LoanDepot cutting wholesale channel in profitability push

LoanDepot leaders said they believe the company will achieve profitability by the end of the year, after revealing a big second-quarter loss and even deeper budget cuts than previously announced.

The lender and servicer reported a net loss of $223.8 million in the second quarter on Tuesday, continuing a significant slide from a $91.3 million loss over the first three months of the year. The results are a far cry from last year's second quarter, when loanDepot reported $26.3 million in profit in its challenging first quarter as a public company. 

The mortgage giant will lay off even more employees than it initially projected last month and is exiting the wholesale market to combat industry headwinds and align itself with its Vision 2025 restructuring plan, executives said.

"We're not chasing share and volume at the expense of liquidity and profitability, and strategy, frankly," said Frank Martell, loanDepot president and CEO, who led his first earnings conference call since being hired in April.

The Foothill Ranch, California-based firm has already slashed nearly 4,000 jobs since the beginning of the year and will end the year with a headcount below its initially stated goal of 6,500, executives said. The lender will fund its remaining $1 billion wholesale pipeline and close the channel by the end of October, Martell said.

"The exit of wholesale is really around trying to get more intimate with the customer and not go through intermediaries," he said. "Not that we wouldn't do some of that if it serves the strategy — certainly, we're simplifying our organization in the process."

Analysts questioned Martell and Chief Financial Officer Patrick Flanagan on loanDepot's progress toward achieving run-rate profitability by the end of 2022, a tenet of its Vision 2025 plan. LoanDepot reported expenses of $560.6 million in the second quarter, just 7% lower than the first quarter's $606.2 million. 

The company is very close to identifying its target of annualized savings of $375 million to $400 million, with over half of the total in the process of being realized as of Tuesday, Martell said. He declined to disclose the savings from the wholesale channel exit, but said two-thirds of it is related to staffing.

LoanDepot's addition of a home equity line of credit program later this year will be a modest contributor to revenue, Martell said. 

The lender's net origination income fell by one-third to $39.1 million in the second quarter from $59.1 million the quarter prior — also a 57% decline from $92.6 million at the same time last year. LoanDepot originated nearly $16 billion in loans between April and June, 59% of them purchase loans, down from $21.6 billion at the beginning of the year. 

Gain-on-sale margins fell to 1.16% from 1.96% in the first quarter, over 100 basis points below 2.28% in the second quarter last year. Pull-through weighted GOS dropped less precipitously to 1.50% in the second quarter versus 2.13% in the first quarter. Flanagan said the firm expects third quarter pull-through weighted GOS margins to increase to between 175 and 225 basis points reflecting competitive pressures.

The company reported a bright spot in rising servicing fee income, reporting $117.3 million in the second quarter compared to $111 million at the beginning of the year and $94.7 million the year prior. It serviced 87% of its portfolio in-house compared to 67% at the end of the first quarter and is on track to bringing all of its agency and Ginnie Mae servicing in-house by the end of the year, Flanagan said. LoanDepot also completed an $18.6 billion mortgage-servicing rights sale in July. 

"The markets were still robust in the second quarter so we can rely on MSR sales if we have to," Flanagan said. "But our focus is to shrink operating losses, eliminate the cash burn from operating losses as quickly as possible."

The company reported an adjusted net loss of $167.8 million, more than doubling last quarter's adjusted net loss of $81.7 million. At the same time last year, loanDepot reported adjusted net income of $57.5 million. Net revenue declined approximately 38% to $308.6 million from the previous quarter's $503.3 million and 57% from $719.9 million year over year.

Executives emphasized the firm's unrestricted cash and equivalents of $954.9 million at the end of June as additional reason for optimism. 

"We're looking at a decline into 2023," Martell said. "So I think it's important to recognize that our plans incorporate a run rate that will allow us to overcome that expected downdraft as well."

The mortgage leader's share price opened at $1.79 Wednesday, a tick below its Tuesday close at $1.85, and sat at $1.92 at midday.