The impact of falling volumes and decreased margins drove LoanDepot into the red during the first quarter, with the company posting its first quarterly loss since going public.
LoanDepot reported a net loss of $91.3 million in the first quarter after posting profits of $14.7 million over the prior three months and $427.8 million one year ago. The loss represented drops of 721% and 121%, respectively.
“The increase in mortgage rates during the quarter happened much more quickly and sharply than anyone anticipated when the quarter began and resulted in significant and rapid decreases in profit margins,” said Executive Chair Anthony Hsieh, in the company’s earnings call on Tuesday.
Reflecting the industry-wide slowdown in refinance originations, loanDepot was among the latest to report a notable drop in that segment to start the year. But while servicing income at other nonbank lenders kept them profitable, it failed to cushion the blow for the Foothill Ranch, California-based company, leading it to adjust its strategy over the coming year. Hsieh, who was also loanDepot’s CEO until mid-April, recently appointed former CoreLogic executive Frank Martell as CEO and president of the company.
Current headwinds are formidable enough that loanDepot said it would not turn a profit in fiscal year 2022. As a result, the company announced it would suspend dividend payments “for the foreseeable future.” Officials expect profitability to return toward the latter part of the year.
“We believe retaining cash on the balance sheet is a better use for the long-term benefit of our investors,” said Patrick Flanagan, loanDepot’s chief financial officer.
Although loanDepot reduced its expenses in the first quarter by 13%, company officials said that additional cost-cutting measures will be needed. Mortgage market analysts all slashed 2022 origination forecasts in April due to rising rates and persistent inflation.
“The vast majority of our expenses are people-related and commission and volume dependent,” said Hsieh. “And so we’ll continue to work primarily on scaling those to the current operating environment.”
Loan originations at loanDepot totaled $21.6 billion for the first quarter, a decrease of 26% from $29 million in the final three months of 2021 and $41.5 million one year ago. Purchases accounted for approximately $8 billion in volume, increasing its quarterly share from 19% to 37%, with refinances totaling $13.5 billion. The combined share of purchases and cash-out refinances, which are more profitable compared to rate-and-term refis, increased from 43% to 83%.
But the company said it expects originations to slow further this spring, finishing between $13 billion and $18 billion in the second quarter.
Gain-on-sale margins on originations decreased to 196 basis points in the first quarter from 223 bps three months earlier and 298 bps year over year. Pull-through weighted gain on sale, based on weighted rate-lock volume, came in at 213 bps, down from 281 bps on a quarterly basis and 369 bps in the first quarter of 2021.
The swift fall in originations numbers have led nonbanks to start pivoting toward other products, diversifying offerings and channels to generate business, with loanDepot being no exception. Earlier this year, the company unveiled a sister business unit, mello, to offer real-estate and mortgage-adjacent services. Last week, it announced mello would offer a home-equity line of credit in the third quarter, joining fellow lender New Residential in introducing a HELOC product this month, with an eye on customer retention. Hsieh said he believed HELOC customers would likely turn into mortgage clients down the road when rates fall.
“It’s not just a purchase-versus-refinance ratio going forward,” Hsieh said. “It’s really how to increase product so that the customer has an opportunity to buy from you. We are in a significantly different market today than I ever have witnessed in my career.”
Product diversification is just one component in broader changes happening in response to current pressures, he added.
“We have real-estate services disruption happening as well, which is our same core customer. Real estate buying-and-selling services and real estate finance should be in the same company. So I think you’re going to see that come closer together in this cycle as well,” Hsieh said.
LoanDepot has also recently turned toward servicing to help hedge against slowing originations, increasing the share of its portfolio serviced in-house to 67% at the end of the first quarter compared to 44% three months prior. The proportion increased after a transfer of $33 billion in unpaid balances from a subservicing provider, Flanagan said. The unpaid principal balance totaled $153.4 billion at the end of the quarter, compared with $162.1 billion three months earlier and $129.7 billion year over year. The decrease in quarterly unpaid balance included the sale of $23.8 billion in principal.
Servicing operations brought in $111 million in net income, 2.5% lower than $113.9 million earned the previous quarter, but 34% higher than $82.6 million over the same period last year. The results reflected a $68.4 million negative adjustment to the fair value of mortgage-servicing rights, compared to $118.7 million in the fourth quarter and $43.6 million 12 months ago.
While loanDepot echoed the remarks of several other companies in expecting turbulence ahead, Hsieh also commented that the current market environment may be near the point of turning around, which could be good for the industry overall.
“I think we are in the trough at this point. We’re heading into the right time of the season, and I think that the pressure is good,” he said. “Any time this happens, it’s great for market consolidation.”