frank I think first of all I think that yes, as I said the team did a great job in.
We reduced our expense structure significantly.
I think are we confident that we can roll out of the cycle, Yes, I think absolutely.
We anticipate as I said, a very challenging 2023, so we remain very focused on the market and where the market goes and we have.
We have actions that can address market downsides, but also we are committed to investing we have certain in flight investments that we're making that will help us when the market returns to grow efficiently and effectively.
Awesome that's it for me thanks for taking my question.
The next question comes from Kyle Joseph Jefferies.
Yeah. Good afternoon. Thanks for taking my questions just at high level, obviously demand for mortgages, we know what thats done just from your perspective.
And the industry has supply caught up with that or would you need rates really stabilized for supply catch up with demand.
Yes, I don't think we see capacity come out quite as quickly as we would have thought.
I think thats occurring.
Now, but still going forward, there's room for a reduced capacity in our view.
I think we're prepared.
Hopefully to be a beneficiary of that reduce capacity when it happens.
Got it and then just one quick follow up or clarification now that servicing is it has just looking at the loan you guys sold $6 8 billion of loans in the quarter.
At least $2 6 billion of that of the servicing type of those loans, what do you think that mix looks like going forward.
Well I think.
That servicing sale, you're referencing was a third quarter event, there were no bulk sales of servicing in the fourth quarter.
Okay Gotcha.
Thanks for taking my questions.
Your next question comes from John Davis, Raymond James.
Hi, Thanks for taking the question. This is Taylor on for J D.
Just maybe to start on the HELOC launch.
Can you just talk about the feedback you've gotten so far and how the launch has gone versus your expectations. When you first rolled it out.
Yes. This is Jeff Walsh.
The launch is going well, we're now in kind of 80% of the market in terms of the opportunity we've been expanding the product offering and we see it becoming a more and more meaningful part of our business going forward not just the volume and revenue in the short term, but also the kind of the long term customer opportunities that get created from.
I'm, having dose consumers in the portfolio.
Great and maybe just one more it's good to see you.
Vision 2025 cost cuts are ahead of schedule and just as you've gone through the exercise of restructuring your cost structure.
Have you found any additional opportunities to reduce costs in any particular area.
Yes, I think look I think there's always opportunity to reduce cost.
We continue every data to get more efficient.
I think some are short term in nature and some are longer term I think the cost cutting that we're doing right now mirrors what was going on in 2022, I think longer term that we're really excited about the new LLS platform.
Announced recently, we think that over the medium to longer term, that's going to generate significant.
Cost cost reduction and efficiency, but also quality and other other opportunities for us. So that's just one example.
The investments, we're making there as many others. So I think we will continue to look at what's important I think as the market.
And how the market evolves.
And make and make.
Cost actions and cost plans accordingly.
But we think that.
We have really good momentum right now coming out of last year.
Feel good about where we are right now.
Great. Thanks.
Next question comes from James Faucette.
Morgan Stanley .
Hi, This is Blake matter on the line for James Thanks for taking my questions.
So in the fourth quarter cash out refi was about 30% of your volumes I'm wondering how has that been trending so far during the first quarter and what kind of assumptions are you baking into your outlook for cash out refi given your renewed focus on the purchase market recently.
Recently launched HELOC product.
Yes. So this is Pat.
The HELOC product as is inclusive are included in that cash out refinance.
Total and I would expect that the origination mix remains pretty steady.
As to the fourth quarter going forward.
We're finding that.
That customers that are benefiting from cash out refinances is is significantly less sort of rate dependent as many of that many of those are cash out and debt consolidation.
So I would I would expect it to to remain about steady mix for the rest of the year.
Got it and as a quick follow up to that industry wide or it looks like average FICO scores and cash out refi loans have been declining quite materially over the past year while on.
On purchase loans remained relatively flat.
So some people are interpreting that to mean that lenders are already finished cashing up the easiest borrowers so to speak.
There are kind of moving down to like Laura credit quality.
Parts of the spectrum I'm wondering how does that impact your cash out refi out work and are you seeing any glass opportunity in this space going forward because of that.
I think this is Jeff first to Gerry and I think the HELOC products is meant to serve some of those higher FICO borrowers that maybe have sticker shock when they see some of the current rates.
<unk>.
Going forward consumers are continually adding to their debt stack.
Which are higher rates than even current mortgage rates. So we expect this to continue to see borrowers come to us for that Tech Foundation option, whether it's the HELOC or first lien cash out.
Got it thank you.
The next question is Bob Napoli William Blair.
Alright, Thank you and good afternoon.
I guess trying to get a little more color I think the most important thing here is to.
Maintain your liquidity and protect as much book value as you can until the market turns and it looks like the market is going to be.
Four.
Longer I mean higher interest rates for longer we may not get a rebound in the mortgage market.
Yes, I don't have 2025, I mean, you have to be prepared.
Are you thinking about that how much cash do you expect the I mean.
At this market you have to get in a way that you have to get to profitability.
Zero cash burn so you were around for the other side.
Or your thoughts on that how much room do you have and how it's done and it's a really tough.
Question in tough market and you've done a great job, reducing expenses, but it seems like more has to be done to get to where you can generate positive.
At least flat free cash flow in this market.
I mean, I think some color on how much room you have when how you can do that in this kind of a market.
So you get the benefit when the all these high interest rate mortgages are refined.
Years from now.
Okay.
It's a good question Bob This is Pat and I think I think the first thing to recognize is that our sort of prediction of a one five trillion dollar market is probably significantly lower than most other.
Forecast for the year. So we've already started that thought process of building our expense base to be able to get back to profitability.
And in a much smaller market than even we had last year and we will and we do are starting to see some seasonal pick up in home purchase activity and we'll have to watch very closely to see if that materializes through the spring I think the other we are carrying significantly higher cash balance as a percent until <unk>.
Assets than we would normally in a more stabilized market will continue to protect liquidity, we have a significant amount of unlevered equity in the Msr's and.
And so that allows us access to additional capital should we need it but I think.
We've demonstrated over the last year that we have the ability to focus on market conditions and adjust.
Our outperformance of expense cuts of more than $400 million to 519 as representative that our original view was that the market size will be close to two trillion, we adjusted down to Australia, and a half and made the necessary expense cuts along the way and so I think we will continue that focus on the business and we have that discipline to adjust.
Tim market cycles and as in my remarks earlier, we did say, what we're going to keep our current balance sheet management strategy and focus on maintaining liquidity.
Can you get to breakeven.
From a financial.
Net income perspective in this market.
Over the next year.
Yes look I think as we stated we will continue to.
Drive toward cash flow neutrality and operating profitability.
In any market and as Pat said I think we planned this year on a $1 five trillion, which is a very low market volume.
And I don't think we haven't.
Certain anti updating as anybody does but I think we're taking the as you pointed out we're taking the right actions.
And as I said in my prepared remarks, we're prepared to.
To adjust our planning.
Depending on market conditions.
We're hopeful we'll see.
A solid uptick in.
And the selling season in the spring.
That doesn't materialize, we will be looking at continued cost management activity aggressive cost management activity.
But getting to run rate profitability continues to be a northstar under the under the vision 2025 is just a function of the market and managing through the market and it's certainly the roughest market and the generation for sure.
But I think we are we have liquidity we have.
A very sound and prudent capital management strategy that.
That will see us through this cycle.
Thank you I appreciate it.
This does.
The question and answer session, Frank Martell, I'll turn the call back over to you for any additional or closing remarks.
Thanks, Lisa So look thanks, everybody for joining us today, we really appreciate the.
The insightful questions and your time today on behalf of Jeff and Jeff and Pat and really the rest of the team on depot I want to thank everybody for your support.
And your continued interest in the company and we will continue to keep you all appraised of our continued progress both on a short term EDA, but a longer term.
Our shareholder value creation plan.
We believe it is encapsulated in vision 2025, so again, thanks, very much and have a great great day.
And this concludes today's conference call you may now disconnect.
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Okay.
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