Good afternoon, and welcome everyone to loanDepot's Q2 2022 conference call. All lines have been placed on mute to prevent any background noise. If you would like to ask a question during the call, simply press star followed by the one on your telephone keypad. If you would like to withdraw your question, press star one again. I would now like to turn the call over to Gerhard Erdelji, Senior Vice President, Investor Relations. Please go ahead.
Good afternoon, everyone, and thank you for joining our call. I'm Gerhard Erdelji, Investor Relations Officer at loanDepot. Today, we will discuss loanDepot's Q2 2022 results. Before we begin, I would like to remind everyone that this conference call may include forward-looking statements regarding the company's operating and financial performance in future periods. All statements other than statements of historical fact are statements that could be deemed forward-looking statements, including, but not limited to, guidance to our pull-through weighted rate lock volume, origination volume, pull-through weighted gain on sale margin, and expenses. These statements are based on the company's current expectations and available information. Actual results for future periods may differ materially from these forward-looking statements due to risks or other factors that are described in the Risk Factors sections of our filings with the SEC.
A webcast and a transcript of this call will be posted on the company's investor relations website at investors.loandepot.com under the Events and Presentations tab. On today's call, we have loanDepot President and Chief Executive Officer, Frank Martell, and Chief Financial Officer, Patrick Flanagan, to provide an overview of our quarter as well as our financial and operational results, outlook, and to answer your questions. We are also joined by our Chief Capital Markets Officer, Jeff DerGurahian, and LDI Mortgage President, Jeff Walsh, to help address any questions you might have after our prepared remarks. With that, I'll turn things over to Frank to get us started. Frank?
Thank you, Gerhard. Thank you all for joining us on today's call. I look forward to sharing my perspective on market conditions, our results, and the company's Vision 2025 plan. Our Q2 results reflect some large call-out items, which Pat will elaborate on shortly, as well as the challenging market environment that continues in our industry, which resulted in declines in our mortgage volumes and profit margins. We discussed a few weeks ago during our public announcement of our Vision 2025 plan, like other mortgage companies, we scaled our organization during 2020 and 2021 to meet the demands of unprecedented mortgage volumes, especially refinancing transactions. After two years of record-breaking volumes, the market has contracted sharply and abruptly so far this year.
We anticipate market conditions will remain challenging over the short to medium term, with mortgage originations projected to decline by roughly 50% in 2022 from 2021, including an accelerated decline in the second half of 2022. At this point, we expect to see further declines in volumes in 2023. Despite this environment, informed by our Vision 2025 plan, we continue to believe loanDepot is positioned for long-term success built on the support of a strong balance sheet and ample liquidity. Our recently announced Vision 2025 plan is designed to address current and anticipated market conditions, achieve run rate profitability exiting 2022, and position the company for long-term value creation. The four primary strategic pillars of Vision 2025 are, first, raising our focus on purchase transactions while serving increasingly diverse communities across the country.
As the company pivots to an increasingly purpose-driven origination organization, we expect to increase our focus on addressing persistent gaps in equitable housing while advancing the goal of growing our share of lending for purchase transactions and maintaining responsible management of credit risk. Second, meaningfully progress our previously announced growth-generating initiatives, including launching a digital HELOC product later this year and continuing to leverage our investment in our servicing business. Third, centralizing management of loan originations and fulfillment, increasing operating leverage, and achieving best-in-class quality and service levels. Fourth, aggressively rightsizing our cost structure for current and expected mortgage origination volumes. Over the past several months, we have taken aggressive actions to realize the goals outlined in our Vision 2025 program. We have made substantial progress in a number of critical areas, including one, pivoting our origination organization toward a unified and purpose-driven unit.
Second, reducing organizational layers and increasing management spans to create operating efficiencies. Third, centralizing our operations, compliance, and support efforts. Fourth, cutting third-party and facilities-related spending. Fifth, reducing staffing levels. In a few minutes, Pat will provide additional detail on our progress resetting our cost structure. Importantly, I believe the progress we've made over the past several months clearly supports the achievement of our goal of achieving run rate operating profitability exiting 2022. Earlier I mentioned pivoting our originations business to a unified and purpose-driven organization.
One of the main goals of Vision 2025 is to delight our customers during one of the most important financial transactions of his or her lifetime. To meet this goal, we want to provide our superior standard of customer service throughout the home ownership journey, from marketing to underwriting and closing, to providing ancillary and complementary products and services, to servicing the loan for its duration. Working through third-party mortgage brokers makes it more difficult for us to control the customer experience and adds a layer of expense that reduces our profitability. Therefore, as part of the Vision 2025 plan, we have initiated the exit of our wholesale business channel. This will enable us to further reduce expenses, consolidate operations, and better meet our goals of becoming a purpose-driven organization with direct customer engagement throughout the entire lending process.
In summary, despite challenging market conditions, we remain laser-focused on aggressively implementing Vision 2025, and we expect to exit 2022 achieving run rate operating profitability. As we look ahead to 2023 and beyond, I believe loanDepot is well positioned to succeed through leveraging and expanding our unique lending and servicing solutions, driving first quartile cost productivity and process efficiency, and harnessing the collective energy and innovative spirit of the company's dedicated team. With that, I will now turn the call over to Pat Flanagan, who will take you through our financial results in more detail.
Thanks, Frank, and good afternoon, everyone. During the Q2, loan origination volume was $16 billion, a decrease of 26% from the Q1 of 2022. This was within the guidance we issued last quarter of between $13 billion and $18 billion. Volume during that period consisted of $10 billion in purchase loan originations and $6 billion of refinance originations, primarily cash-out refinances. Our strategy to emphasize less interest rate sensitive mortgage products has resulted in an increase in the proportion of purchase transactions from 30% a year ago to 59% in the Q2, as well as increasing cash-out and purchase transactions from 59% - 95% during the same period.
Our pull-through weighted rate lock volume of $12 billion for the Q2 resulted in quarterly total revenue of $309 million, which represented a 20.39% decrease from the Q1. Rate lock volume came in at the low end of our guidance we issued last quarter of $12 billion-$22 billion. The decrease in revenue is a result of significant margin compression driven by increasing volatile interest rates and market adjustments as the industry continues to shed capacity. Our pull-through weighted gain on sale margin for the Q1 came in at 150 basis points, which is below the guidance we provided for the Q2. An increase in provision for repurchase loss reserve also impacted our revenue and gain on sale margin.
Our provision for repurchase reserve increased to $82 million during the Q2 from $13 million during the Q1 . The increase was mainly driven by rapidly increasing interest rates, which negatively impacted the fair value of loans subject to repurchase that were originated in prior periods at lower interest rates. Adjusting for the $69 million increase in the provision for repurchase loss reserve, our pull-through weighted gain on sale margin would have been 205 basis points or near the higher end of our guidance for the quarter. Turning now to our servicing portfolio. Customer retention remains one of our primary areas of focus. By controlling the entire customer experience and retaining data in our in-house platform, we improve our operating efficiency by capturing additional revenue opportunities and leveraging our marketing and customer acquisition expenses across multiple products and services.
Our preliminary organic recapture rate remains strong at 72% for the twelve months ended June 30 2022. The unpaid principal balance of our servicing portfolio increased to $155 billion as of June 30th 2022, compared to $153 billion as of March 31st 2022. This increase was primarily due to net additions to the portfolio, offset somewhat by the sale of $4 billion in unpaid balances during the quarter. As of the end of the Q2, we serviced 87% of our portfolio in-house, compared to 67% at the end of the Q1, and we're on track to bring all of our agency and Ginnie Mae servicing in-house before the end of the year.
By leveraging our in-house infrastructure for this highly scalable business, we've reduced our quarterly cost of servicing from 2.4 basis points of unpaid balance in the Q1 to 2 basis points in the second. Reflecting the net growth of the portfolio, servicing fee income increased from $111 million in the Q1 of 2022 to $117 million in the Q2 of 2022. We hedge our servicing portfolio so we do not record the full impact of the increase in fair value in a rising interest rate environment in the results of our operations. We believe this strategy protects against volatility in our earnings and liquidity. Our strategy for hedging the servicing portfolio is dynamic, and we adjust our hedge positions in reaction to changing interest rate environments.
During our Vision 2025 call in July, we discussed our market outlook for the remainder of 2022. We continue to forecast the market will come in below an annualized $2 trillion. A significant component of this plan is to align our expense base with lower origination volume and create efficiencies we believe will result in improved operating leverage and financial performance over time. Looking ahead to the Q3 and assuming no material changes in the interest rates or the competitive landscape, we expect both pull-through weighted rate lock volume and origination volume of between $6.5 billion and $11.5 billion, reflecting the current interest rate environment weighing on demand.
We expect Q3 pull-through weighted gain on sale margin to increase from the Q2 margin to between 175 and 225 basis points, reflecting ongoing competitive pressures. Our total expenses for the Q2 of 2022 decreased by $88 million or 8% from the prior quarter, driven primarily by lower personnel expenses, including both salaries and volume-based commissions and lower marketing expenses. The Q2 included charges of $41 million for goodwill impairment, $6 million of real estate and other intangible asset impairment, $4 million of severance benefits, and $3 million of consulting and other professional expenses related to Vision 2025. Net of these items and the $69.2 million increase in the provision for purchased loan loss reserves, our adjusted Q2 pre-tax loss would have been $130 million.
We continue to aggressively reduce our cost structure to return to run rate profitability by the end of 2022. We reduced our headcount from approximately 11,300 at year-end 2021 to approximately 8,500 at the end of the Q2 and expect to end the Q3 with our headcount below our previously stated year-end goal of 6,500. We plan to achieve our cost reduction goal by further reducing management spans, consolidating redundant operational functions, reducing marketing expenditures, real estate costs, and other third-party charges. We also continue to evaluate all aspects of our business for potential additional expense reduction as the market continues to evolve.
As a reminder, we expect to recognize additional charges during the second half of 2022 as part of our Vision 2025 plan, including severance and benefits-related charges currently anticipated between approximately $25 million-$28 million, charges related to the exit of real estate now approximately $6 million-$8 million, and approximately $7 million-$9 million of outside service costs. Approximately 75% of these expenses will be recognized in the Q3, with the remainder expected in the Q4 of the year. The plan is being executed against a backdrop of a strong balance sheet with $1.2 billion of tangible equity, ample liquidity with over $950 million of unrestricted cash and equivalents, and what we believe are excellent relationships and the support of our financing partners, the agencies and other investors. With that, we're ready to turn it back to the operator for questions and answers. Operator?
At this time, if you'd like to ask a question, simply press star followed by the number one on your telephone keypad. Our first question will come from the line of James Faucette with Morgan Stanley. Please go ahead.
Thanks. Yeah, this is Sandy Beedon for James. Exiting the wholesale channel and mindful of your outlook just on gain on sale margins, how are you thinking about the cadence? I know you only provide quarterly guidance here, but the cadence of GOS margins over the coming quarters and will exiting that channel provide some support or upward pressure? Really, how are you thinking about that?
We think net of the adjustments for the provision increases, as we mentioned, margins are expected to be higher in the Q3 within the range that we talked about. Exiting the wholesale business actually provides some upward lift to margins.
Got it. Thank you. Just one follow-up. You walked through the cost structure. Any areas where you're leaning in or maintaining investments that you'd like to call out? I'm thinking technology and a few other things. Anything to flag there?
No. I think really if you look at the $375 million-$400 million, you know, full year run rate cost savings, about 65% of those are going to be in the people area with the balance being a blend of other third party and infrastructure related as well. There will be some investments that we will make that will offset some of that reduction, primarily around our customer-facing organization, some of our tools, our quality systems as well. There'll be a few offsets. In general, it breaks down roughly 2/3 staffing and 1/3 other.
Got it. Thank you, guys.
Your next question will come from the line of Doug Harter with Credit Suisse. Please go ahead.
Thanks. Just on your commentary that you expect to be breakeven by the end of this year, you know, what are you expecting on the revenue side there? You know, how much contribution from home equity are you expecting? Is it mainly on the cost side that gets you back to breakeven?
Yeah. I think that the primary focus is adjusting our cost structure to the market forecast that I think both Pat and I talked about. I think HELOC is a very modest because we're launching it later in the year as a very modest contributor. Really de minimis, frankly.
Just to make sure I understand, the volume guidance in the context of exiting wholesale. You know, I guess when do you expect to kind of stop funding volumes and, you know, and how much of kind of the three Q volume guide is from wholesale?
Right. The plan is to fund out the remaining wholesale pipeline, which is approximately $1 billion, and have the entire pipeline wrapped up by the end of October of this year. Got it. Makes sense. Thank you.
Your next question will come from the line of Trevor Cranston with JMP Securities. Please go ahead.
Hey, thanks. A follow-up on that question about, you know, the plan to exit 2022, being profitable. Can you comment on what's kind of baked into that projection in terms of, you know, where you need to see volume and gain on sale levels? Is it kind of steady from what you're expecting in the Q3? Is there any improvement at all baked into the expectation to get back to profitability?
Yeah, I think broadly speaking, you know, of course, we're looking at a market that looks more like, you know, in the low $2 trillion for the year. That implies a, you know, slowdown, continued slowdown through the second half of the year. You know, as I mentioned in my prepared remarks, you know, we're looking at a decline into 2023. 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. You know, I think if you look at 2023, you know, we're kind of thinking in line with most of the other, you know, externally available, you know, MBA, you know, type forecasts that are out there, with some. with a bit more conservatism applied on our part.
As far as gain on sale margins, the plan that we've been talking about, the Vision 2025 plan ending the year with run rate profitability assumes that the fourth quarter gain on sale margins should be relatively consistent with the guidance we provided for Q3.
Okay. Got it. You mentioned the impact of higher rates on the repurchase provision in the Q2. I guess when you look at how rates have moved so far in the Q3, you know, if they were to stay relatively steady from here, would it be reasonable to expect, you know, some of that provision to come back in 3Q, just based on how rates have moved?
Well, we think that the provision levels are adequate for what we see in the future. We think that over time, as rates continue to rise at a slower pace or remain stable, that gap will come back and the provision will look similar to historic levels. This was an anomaly around the differential between the rate when the loans were originated and the rate at market rates when we repurchased.
Okay. Thank you.
Your next question will come from the line of Kevin Barker with Piper Sandler. Please go ahead.
Thank you. Thank you for taking my questions. How much of OpEx or operating expenses will decline from the exit in the broker channel? Is this fully embedded in your guidance for $375 million-$400 million of expense savings?
Yeah, Kevin, it's included as part of the overall run rate reductions in the $375-$400.
Okay. How much is coming from, directly from the exit of the broker channel? Are you able to provide that or?
No, we don't provide that level of specificity.
Okay. In regards to the expenses, how much is already embedded within the Q2 operating expenses, excluding the goodwill impairment?
When you say embedded, can you just define what that you're talking about there, just so we're clear?
How much of the $375 million-$400 million of expense savings that you laid out has already been achieved as of the Q2 with the $520 million of operating expenses that you reported, excluding the $41 million of goodwill impairment?
In terms of the $375 million-$400 million of expense reduction, that's really not. I think goodwill is not in that number, just to be clear. You know, we've identified substantially all of that and have action plans against all of that. You know, there's still a bit to solve for, but essentially, I'd say that we're very close to identifying the entire target. And actually have action plans. And a lot of, a substantial amount, well over half of that's actually been actioned or is in the process of being actioned, as of today.
A significant portion will be realized in Q3. You know, a significant amount of headcount reductions in July and August. There's a couple of months of severance expense that trails as a result of those terminations.
Okay. When we think about the move in operating expenses from $606 million in the Q1 to $520 million in the Q2, how much of that is due to the expense saving initiatives you put in place versus production declines? Is another way to look at it. It's like, how much more do we or should we expect?
Well, we had you know headcount declines of you know it was about 25% reduction. In the quarter, we had a 40% reduction quarter-over-quarter for marketing expense. 15% was personnel related, and then 8% was volume-based commission plans. Adjusted expenses were 17% lower quarter-over-quarter. We didn't break it out that way because we were projecting the volume decline into the model. I don't have it sort of segregated against Vision 2025 and volume decline. It was all you know intermingled into getting to the appropriate level of expenses.
Okay. Thank you for taking my questions.
Your next question will come from the line of Stephen Sheldon with William Blair. Please go ahead.
Hey, team. This is Pat McElhinney on for Stephen today. My first one: what top of funnel trends have you been seeing as mortgage rates have pulled back a little bit in recent weeks? Just curious, are you seeing any more organic traffic at all as that's happened?
Not to a material degree.
Okay. How do you think about your ability to gain market share in this declining originations market? Or is this really more about positioning yourself to stabilize the cost structure and then gain market share once volumes really do stabilize?
Yeah. You know, we're not gonna chase market share. We are very focused on pivoting to a purpose-driven, you know, affordable lending, underserved lending model. It's gonna take some time for us to get there. You know, we're very laser-focused on, you know, cash flow profitability. Certainly we have areas that we think we're strong in from a market position standpoint. But in terms of in general, trying to drive share in this environment is not something we're trying to do. It's a much more of a focus on trying to get the, you know, the toward a model whereby we are intimate with our customers throughout the life cycle of their transactions. You're gonna see a lot more focus on our talk track around that kind of mantra. We're not chasing share and volume at the expense of liquidity and profitability and strategy, frankly.
Okay. That's helpful. Thank you.
Your next question will come from the line of Mark DeVries with Barclays. Please go ahead.
Yeah, couple questions about the exit of wholesale. One is just a point of clarification. Are you just getting out of the broker business, or are you also exiting the work with the JVs?
No, this is simply related to wholesale and non-delegated correspondent business channel. In the partnership channel, we had always separated those two entities. Joint venture still being a big part of our focus with new builder and affordable housing and such, and wholesale and non-delegated correspondent is what is being wound up currently.
Okay. Frank, could you just talk a little bit more about, you know, the decision to exit as opposed to, you know, just attempt to take out, you know, some of the cost and try and continue to run those businesses?
Yeah. Look, I think we wanna stand for something. When we talk about purchase driven, I think the demographic shifts in housing and mortgage are such that, you know, we think the future is around serving, you know, a broader constituency, and particularly the diversity of the millennial and the subsequent generations there. You know, that implies a lot of investment in certain areas over time to be able to do that. We're definitely looking at, you know, the demographics and the long-term view and trying to make sure that we service those markets and have the solutions to service those markets and delight the customers. You know, my view is some of this, you know, we've had four go-to-market channels.
You know, we wanna go to one kind of. You know, and frankly, we've operated those in somewhat separate ways to some degree. We're trying to go to unified back office where we have a you know, unified operational group, you know, and the support around that. It really free up the team to look at the market holistically, and serve the end markets that we want to serve, which, you know, which is that purpose-driven lending. It's gonna take us a little bit of time to get there, but, you know, I think the exit of wholesale, like I talked about, is really around trying to get more intimate with the customer set and not go through intermediaries. Not that we, you know, we wouldn't do some of that if it served the strategy, but certainly we're simplifying our organization in the process.
Got it. Makes sense. Just one question about the guidance for 3Q. Pretty wide range on the two, you know, origination ranges. What kind of gets you to the high end and what scenario gets you to the low end of those ranges?
I think they're the same dollar range as we've previously given. We understand the context is wider because of just the shrinking market. I think it really is dependent on market conditions in the near term. It is a very fast-moving market. Part of that range is how well our JVs do in completing inventory by year-end. The volatility is what makes us need to give a wide range.
Okay, got it. Thank you. Our next question will come from the line of Kevin Barker with Piper Sandler. Please go ahead.
Hey, thanks. I just wanted to clarify and follow up some of the questions about the gain on sale margin in this quarter, given the decline. You broke up a little bit on the call, so I just wanted to clarify some of those. Was this related specifically to repurchase liability, or was it due to loans in pipeline that were unable to be sold or the market moved quickly against you? How should we think about, like, the decline in gain on sale margin in the Q2?
It's almost entirely in repurchase activity. It's the market price differential from the increase in interest rates.
Okay.
It's not fallout related.
Okay. The repurchase liability, is that related only to your pipeline from the Q2 or is this, you know, loans over a long period of time that it's related to?
They're loans that were sold in whole loan over the last 12 months that come back for rep and warrant, you know, violations or performance-related issues.
Okay. Okay.
It was, you know, 3% loans repurchased in a 6% world, right? You have, you know, a differential of almost 300 basis points. On top of that, new yield requirements by purchasers of these types of loans.
Okay. All right. Thank you for taking my questions. Appreciate it.
Our next question will come from the line of Kyle Joseph with Jefferies. Please go ahead.
Hey, good afternoon. Thanks for taking my questions. Sorry if you covered this, hopped on a little late. Just one follow-up would be on for your 3Q guidance and kind of the intermediate term outlook going into the Q4 in terms of break even, can you give us a sense for the cadence and magnitude of MSR sales?
We are trying to accelerate the cost cutting and expense savings into the Q3 so that we can preserve most of the balance sheet and have to sell less MSRs to cover operating losses. We did complete a $18.6 billion MSR sale in July. That was, and the 6/30, the June 30th quarter-end marks reflected the value of that MSR sale. The market was still, you know, robust in the Q2, so we can rely on MSR sales if we have to. Our focus is to shrink operating losses and eliminate the cash burn from operating losses as quickly as possible. We'll continue to adjust the mix of both the amount of servicing we sell at the time of origination, and couple that with any other bulk sales should we need to bolster liquidity. The goal is to try to minimize the amount of MSR sales going forward.
Got it. Very helpful. Thanks for taking my question.
I will now turn the conference back over to management for any closing remarks.
Okay. Thank you, Regina. Look, thanks, everybody, again for joining us and for, you know, some very good questions. We appreciate that. I just want to close by reiterating our Vision 2025 plan is having its intended effect. We have we've made a tremendous amount of progress, both structurally and from an operational point of view. I think those are the actions needed to achieve our targeted $375 million-$400 million annualized expense savings target going into 2023. I think we're on our way to achieving that and to hit run rate profitability exiting this year, which has been the goal. As Pat mentioned, we have, you know, we have strong liquidity, and we want to preserve that.
We want to do that without selling MSRs if possible. That is definitely the goal, and we're making progress there. We do have an eye on the lower volume scenario anticipated for 2023, and making sure that's incorporated in our planning. We do have one eye on 2023 as well. I think importantly, looking forward, you know, from a business point of view, I think, you know, I'm excited about our strategic pivot to a purpose-driven organization. We have a number of new digital solutions that we think, including the HELOC solution, which we think will be innovative and differentiate the company in the marketplace. I think importantly, we also have a best-in-class servicing operation which we think we can leverage for growth as well. Those are good growth aspects. It's not just cost cutting, but there is growth entailed in our plan. Look, on behalf of Pat and the rest of the team, I wanna thank everybody, and we look forward to continuing to keep you all apprised on our drive to enhance both short-term and long-term shareholder value.
Ladies and gentlemen, that will conclude today's call. Thank you all for joining. You may now disconnect.