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spk00: Good morning and welcome everyone to Loan Depot's second quarter 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 number one on your telephone keypad. If you would like to withdraw your question, press the pound key. I would now like to turn the call over to Gerhard Erdely, Senior Vice President, Investor Relations. Please go ahead.
spk08: Good morning, everyone, and thank you for joining our call. I'm Gary Herger, Daily Investor Relations Officer here at Loan Depot. Today, we will discuss Loan Depot's second quarter results. We are excited to share our financial results and other highlights of the quarter with you. 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. 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 section 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 Loan Depot founder, chairman, and CEO, Anthony Shea, and our 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 DeGurion, our Chief Analytics Officer, John Lee, and our Chief Revenue Officer, Jeff Walsh, to help address any questions you might have after our prepared remarks. And with that, I'll turn things over to Anthony to get us started. Anthony?
spk04: Thank you, Gerhard, and good morning, everyone. I'm pleased to be with all of you on the call today. Thank you for joining us. I look forward to sharing my comments and answering your questions. What was in 2020 arguably the strongest mortgage market in history, fueled by the unique circumstances of the pandemic, ended in the second quarter of 2021. While others see headwinds, we see opportunity because Loan Depot was purpose-built for this moment in time. This is precisely when a diversified at-scale marketing powerhouse like Loan Depot will shine. Our model was designed to capitalize on this changing landscape, and we are continuing to increase purchase volume, aggressively recruit loan officers, launch new joint ventures, and new product offerings like the Loan Depot Grand Slam, all while focusing on operational efficiencies and investing in our technology backbone. Based on data from the Mortgage Bankers Association, our model is succeeding, as evidenced by the growth of our market share over the past year. It took us 10 years to grow to 2.3% market share and just one additional year to get to 3.3%. leaving 96.7% of the market for us to go after in the future. In the same time period, we also achieved year over year and quarter over quarter increases in customer impressions and contacts as a result of our powerful data science and machine learning models that dramatically widened our top of funnel marketing reach. It's easy to do business and look attractive when interest rates are low, volume is high, and margins are fat. However, when markets shift, weaknesses are exposed. When interest rates rise, originations shrink and margins vanish. And that's precisely when we gain market share with our scale, brand, and diversified origination model. Companies that lack brand, technology, diversified reach, and a suite of service offerings will not be successful in delivering customer or shareholder value. Looking across the landscape of mortgage providers, we see lower gain on sale margins resulting from overcapacity and increased competitive pressure, particularly in the wholesale partner channel. We have noted previously that the industry will consolidate towards proven leaders as market shifts. We will withstand that pressure and, in fact, we can actually apply some pressure to the competitive landscape. Our purposely diversified origination model guards us against margin compression in any particular channel, affording us a competitive advantage to profitably take market share. Because of our marketing power, its massive scale, and our ability to fully leverage it, we demonstrate a nimbleness and versatility that relatively few can. Our marketing machine is one of our greatest assets. and able to successfully feed our direct lending loan officers as well as our in-market and partner teams. Our ability to nimbly and successfully load balance in this way drove an 87% year-over-year and 31% quarter-over-quarter increase in our purchase mortgage transaction volume. Complementing our customer acquisition and production skill is our brand. recognition of which increased 9% quarter over quarter. We have deliberately invested in our brand, helping it become the second most recognized brand in the industry today. Thanks to our popular Home Means Everything campaign, our organic website traffic has increased 200% over the past quarter. In addition to our national broadcast campaigns, our partnership with Major League Baseball served over 406 million impressions in the second quarter. We just passed the all-star break, and with the league championship series approaching later this year, we expect to substantially grow our brand recognition without significant additional cost. Disruption in the market today is all about better serving the home buyer or seller with easy-to-navigate bundle real estate services that simplify a complex and stressful transaction. While others have approached this from the real estate side, we use the power and scale of our industry-leading top-of-the-funnel digital marketing power with our strategic and purposeful sister companies and other Loan Depot assets to create a bundle service for our customers that most of our competitors simply cannot touch. To that end, we recently announced the launch of the Loan Depot Grand Slam, Powered by Miller Home. As most of you know, a constellation of important companies sit underneath Loan Depot umbrella. We provide real estate services through Mellow Home and mortgage services through Loan Depot. In addition, we also provide title, escrow, and closing services through our ACT and CUSA companies, and insurance services through Mellow Insurance. This strategy has been executed for many years with strategic acquisitions and organic bills. The Lone Depot Grand Slam bundles each of these items, all of which are necessary for closing, into one easy package to delight and simplify the customer's journey of homeownership and to increase revenue for us in each transaction. This will ultimately provide greater return on and leverage of our marketing spend. Constant interaction with our competitors, with our customers throughout their entire home ownership experience via multiple touch points complete the five wheel effect and increases our top of funnel velocity. Today, Loan Depot is more than a mortgage company. We're a digital commerce company committed to serving our customers throughout the home ownership journey. we are uniquely positioned to provide exceptional value and a reason to return to us long after the initial home financing transaction is complete. The Loan Depot Grand Slam represents a significant step towards our vision to become the most trusted homeowner fulfillment company in the world. There's an energy and enthusiasm at Loan Depot. We're growing and remaining very true to our public statements about our intentions, abilities, and the ways in which we can, do, and will deliver for our customers. While we are proud of our progress, much of our energy is derived from the fact that we are just getting started. We are always looking for new opportunities to grow and further accelerate our long-term strategy. I am excited about what the future holds for our customers, our team, and ultimately our shareholders. With that, I'll turn things over to our CFO, Pat Flanagan, who will take you through our financial results in more detail. Pat?
spk09: Thanks, Anthony, and good morning, everyone. We are coming up on our six-month mark since our IPO in February, and I'm both excited and proud of what we've achieved during this short period of time as a public company, thanks to the continuous hard work and commitment of Team Loan Depot. This quarter, we reported total revenue of $780 million, diluted earnings per share of $0.07 and adjusted diluted earnings per share of $0.18, reflecting lower loan origination volumes and gain on sale margins, which is reflective of the overall industry reality. In the second quarter, loan origination volume was $34.5 billion, a decrease of 17% from the first quarter of 2021. Our retail and partner strategies delivered $10.4 billion of purchased loan originations and $24.1 billion of refinanced loan originations during that period. Our retail channel accounted for 81% of our loan originations, and our partner channel accounted for 19% of our loan originations. The consistent contributions across both channels signify the strong customer and mortgage broker relationships we have built over time, as well as the effectiveness of our innovative Mellow Technology platform to underwrite, process, and fund mortgage loans originated both in-house and with our partners while delivering the exceptional customer experience. Our rate lock volume of $42.1 billion for the second quarter resulted in quarterly total revenue of $780 million, which represented a decrease of 41% from the first quarter. The decrease in revenue is a result of the broader trend in the mortgage industry leading to lower industry loan origination volumes and gain on sale margins. Our total expenses for the second quarter of 2021 decreased by 14% from the first quarter of 2021, primarily due to lower variable expenses on loan origination volume and IPO-related expenses incurred in the first quarter. We also implemented cost-cutting initiatives, the results of which we expect to be primarily realized in the second half of 2021. Our technology-driven processes allow us to adjust our expenses to changing market conditions, or as demonstrated by our increase in purchase loan originations during the quarter, adjust our pipeline composition to load balance our operational capabilities. Our growing servicing portfolio perfectly complements our origination strategy and ensures that we can serve our customers through the entire mortgage journey. The unpaid principal balance of our servicing portfolio grew to a record level of $138.8 billion as of June 30, 2021, compared to $129.7 billion in the first quarter. This growth was inclusive of a sale of $14.4 billion of unpaid principal balance completed during the quarter. The change in fair value of our mortgage servicing rights was not fully offset by our hedging instruments as longer-term interest rates fell and experienced a higher level of volatility. Also, the low interest rate environment is continuing to result in high levels of amortization expense from higher prepayment rates. Fortunately, We were able to retain many of these customers as our organic refinance consumer direct recapture rate increased to 75% as compared to 72% for the first quarter of 2021, highlighting the strength of our customer relationships. We are very proud of our progress because this growth was against the backdrop of growing our servicing portfolio in-house and relying relatively less on third-party subservicing partners. We reported adjusted EBITDA of $109.3 million and net income of $26.3 million as compared to $458.1 million and $427.9 million for the first quarter of 2021. The quarter-over-quarter decrease was primarily driven by the decline in gain-on-sale margins and rate lock volume. Importantly, adjusted EBITDA exhibited a smaller decline than net income, reflecting the strength of our core business. As we look ahead to the third quarter and building our growth strategies that Anthony laid out, and assuming no material changes in interest rates and competitive landscape, the company expects rate lock volume of between $44 billion and $54 billion, reflecting the recent decrease in interest rates, our strong July production volumes, and the addition of loan officers and joint venture partners. We also expect loan origination volume between $30 billion and $36 billion, and we expect third quarter gain on sale margins of between 245 and 295 basis points of origination volume. Now let me turn it back over to Anthony for some closing comments.
spk04: Thank you, Pat. Before we turn to questions, I just want to take a moment and say that I'm proud of the team and our results this quarter. As proud as I am of all Loan Depot has accomplished and as confident as I am about what Loan Depot and our affiliate companies will deliver, we will never be a company that is satisfied or one that rests on our laurels. We remain focused on our strategy of offering even more adjacent non-mortgage real estate related services that will serve our customers through every stage of the home ownership journey. providing our customers with robust choices in an expansive set of products and services through our proprietary technology, powerful data and analytical capabilities, and exceptional service, how we will continue to win. Loan Depot is uniquely suited to reimagine the home buying and selling experience thanks to its top-of-the-funnel marketing and customer acquisition power. diversify loan origination strategy, proprietary technology, and answerly services. Our assets and capabilities are some of the most sophisticated and diverse in the industry today. We continue to use our collective wisdom, relentless drive, and unending curiosity about what is possible to delight customers and employees, diversify our offerings, and subsequently our revenue stream, and deliver shareholder value. During our initial public offering earlier this year, we told you we would continue to focus our long-term vision by growing our brand, investing in our technology, and aggressively recruiting loan officers as we continue to grow our market share. Our results this quarter demonstrate our commitment to those principles, and you'll see us continuing to deliver on those promises in the quarter and years to come. Now, with that, we are ready to turn it back to the operator for Q&A. Operator?
spk00: At this time, I would like to remind everyone, in order to ask a question, press star, then the number one on your telephone keypad. We'll pause for just a moment to compile the Q&A roster. Your first question comes from the line of Doug Harter from Credit Suisse. Your line is open.
spk09: Thanks. First off, thanks. Thanks for the guidance. Just hoping you could talk a little bit more about how gain on sale margins have progressed kind of throughout the second quarter into July. Sure. Thanks, Doug. This is Pat. So as we stated in the range of guidance that we provided between 245 and 295, we have seen a recovery in June and July for caused by a combination of factors, including expanding our product offerings. And we're confident in that range that we quoted, and we've seen significant recovery in July. And I think that it's also representative of our multiple channels, both partnership and retail, allowing us the flexibility to offer different products at higher margins. Great. And then can you just, you know, talk about how you're seeing consumer response to these lower rates and, you know, kind of thoughts as to whether we're starting to see refi burnout at this level of rates, you know, kind of putting that in the context of where we are today?
spk04: Hi, Doug. It's Anthony. So I think there was a couple of questions there. First, you know, with interest rates reducing a bit over the last month or so, we have seen an increase in refinance demand. But more importantly, the company has shifted some of our marketing towards non-rate and term refinance, so those consumers that are less interest rate sensitive. such as cash out for debt consolidation, home improvement, and, of course, purchase lending. So there is a substantial amount of interest level from our customers. We are talking to more customers than ever in our 11-and-a-half-year history. We are seeing... more leads being developed by our brand and our marketing team than our 11-and-a-half-year history. So there's plenty at the top of the funnel. So this is an expense as well as a margin environment as the industry continues to sort out capacity and how to neutralize capacity, and ultimately margins will return. the margins you're seeing today is very temporary. It always happens during a time of change. But we're very bullish on the top of the funnel. The customer demands are still very, very active.
spk06: Great. Thank you, Anthony.
spk00: Of course. Your next question comes from the line of Brian Carr from Jefferies. Your line is open.
spk01: Hi, good morning, guys. Thanks for taking my question. The first one is on the guidance. You're guiding up on gain on sale for 3Q. I'm curious, can you touch on the competitive trends you're seeing in the in the retail channel that kind of causes 2Q dynamics, and then is the 3Q guide mix shift, how much of that is a function of an improvement in margins versus mix shift across channels? Thank you.
spk09: Yeah, what we're seeing in the in-market, this is Jeff Walsh, what we're seeing in the in-market retail channel is the ability to hold on to margins. And as we watch the kind of the compositions of our pipeline shift into purchase, we see, you know, 31% increase in purchase volume, Q over Q, and 87% year over year increase. because of the nature of that transaction on the purchase side, the margins are higher. And, you know, we're positioned, I think, well to take advantage of both purchase and refi markets, whatever the market gives us. The diversification allows us to take advantage of either, but we're definitely seeing that dynamic of the margin on the retail side.
spk04: Hey, Brian, it's Anthony. Let me just add on to Jeff's comments and provide some context so this is the the the start of a trend change and the industry is trying to sort out where margins should rest on a go-forward basis and what i'm seeing today is the first of of its kind and that is through different models and distribution margins are decoupled You have one channel that is different from others. I've not seen that before. And it would be interesting to see how it adjusts one channel versus another. But it's not sustainable for margins to be decoupled when the industry is selling the same exact product. Now, keep in mind that 90-plus percent, the fundings that we're still seeing through the mortgage industry today is fueled by FHA, VA, Fannie and Freddie. So it is the same product with different margin profiles that has been decoupled. All of this is new post-financial crisis and the fact that, you know, countrywide vacated 22% market share when it fell. So, you know, the land grab here and the race, for substantial category-leading lenders to mass market share, we're seeing some behavior that's interesting. But the decoupled margin is not sustainable, so we're watching that pretty carefully.
spk01: Got it. Thank you. And then a quick follow-up specifically on the expense side. Your expense cuts, where are you going to see the bulk of those come into play? I know you noted for the back half of this year, but what about 2022? And within that, where do you kind of see yourself getting from a pre-tax income as a percentage of volume basis for next year in a more normalized environment?
spk09: Yeah, Ryan, so where you would expect to see the expense savings in the back half of this year is going to be primarily in personnel expense, and it's largely driven by changes in variable comp components. And as we mentioned during the IPO process, as we continue to roll out additional technologies, particularly in our fulfillment groups, it allows us to reduce the variable costs. and primarily the fulfillment side of the house, reductions in overtime spending as we work through the pipeline backlog and we're more appropriately staffed with the mix between salespeople and processing people. And I think you'll see the continued rollout of technology into the next year, and we continue to focus on driving efficiencies out of the business, but we haven't provided any specific guidance towards that in 2022 yet. But we're very focused on costs and efficiencies and reducing the volatility around those expenses when we have changes in the interest rate cycles.
spk01: Thanks very much.
spk00: Your next question comes from the line of Manu Sribarirat from UBS. Your line is open.
spk05: Good morning, guys. I'm on for Brock Vanderbilt this morning. How's everyone? We're good, Manu. How are you? Not bad, not bad. I just had a quick question on market share. Acknowledging the pressure on volumes that we saw, it looks like your market share in purchase and refi fell a bit over the last quarter. Any thoughts on whether it's the banks who are getting the share or whether that's a function of other factors in the industry?
spk04: It's Anthony. So we've grown our volume compared to last year, six months, to this year, year today, six months. We've grown our volume at Lone Depot by 110%. And we've grown on the average of 46% for the first 10 years of our history, and we've grown our market share substantially in the last 6 to 12 months. A lot of that is the fact that we continue to be very disciplined on a diversified origination channel, arguably the most diversified in contemporary times. We have in-market loan officers, direct lending loan officers, joint venture partners, and mortgage broker partners. And in addition to that, we've been very disciplined on continually and consistently building our brand and our brand recognition that ultimately helps us drive down customer acquisition costs. So the banks are conceding market share to non-banks, and I think the non-bank community, you're going to see consolidation continue to happen. The massive capacity buildup of non-bank lenders started in 2009, but I believe in the last nine months it has shifted into a market that's going to consolidate, and we certainly are confident that we're going to be a beneficiary of this market that is consolidating while we continue to look for organic builds in all of our channels and as well as continue to be very aggressive on the lookout for any acquisition opportunities.
spk05: Okay, that sounds good. Thank you for that caller. And, Anthony, you know, many people have come on to your comment last quarter, which was that no one would be willing to sell you a dollar bill for 90 cents. And so I guess my question is that, you know, any color on how long this excess capacity within the industry can persist? Are we talking quarters here or are we talking, you know, a year down the road?
spk04: It depends on where the 10 years will rest. So we certainly got some of that back. And as a result of it, mortgage volume increased because of lower volumes. But we've had some challenges in the purchase market because of the lack of inventory. So we like the fact that there is pressure. So selling dollar bills for 90 cents is a good thing for companies that have the proper strategy. We don't like giving away earnings. Certainly that is something that no one likes. However, the value that we create in amassing market share is substantial. So, you know, as we provide guidance, which, by the way, I'm against it, but my team very much wants to provide guidance to all of you. Margin is a reflection of how competitive we want to be. And I know my competitors think exactly the same way. And that is, it is a tool that we can use to temporarily put additional pressure on some of the lenders that cannot withstand that sort of pressure. And ultimately, the total addressable market is massive. The barrier to entry is significant. and we are on our way to amass more market share over a long-term strategy. So this is very, very temporary. This is a nine-inning game, and we are in the bottom of the first inning, and there's a long, long ways to go.
spk05: Gotcha. I appreciate the color. I will say that I appreciate the guidance as well. Thanks for the time this morning, guys. You're welcome.
spk00: Your next question comes from the line of Kevin Barker from Piper Sandler. Your line is open.
spk03: Good morning. Thanks for taking my questions. In regards to the gain-on-sale guidance, I just wanted to clarify that is on pull-through weighted gain-on-sale margin, right, not the stated 228 gain-on-sale margin? Could you clarify that?
spk09: Kevin, no, that is on funded loan origination, not pull-through weighted loss.
spk03: So you have it going from 228 up to the 245 to 295, right?
spk09: That's correct.
spk03: Okay. And then the retail gain on sale margins went down 75 basis points quarter over quarter on funded volume, which seemed like a heavier drop than we've seen from other retail originators or ones that are focused mostly on the retail channel. Was there anything in particular that occurred this quarter that may have caused that additional weight? Was there something with hedging or pull-through that may have impacted it?
spk09: No, I think more of what that was reflective of is the difference between funded loan volumes that were carried over from the prior quarter into locks in the current quarter. So in the press release, when we show the pull-through weighted gain on sale margin at 264, I'm not sure, did we get the channel breakout? But there was less variability when you looked at it on locks that occurred during the quarter. So I think that was largely the timing difference that that show it to be artificially low or lower.
spk03: Okay. If you were to right-size the gain-on-sale margin guidance on a pull-through weighted basis, what would that look like relative to the 264?
spk09: But we'll circle back and get back to that. I don't have that handy. But I can say that the trend that we're seeing now is we've overcome the majority of the pipeline backlog. So the level of lock that you see in a quarter should be representative of the, you know, should be reflective of what the funded volume results in. And so, you know, you're going to see the difference between portfolio-related lock on sale and funded gain on sale become tighter.
spk03: Okay, and then on the cost-cutting initiatives, is there any way you could size up whether it's on an absolute basis or as a percentage of your total origination volume that we should expect with total operating expenses?
spk09: Well, we're continuing to grow and add headcount and add loan officers, so I would expect the overall dollars of expenses in the quarter to increase. Okay. but the cost to acquire and the cost to manufacture alone will be representative of the operating leverage we're creating through technology and change in workflow. Okay.
spk03: Thank you for taking my question.
spk00: Your next question comes from the line of Trevor Cranston from JMP Securities. Your line is open.
spk02: All right. Thanks. Good morning. You guys mentioned focusing more going forward on the non-rate-term refinancing opportunities and more so on the cash-out side. I was wondering if you could maybe provide some color around kind of how much of the refi volume in 2Q was cash-out, what you've seen in terms of trends and success in growing the cash-out business and how much of a growth opportunity you think there is going forward. Thanks.
spk04: We're looking that up right now, Trevor. I'm not sure if we have that quite handy. But if not, we can certainly get back to you. Yeah, we don't have all the details for you, Trevor, but 56% of volume of this quarter was cash out and purchase. So we can certainly get you some of those details offline.
spk09: And I think we couple those cash out and purchase together as they're less interest rate sensitive portions of the business.
spk02: Got it. Okay, that makes sense. Yeah, that makes sense. Okay, appreciate the comments. Thank you.
spk00: Your next question comes from the line of Steven Sheldon from William Blair. Your line is open.
spk05: Hi, thanks for taking my questions. It sounds like you're continuing to see strong lead volume. So I wanted to ask, I guess, how much of that is being driven through Loan Depot's organic channels versus relying on third-party leads? Are you getting enough lead volume organically where you're not needing to rely on third-party sources, especially with some of the increasing brand awareness that you've noted? Or have you opened up more on the third-party side to kind of supplement the strong lead volume that you're generating organically?
spk09: This is John Lee. I'll cover that. That's a great question. So we're seeing very strong organic lead volume growth as our top of funnel reach is really impacting our ability to market digitally and through other direct response channels. And we've actually seen our organic lead performance outperform the first half of 2020. It's up 60% versus last year, same period. We're also seeing a very large increase in website visitors, and it's up 200% quarter over quarter. So organic marketing and really our brand marketing is having an impact on the top of the funnel. Most importantly, though, it's having a big impact at the transaction level as well. So our brand awareness is converting into more transactions for the company.
spk04: I just want to add on to that, and I think the question was, you know, how much of it is organic, how much is a third party? And the way that we measure that is, you know, we look at the return on investment of our marketing dollars on all of those channels. And what happens with third party lead performance is we see an increase in conversion because of brand recognition. So as we develop brand and add to the top of the funnel of greater marketing spend, we're seeing this flywheel effect where organically we're producing more leads because of brand awareness, and we're seeing higher conversion through our lead partners because of brand awareness. And my last comment that I want to make is understanding that a digital company company that is creating velocity and commerce at the top of the funnel. As we add adjacent products and services, we have an embedded cost of marketing. And our ability to increase revenue by adding adjacent products and services to the same core customer base, which is a homeowner or home buyer, allows us to further increase our marketing leverage get paid back on the marketing spend. This is an important point of differentiation between Loan Depot and many of our legacy mortgage competitors is that they do not have these assets at the top of the business model.
spk05: Got it. That's really helpful. Paul, I just wanted to ask about the Grand Slam package. Just some more detail there on the rollout, the timeline for it to be available. Is it going to be kind of a gradual by geography or more of a national rollout? And if it becomes highly utilized by consumers, how should investors think about the potential financial implications?
spk04: So this is the future. So we've been hard at work on adding adjacent product and services and adding these assets for many, many years. So the product is available on October 1st. We have 4,000 of the top performance real estate agents throughout the country that is participating through Melahome, which is our sister company. Our title is going to be available, Jeff, correct me if I'm wrong, about 40 states as we roll that out, as well as rolling out mellow insurance and providing a free home warranty for our homebuyers. What's important here is that as we create the top of the funnel lead flow and many customers are coming to us, they do not yet have a real estate professional. They are looking to buy a home. They're looking to get pre-qualified. And this gives us a substantial opportunity to utilize our brand and allow that customer to come through us for us to initiate a transfer or introduction to a mellow home participating real estate agent. And as a result of it, the bundled service, which has a guaranteed low price component to the consumer, they will never pay more by utilizing the Loan Depot Grand Slam service. And as they do, we actually will provide a $7,000 cash rebate back to the consumer. So not only do they save money and have that $7,000 to fuel some of their moving costs or some of the costs to improve the property, but they have a bundle service and a single branded approach that encompasses all of those adjacent products and services together.
spk05: Great. Thank you.
spk00: Your next question comes from the line of James Fawcett from Gan Stanley. Your line is open.
spk06: Hey, good morning. My question maybe seems a little bit odd given what's going on in the market, et cetera, but if we take a step back, the market's still quite good. You're obviously making adjustments to to the realities of kind of the current economics. But to your point, Anthony, there'll be some point of normalization where, you know, things will kind of settle back into, you know, probably something that's more sustainable economically. And you're still making a fair amount of money and generating good cash. So how should we think about, like, where the uses of that cash? Is this something where it makes sense to look at returns to shareholders, or is this the right time to be reinvesting, or should you be kind of building a war chest of funds in the event that rationalization and normalization takes longer than expected? Just trying to think through kind of the different ways that you can take advantage of the current environment, even if it is under some pressure right now.
spk09: Hi, James. Thanks. It's a good question. And, you know, we think about capital planning and proper levels of liquidity to run our business. Obviously, constantly we have internal metrics that we measure against. And then on the other hand, we are always looking at the right way for us to return and create value for our shareholders. So, You know, we can invest in growing our origination franchise, which we will and continuously do. And then it becomes a question of capital allocation, how much we want to invest in growing the servicing assets as well. As we've said before, we're actively looking in the M&A market, both in the mortgage side and the non-mortgage side, And we've also stated our intention to be a constant dividend payer on a quarterly basis. But outside of that, if we have excess capital, we can use any kind of combination of factors or tools to return value to the shareholders, as evidenced by our special dividend earlier in the year. And so we'll continue to evaluate all that, but the focus is on growing shareholder value.
spk06: And I appreciate that. And, Anthony, you know, obviously you've been enmeshed in this industry much longer and deeper than probably anybody on this call or at least most people on this call. Can you – Was there a time where you can draw some parallels from your experience and kind of what was the things that you did with your companies, whether Lone Depot or previous ones, in reaction to that and just looking for any parallels to maybe what you've seen in your experience versus now and how it's informing your decision-making right now?
spk04: uh james this is this is certainly you know not our first rodeo uh everything here is highly predictable there's been very very little surprise um you know my challenge as as the founder and ceo is to make absolutely certain that this team is poised to continue on our strategic journey and that we don't get sidetracked by some of these temporary flavors that we're seeing today, which is highly predictable. It will return. This is all temporary. The primary difference here versus the cycles I've done in the past, I've gone through in the past, is the digital disruption. Consumers are changing. We have to continue to invest into technology and brands. Those are the differentiators. That will not change during this this disruption that is creating wonderful opportunities for companies that get it, that understand how to build a better mousetrap for the future. So we have to remain very focused to our purpose and not allow the temporary noise of margin that is going to derail us in any way. So nothing, James, that I've seen during this cycle that is really anything different.
spk06: I appreciate that. Thank you.
spk00: Your next question comes from the line of Mark DeVries from Barclays. Your line is open.
spk07: Thank you. Were there any material differences this quarter in your retail gain on sale margins in the in-market business versus direct to consumer?
spk04: So I'll take that. Yes, I don't believe, Mark, that we have separated out our revenues by direct lending versus in-market. But I will say that these two markets have decoupled, and that is not sustainable. They will come closer together as the market continues to adjust through the cycle.
spk07: Okay, so is it safe to say that the competitive dynamics in the wholesale channel really had an impact on the end market where you're kind of competing more head-to-head than direct-to-consumer?
spk04: No. No, you know, you can hear the background here. No, you know, what's happening right now is several things, but the wholesale market continues to be, you know, very, very competitive, and that's going to continue fuel pressure for the industry that we like. But, you know, 20%, less than 20% of our sales Origination is our partner channel, and of that, I believe only half of that is our wholesale channel. So as we continue to watch that, there's certainly pressures from how wholesale is pricing and the type of pressure that we're seeing. through customers saying that they have received current bids or offers from mortgage brokers, but it's still not massively affecting the overall retail margins as of yet.
spk09: And let me just add, where we see the competitive nature is more along the lines of purpose than it is by channel. So, as we mentioned, the less rate-sensitive customers are cash-out, refinance, and purchase. And we saw the opposite of that happen in 2Q, where most of the pricing pressure came from in the rate and term refi side, regardless of what channel it was originated in. And that's one of the reasons why we are focusing on broadening the product reach and continuing to go purchase. And we think actually having all four channels and the ability to toggle to the market is a competitive advantage.
spk07: Okay, that's helpful. And just wanted to clarify a few comments you made on Grand Slam. Did I hear correctly? Did you use the word free on the home warranty? Is that something where the premium is being covered? Are you referring to maybe a commission-free sale of the home warranty? How is that going to work?
spk04: We are grouping that in and providing that product free of charge to our Grand Slam customers. So it is free.
spk07: Okay, got it. So that's effectively part of the rebate that you alluded to?
spk04: No, that's in addition to the cash rebate. So the way to look at that, everyone, is the fact that we have an embedded marketing cost as a mortgage lender. And as a mortgage lender, the return on marketing formula works very well for us. If you add in title revenue, closing revenue, real estate services revenue, that really juices our marketing return, and it gives us the ability to provide some of those revenue and earnings as a rebate back to that customer.
spk07: Okay, great. So that – that could come through both a free home warranty policy in addition to a rebate? That's correct. Okay. Interesting. Okay. Thank you. You're welcome.
spk00: There are no further questions at this time. Anthony C., I turn the call back over to you.
spk04: Well, thank you all again for joining us and for your questions. We look forward to continuing to build our relationship with each and every one of you over the long term. Thank you again and have a great rest of the day.
spk00: This concludes today's conference call.
spk04: You may now disconnect.
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