LoanDepot hypes HELOC, cost-cutting amid 9-figure loss

LoanDepot reported a nine-figure loss in the third quarter, but executives professed faith in the company's massive cost-cutting exercise and new loan product expected to revive diminishing gain-on-sale margins.

The Foothill Ranch, California-based mortgage giant disclosed a net loss of $137.5 million in the third quarter, an improvement over the $223.8 million loss in the second quarter. During the booming mortgage market in 2021, the lender and servicer recorded $154.3 million in profit in the third quarter.

The company also incurred $37.2 million in expenses in the quarter tied to its wide-ranging Vision 2025 cost-cutting plan, including $20.8 million of lease and other asset impairments, $9.4 million of personnel related expenses, and $7.0 million of professional services fees. It spent $54.6 million on the Vision 2025 plan in the second quarter.

The plan, which includes layoffs dropping the company's headcount to 6,100 from 11,300 at the end of last year, is expected to save loanDepot between $375 million and $400 million in annualized savings. The lender lowered its total expenses 22% in the third quarter to $435.1 million, also a 44% decline from the $774.7 million in expenses the same time last year.

"Our Vision 2025 plan is having its intended effect," said Frank Martell, president and CEO, during a conference call Tuesday. "We made tremendous progress both structurally and from an operational point of view." 

Between July and September, loanDepot reported a gain on sale margin of 1.80%, a rise from the previous quarter's 1.16% mark and well below the 2.84% margin in the third quarter last year. The pull-through weighted GOS margin was 2.03% in the third quarter, following 1.50% in the second quarter and 2.99% at the same time last year.

Executives believe the GOS margin should increase in the fourth quarter, despite an anticipated decrease in volume, because of higher-margin products and its exit from wholesale. The firm projects pull-through weighted gain on sale margin to fall between 210 and 270 basis points.

One of those higher-margin products is the lender's new home equity line of credit offering, expected to be rolled out nationally early next year. 

"We think HELOC expands the conversions of our marketing dollars spent on the generally smaller loan balances and need for smaller amounts of cash out (refinances)," said Patrick Flanagan, chief financial officer. "We look at it as a net gain, not cannibalizing the purchase mortgage side."

Martell said he expects the product to be a significant contributor and profit generator for the lender next year, and suggested the access to capital, which is promised in as little as seven days, is quicker than most competition in the market. Borrowers this summer enjoyed record levels of home equity, but the sky-high figure has since tumbled 7.6% in the third quarter, according to Black Knight.

The firm's servicing unpaid principal balance fell to $139.7 billion in the third quarter compared to $155.2 billion in the prior three months, mostly from the sale of $18.6 billion in mortgage servicing rights. Company leaders said they don't expect to sell any bulk MSRs in the fourth quarter. 

At the end of September, the firm held $1.14 billion in unrestricted cash, a reserve that has more than doubled since the same time last year when it was $506.6 million.

"There's a lot of opportunity for us to manage the balance sheet," said Flanagan. "We are very focused on maintaining a substantial amount of liquidity as we work through the restructuring."

LoanDepot reported $8.8 billion in pull-through weighted lock volume in the third quarter, and projects the figure to fall between $3 billion and $6 billion in the fourth quarter. Since August, the lender has quietly reduced its funding capacity by at least $1.5 billion through a series of warehouse facility adjustments.

Warren Kornfield, senior vice president at Moody's Investment Services, called the company's origination estimates a very material decline. LoanDepot is forecasting $1.5 trillion in originations in 2023 against the Mortgage Bankers Association's $2.05 trillion projection.

"The company is very focused on right-sizing the company for a $1.5 trillion mortgage origination market in 2023, which is more aggressive than peers who are relying on more optimistic origination forecasts," said Kornfield in a statement Wednesday.

LoanDepot's stock opened at $1.53 per share following Tuesday evening's report, and dipped to $1.39 per share by midday.