Here’s something newly public mortgage lenders are learning: When loan profitability sags, jaws drop, tongues wag, and suddenly everyone wants to know who’s about to be fired.
While some senior management jobs may be on the line, it’s a sure bet that rank-and-file mortgage company employees should expect some big cuts coming their way, says Richard Roque, Ph.D., managing director of Menlo Co., a boutique mortgage investment banking firm based in Wilbraham, Mass.
Roque, who also serves as executive vice president of Rhode Island-based Shamrock Loans, was reacting to the new earnings report from loanDepot Inc., released last week. For the second quarter, the Anthony Hsieh-led company posted a stark 93% drop in profit from the first quarter of 2021. The company said corporate earnings in the quarter nosedived to $27.3 million from $427.9 million the previous quarter, citing industry overcapacity and increased competitive pressures for the decline.
During an earnings call with analysts, Hsieh projected resolute optimism about his company’s results, stating that “while others see headwinds, we see opportunity, because loanDepot was purpose-built for this moment in time.” He argues the company’s model “was designed to capitalize on this changing landscape.”
But even Hsieh, who founded loanDepot and serves as CEO, admitted that his company is in for some significant cost-cutting. His chief financial officer, Patrick Flanagan, unveiled during the call with analysts that loanDepot has already “implemented cost-cutting initiatives, results of which we have expected to be primarily realized in the second half of 2021.” He did not provide specifics of those cuts, and the company declined to elaborate.
But Roque thinks what’s coming is obvious. “Companies like loanDepot will be forced to lay off staff, consolidate brick and mortar, increase margins and/or reduce loan-officer compensation structures; any one of these — or all of them, to some degree — will be required in order for them to meet increased net-income objectives,” he said.
NOT STANDING ALONE
In the next few days, other mortgage lenders who went public last year also will report their second-quarter results. For most, Roque believes, the picture will be ugly. He called loanDepot’s “less-than-attractive” earnings report “entirely predictable,” given that the pandemic produced “historic” profit margins for the industry in 2020, margins that have since begun to return to more normal levels.
“As the industry moderates its margin and profit expectations, public companies like loanDepot will be confronted with pressures from investors to … increase their earnings in a margin-contracting environment,” he asserts.
In short, the picture he sees is that publicly traded, independent mortgage banks will need to make significant cuts to their infrastructure and staffing as the housing market calms from the high-water mark caused by the COVID-19 pandemic in 2020. Roque said he expects other publicly traded, independent mortgage lenders to face similar issues, though he cited Rocket Companies as a potential exception because of the diversity of its products and services.
Rocket is expected to release its second-quarter earnings on Thursday, Aug. 12. UWM Holdings Corp., parent of United Wholesale Mortgage, will release its quarterly earnings report on Monday, Aug. 16.
Home Point Capital reported its second-quarter earnings this morning, and it, too, showed a dramatic change, posting a $73 million loss in the quarter, down from a $149 million profit in the first quarter.
Meanwhile, Flanagan, loanDepot's CFO, seems to agree with Roque’s general assessment. Flanagan said during the analyst call that the decrease in revenue was “a result of the broader trend in the mortgage industry that’s leading to lower industry loan-origination volumes and gain-on-sale margins.”
