LOANDEPOT, INC. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Form 10-Q)
The following discussion provides an analysis of the Company's financial condition, cash flows and results of operations from management's perspective and should be read in conjunction with our consolidated financial statements and the accompanying notes included under Part I. Item 1 of this report. The results of operations described below are not necessarily indicative of the results to be expected for any future periods. This discussion includes forward-looking information that involves risks and assumptions which could cause actual results to differ materially from management's expectations. See our cautionary language at the beginning of this report under "Special Note Regarding Forward-Looking Statements" and for a more complete discussion of the factors that could affect our future results refer to Part II. "Item 1A. Risk Factors" and elsewhere in this Form 10-Q and Part I, Item 1A "Risk Factors" in our 2021 Form 10-K. Capitalized terms used but not otherwise defined herein have the meanings set forth in the our Form 10-K. Overview loanDepot is a customer-centric and technology-enabled residential mortgage platform. We launched our business in 2010 to provide mortgage loan solutions to consumers who were dissatisfied with the services offered by banks and other traditional market participants. Since our inception, we have significantly expanded our origination platform both in terms of size and capabilities. Our primary sources of revenue are derived from the origination of conventional and government mortgage loans, servicing conventional and government mortgage loans, and providing a growing suite of ancillary services.
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A summary of our critical accounting policies and estimates is included in the Critical Accounting Policies and Estimates section.
Key Factors Affecting Our Results of Operations
Market and economic environment
The consumer lending market and the associated loan origination volumes for mortgage loans are influenced by interest rates and economic conditions. While borrower demand for consumer credit has typically remained strong in most economic environments, general market conditions, including the interest rate environment, unemployment rates, home price appreciation and consumer confidence may affect borrower willingness to seek financing and investor desire and ability to invest in loans. For example, a significant interest rate increase or rise in unemployment could cause potential borrowers to defer seeking financing as they wait for interest rates to stabilize or the general economic environment to improve. Additionally, if the economy weakens and actual or expected default rates increase, loan investors may postpone or reduce their investments in loan products. The volume of mortgage loan originations associated with home purchases is generally less affected by interest rate fluctuations and more sensitive to broader economic factors as well as the overall strength of the economy and housing prices. Purchase mortgage loan origination volume can be subject to seasonal trends as home sales typically rise during the spring and summer seasons and decline in the fall and winter seasons. This is somewhat offset by purchase loan originations sourced from our joint ventures which experience their highest level of activity during November and December as home builders focus on completing and selling homes prior to year-end. Seasonality has less of an impact on mortgage loan refinancing volumes, which are primarily driven by fluctuations in mortgage loan interest rates.
Interest rate fluctuations
Our mortgage loan refinancing volumes (and to a lesser degree, our purchase volumes), balance sheets, and results of operations are influenced by changes in interest rates and how we effectively manage the related interest rate risk. As interest rates decline, mortgage loan refinance volumes tend to increase, while an increasing interest rate environment may cause a decrease in refinance volumes and purchase volumes. In addition, the majority of our assets are subject to interest rate risk, including LHFS, which consist of mortgage loans held on our consolidated balance sheets for a short period of time after origination until we are able to sell them, IRLCs, servicing rights and mandatory trades, forward sales contracts, interest rate 36 -------------------------------------------------------------------------------- swap futures and put options that we enter into to manage interest rate risk created by IRLCs and uncommitted LHFS. We refer to such mandatory trades, forward sales contracts, interest rate swap futures and put options collectively as "Hedging Instruments." As interest rates increase, our LHFS and IRLCs generally decrease in value while our Hedging Instruments utilized to hedge against interest rate risk typically increase in value. Rising interest rates cause our expected mortgage loan servicing revenues to increase due to a decline in mortgage loan prepayments which extends the average life of our servicing portfolio and increases the value of our servicing rights. Conversely, as interest rates decline, our LHFS and IRLCs generally increase in value while our Hedging Instruments decrease in value. In a declining interest rate environment, borrowers tend to refinance their mortgage loans, which increases prepayment speed and causes our expected mortgage loan servicing revenues to decrease, which reduces the average life of our servicing portfolio and decreases the value of our servicing rights. The changes in fair value of our servicing rights are recorded as unrealized gains and losses in changes in fair value of servicing rights, net, in our consolidated statements of operations. When interest rates rise, rate and term refinancings become less attractive to consumers after a historically long period of low interest rates. However, rising interest rates are also indicative of overall economic growth and inflation that should create more opportunities with respect to cash-out refinancings. In addition, inflation which may result from increases in asset prices and stronger economic growth (leading to higher consumer confidence) typically should generate more purchase-focused transactions requiring loans and greater opportunities for home equity loans.
Current market conditions:
According to the MBA's Mortgage Finance Forecast published
April 13, 2022, there was approximately $12.7 trillionof residential mortgage debt outstanding in the United Statesat March 31, 2022which is forecasted to increase to $13.5 trillionby March 31, 2023. During the year ended December 31, 2021, annual one-to-four family residential mortgage origination volumes were $4.0 trillion, of this $2.3 trillionwas comprised of refinance volume. Annual one-to-four family residential mortgage origination volumes are expected to decrease by 39% to $2.4 trillionby December 31, 2023. The primary driver of this decrease is refinance volume, which is expected to decrease by $1.7 trillion, partially offset by a $127.0 billionexpected increase in purchase volume.
Key performance indicators
We manage and assess the performance of our business by evaluating a variety of metrics. Selected key performance metrics include loan originations and sales and servicing metrics. Loan Origination and Sales Loan originations and sales by volume and units are a measure of how successful we are at growing sales of mortgage loan products and a metric used by management in an attempt to isolate how effectively we are performing. We believe that originations and sales are an indicator of our market penetration in mortgage loans and that this provides useful information because it allows investors to better assess the underlying growth rate of our core business. Loan originations and sales include brokered loan originations not funded by us. We enter into IRLCs to originate loans, at specified interest rates, with customers who have applied for a mortgage and meet certain credit and underwriting criteria. We believe the volume of our IRLCs is another measure of our growth in originations. Gain on sale margin represents the total of (i) gain on origination and sale of loans, net, and (ii) origination income, net, divided by loan origination volume during period. Gain on the origination and sale of loans, net was adjusted to exclude the change in fair value of forward sale contracts, including pair-offs, hedging MSRs, which are now included in the change in fair value of servicing rights, net on the consolidated statements of operations. We determined that this change would more appropriately reflect the hedged item and better align with industry practices. Gain on origination and sale of loans, net and change in fair value of servicing rights, net, in the current and prior periods along with the related disclosures have been adjusted to reflect this reclassification. Pull through weighted gain on sale margin represents the total of (i) gain on origination and sale of loans, net, and (ii) origination income, net, divided by the pull through weighted rate lock volume. Pull through weighted rate lock volume is the unpaid principal balance of loans subject to interest rate lock commitments, net of a pull-through factor for the loan funding probability. Servicing Metrics 37
-------------------------------------------------------------------------------- Servicing metrics include the unpaid principal balance of our servicing portfolio and servicing portfolio units, which represent the number of mortgage loan customers we service. We believe that the net additions to our portfolio and number of units are indicators of the growth of our mortgage loans serviced and our servicing income, but may be offset by sales of servicing rights. Three Months Ended March 31, (Dollars in thousands) 2022 2021 Financial statement data Total revenue
$ 503,311 $ 1,316,008Total expenses 606,256 869,878 Net (loss) income (91,318) 427,853 (Loss) earnings per share of Class A and Class D common stock: Basic $ (0.25) $ 0.36Diluted $ (0.25) $ 0.36Non-GAAP financial measures(1) Adjusted total revenue $ 504,606 $ 1,241,441Adjusted net (loss) income (81,732) 319,527 Adjusted (LBITDA) EBITDA (74,403) 458,098 Adjusted diluted (loss) earnings per share $ (0.26) $ 0.99Loan origination and sales Loan originations by channel: Retail $ 16,479,390 $ 33,427,789Partner 5,071,341 8,051,362 Total $ 21,550,731 $ 41,479,151Loan originations by purpose: Purchase $ 8,030,766 $ 7,916,512Refinance 13,519,965 33,562,639 Total $ 21,550,731 $ 41,479,151Loan originations (units) 64,951 111,400 Licensed loan officers: Retail 2,960 2,568 Partner 301 239 Total 3,261 2,807 Loans sold: Servicing retained $ 17,122,716 $ 37,435,791Servicing released 5,745,322 2,492,886 Total $ 22,868,038 $ 39,928,677Loans sold (units) 68,149 108,687 38
Three Months Ended March 31, (Dollars in thousands) 2022 2021 Gain on sale margin 1.96 % 2.98 % Gain on sale margin - retail 2.24 3.25 Gain on sale margin - partner 1.07 1.85 Pull through weighted gain on sale margin 2.13 3.69 IRLCs
$ 29,991,452 $ 45,762,661IRLCs (units) 91,020 131,551 Pull through weighted lock volume $
Servicing metrics Total servicing portfolio (unpaid principal balance)
$ 153,385,817 $ 129,709,892Total servicing portfolio (units) 496,868 414,540 60+ days delinquent ($) $ 1,444,779 $ 2,125,57360+ days delinquent (%) 0.94 % 1.64 % Servicing rights at fair value, net(2) $ 2,078,187 $ 1,766,088Weighted average servicing fee (3) 0.29 % 0.30 % Multiple(3) (4) 4.9 4.7 (1)Refer to the section titled "Non-GAAP Financial Measures" for a discussion and reconciliation of our Non-GAAP financial measures. (2)Amount represents the fair value of servicing rights, net of servicing liabilities, which are included in accounts payable, accrued expenses, and other liabilities in the consolidated balance sheets. (3)Agency only. (4)Amounts represent the fair value of servicing rights, net, divided by the weighted average annualized servicing fee.
The following table sets forth our consolidated financial statement data for the three months ended
March 31, 2022compared to the three months ended March 31, 2021. 39
Three Months Ended March 31, Change Change (Dollars in thousands) 2022 2021 $ % (Unaudited) REVENUES: Net interest income
$ 13,076 $ 1,233 $ 11,843960.5 % Gain on origination and sale of loans, net 363,131 1,133,575 (770,444) (68.0) Origination income, net 59,073 101,599 (42,526) (41.9) Servicing fee income 111,059 82,568 28,491 34.5 Change in fair value of servicing rights, net (68,383) (43,635) (24,748) (56.7) Other income 25,355 40,668 (15,313) (37.7) Total net revenues 503,311 1,316,008 (812,697) (61.8) EXPENSES: Personnel expense 345,993 603,735 (257,742) (42.7) Marketing and advertising expense 101,513 109,626 (8,113) (7.4) Direct origination expense 53,157 46,976 6,181 13.2 General and administrative expense 49,748 51,317 (1,569) (3.1) Occupancy expense 9,396 9,988 (592) (5.9) Depreciation and amortization 10,545 8,454 2,091 24.7 Servicing expense 21,511 26,611 (5,100) (19.2) Other interest expense 14,393 13,171 1,222 9.3 Total expenses 606,256 869,878 (263,622) (30.3) (Loss) income before income taxes (102,945) 446,130 (549,075) (123.1) Income tax (benefit) expense (11,627) 18,277 (29,904) (163.6) Net (loss) income (91,318) 427,853 (519,171) (121.3) Net (loss) income attributable to noncontrolling interests (56,577) 382,978 (439,555)
Net (loss) income attributable to loanDepot, Inc.
$ (34,741) $ 44,875 $ (79,616)(177.4) The results for the three months ended March 31, 2022reflected a sharp increase in mortgage rates which resulted in a decrease to our profit margins. The decrease of $519.2 million, or 121.3% in net income is primarily from a $770.4 milliondecrease in gain on origination and sale of loans, net, partially offset by a $263.6 milliondecrease in total expenses. The increased interest rate environment during the first quarter of 2022 resulted in a decrease in margins and volume of mortgage loan originations and IRLCs from the comparable 2021 period.
Net Interest Income. Net interest income is earned on LHFS offset by interest expense on amounts borrowed under warehouse lines to finance such loans until sold. The increase in net interest income reflected lower utilization of higher costing warehouse lines and higher yield on LHFS, partially offset by a
$1.3 billiondecrease in average LHFS.
Gain on origination and sale of loans, net. Gain on origination and sale of loans, net, included the following:
Three Months Ended March 31, Change Change (Dollars in thousands) 2022 2021 $ % (Discount) premium from loan sales
$ (236,096) $ 470,572 $ (706,668)(150.2) % Servicing rights 269,760 529,544 (259,784) (49.1) Fair value losses on IRLC and LHFS (393,759) (579,111) 185,352 32.0 Fair value gains from Hedging Instruments 676,405 828,225 (151,820) (18.3) Discount points, rebates and lender paid costs 60,067 (114,855) 174,922 152.3 Provision for loan loss obligation for loans sold (13,246) (800) (12,446) (1,555.8) Total gain on origination and sale of loans, net $ 363,131 $ 1,133,575 $ (770,444)(68.0) • (Discount) premium from loan sales represent the net premium or discount we receive or pay in excess of the loan principal amount and certain fees charged by investors upon sale of the loans. The decrease in premiums from loan sales was a result of lower volume and margins due to increasing interest rates during the three months ended March 31, 2022compared to decreasing rates during the three months ended March 31, 2021. • Servicing rights represent the fair value of servicing rights from loans sold on a servicing-retained basis. The 49.1% decrease in servicing rights was driven by the 54.3% decrease in volume of loans sold on a servicing-retained basis. •Fair value losses on IRLC and LHFS decreased $185.4 millionor 32.0%. The decrease in loss was primarily due to the decrease in volume, partially offset by increasing interest rates during the three months ended March 31, 2022compared to decreasing rates during the three months ended March 31, 2021. • Fair value gains on Hedging Instruments represent the net unrealized gains or losses on mandatory trades, forward sales contracts, interest rate swap futures, and put options hedging IRLCs and LHFS as well as realized gains or losses from pair-off settlements. The decrease of $151.8 millionreflects lower volumes and changes in interest rates during the period. •Discount points, rebates, and lender paid costs represent discount points collected, rebates paid to borrowers, and lender paid costs for the origination of loans (including broker fee compensation paid to independent wholesale brokers and brokerage fees paid to our joint ventures for referred loans). The increase of $174.9 millionor 152.3% was driven by an increase in discount points collected and a decrease in lender paid costs. •Provision for loan loss obligation related to loans sold represents the provision to establish our estimated liability for loan losses that we may experience as a result of a breach of representation or warranty provided to the purchasers or insurers of loans that we have sold. The increase of $12.4 millionreflects an $8.0 millionreversal during the first quarter of 2021 due to a decrease in estimated losses on repurchase requests and decreased severity of losses on repurchased loans. Origination Income, Net. Origination income, net, reflects the fees that we earn, net of lender credits we pay, from originating loans. Origination income includes loan origination fees, processing fees, underwriting fees, and other fees collected from the borrower at the time of funding. Lender credits typically include rebates or concessions to borrowers for certain loan origination costs. The $42.5 millionor 41.9% decrease in origination income was the result of a 48.0% decrease in loan origination volumes. Servicing Fee Income. Servicing fee income reflects contractual servicing fees and ancillary and other fees (including late charges) related to the servicing of mortgage loans. The increase of $28.5 millionor 34.5% in servicing income was the result of an increase of $45.7 billionin the average UPB of our servicing portfolio due to an increase in servicing-retained loan sales. Change in Fair Value of Servicing Rights, Net. Change in fair value of servicing rights, net includes (i) fair value gains or losses net of Hedging Instrument gains or losses; (ii) fallout and decay, which includes principal amortization and prepayments; and (iii) realized gains or losses on the sales of servicing rights. Change in fair value of servicing rights, net was a loss of $68.4 millionfor the three months ended March 31, 2022, as compared to $43.6 millionfor the three months ended March 31, 2021; 41 -------------------------------------------------------------------------------- the increase in loss reflects $75.9 millionin fair value gains, net of hedging losses, partially offset by a $41.0 milliondecrease in fallout and decay due to the increasing rate environment for the three months ended March 31, 2022. Other Income. Other income includes our pro rata share of the net earnings from joint ventures and fee income from title, escrow and settlement services for mortgage loan transactions performed by LDSS, and fair value changes in our trading securities. The decrease of $15.3 millionor 37.7% was primarily the result of a decrease of $8.7 millionin escrow and title fee income due to decreased mortgage loan settlement services and fair value losses of $6.8 millionon our trading securities due to the increasing rate environment.
Personnel Expense. Personnel expense reflects employee compensation related to salaries, commissions, incentive compensation, benefits, and other employee costs. The
$257.7 millionor 42.7% decrease was the result of a decrease of $146.6 millionin commissions due to the decreases in loan origination volumes and decreases in salaries and benefits expense of $111.1 million. As of March 31, 2022, we had 10,054 employees compared to 11,037 employees as of March 31, 2021, representing a decrease of 8.9%. Marketing and Advertising Expense. Marketing and advertising expense primarily reflects online advertising costs, including fees paid to search engines, television, print and radio, distribution partners, master service agreements with brokers, and desk rental agreements with realtors. The $8.1 millionor 7.4% decrease in marketing expense was driven by a reduction in national television campaigns, partially offset by an increase in acquired leads. Direct Origination Expense. Direct origination expense reflects the unreimbursed portion of direct out-of-pocket expenses that we incur in the loan origination process, including underwriting, appraisal, credit report, loan document and other expenses paid to non-affiliates. The $6.2 millionor 13.2% increase included $3.8 millionof operational write-offs and $2.0 millionof investor due diligence fees. Servicing Expense. Servicing expense reflects in-house servicing costs as well as amounts that we pay to our sub-servicers to service our mortgage loan servicing portfolio. The $5.1 millionor 19.2% decrease in subservicing expense reflects our shift to in-house servicing. Other Interest Expense. The $1.2 millionor 9.3% increase in other interest expense between periods was the result of a $985.0 millionincrease in average outstanding debt obligations primarily resulting from a $225.6 millionincrease in secured credit facilities, and issuance of the 2028 Senior Notes in March 2021with an initial balance of $600.0 million. The increase in interest expense during the three months ended March 31, 2022was partially offset by a $10.5 milliongain on extinguishment of debt from the repurchase of $97.5 millionof the 2028 Senior Notes at an average purchase price of 87.9%. Income Tax Expense (Benefit). Benefit for income taxes was $11.6 millionfor the three months ended March 31, 2022, as compared to expense of $18.3 millionfor the three months ended March 31, 2021. The decrease represents the Company's share of net taxable loss of LD Holdingsfor three months ended March 31, 2022compared to net taxable income of LD Holdingsfor the three months ended March 31, 2021. 42
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