LoanDepot's second quarter net income slipped dramatically as competitive pressures drove margins and revenues lower, in what management calls a "transitional period" for the mortgage industry.
The company’s earnings dropped by more than 93% quarter to quarter, falling to $27.3 million, compared with $427.9 million in the first part of 2021.
This is the first full quarter for loanDepot as a public company, following its
"We will withstand that pressure, and in fact, we can actually apply some pressure to the competitive landscape," CEO Anthony Hsieh said on the earnings call. "Our purposely diversified origination model guards against margin compression in any particular channel, affording us a competitive advantage to profitably take market share."
Second quarter total revenue of $779.9 million was down from $1.3 billion from
In the retail channel, which made up 81% of overall production, gain on sale fell to 250 bps in the most recent quarter, from 325 bps in the first quarter and 568 bps one year ago. Margins are much lower in the wholesale and joint venture origination channel, 132 bps versus 185 bps and 407 bps respectively over the same time frame, largely due to the competitive pressures in the mortgage broker-facing business.
The company saw growth in purchase originations, which totaled $10.4 billion in the second quarter, versus $7.9 billion in the first quarter and $5.5 billion a year ago.
LoanDepot recorded $94.7 million of servicing fee income in the quarter, as its portfolio grew by $10 million during the three month period to $1.77 billion as of June 30. But the company recorded a $145.1 million hit to the fair value of its mortgage servicing rights during the quarter, compared with a $43.6 million reduction in the first quarter and a $33.1 million reduction in the second quarter of 2020.
"The change in fair value of our mortgage servicing rights was not fully offset by our hedging instruments as longer term interest rates fell and experienced a higher level of volatility," said Patrick Flanagan, chief financial officer. "Also, the low interest rate environment is continuing to result in high levels of amortization expense from higher prepayment rates."
The company was able to retain many of these prepaying customers as its consumer direct refinance recapture rate increased to 75% in the second quarter, from 72% for the first quarter, Flanagan said.
First quarter servicing fee income was $82.6 million, while it was $36.6 million in the second quarter one year ago, when the MSR portfolio was just $569.9 million.
In the third quarter, loanDepot should have between $44 billion and $54 billion in rate lock volume, reflecting the recent
Gain on sale margins should increase compared with the second quarter to between 245 bps and 295 bps, he predicted.
"We have seen a recovery in June and July caused by a combination of factors including expanding our product offerings, and we're confident in that range that we quoted," Flanagan said. "We've seen significant recovery in July, and I think that it's also representative of our multiple channels, both partnership and retail, allowing us the flexibility to offer different products at higher margins."
The company launched a
Regarding the cash earned from its public offering, Hsieh said company does plan to pay dividends to shareholders, but also, "it becomes a question of capital allocation, on how much we want to invest in growing the servicing assets as well as…we're actively looking in the M&A market, both in the mortgage side and the non-mortgage side."
Hsieh, who
"My challenge as the founder and CEO is to make absolutely certain that this team is poised to continue on our strategic journey, and that we don't get sidetracked by some of [what] we're seeing today," he said, adding the company will continue to spend on the differentiators of branding and technology. "So we have to remain very focused on our purpose and not allow the temporary noise of margin…to derail us in any way."
