This conference call transcript was computer generated and almost certianly contains errors. This transcript is provided for information purposes only.EarningsCall, LLC makes no representation about the accuracy of the aforementioned transcript, and you are cautioned not to place undue reliance on the information provided by the transcript.
spk04: Good morning and welcome everyone to Loan Depot's first quarter 2022 conference call. All lines have been placed on mute to prevent any background noise, and if you would like to ask a question during the call, simply press star 1 on your telephone keypad. If you would like to withdraw your question, please press star 1 again. I would now like to turn the call over to Gerhard Egele, Senior Vice President, Investor Relations. Please go ahead.
spk09: Good morning, everyone, and thank you for joining our call. I'm Gary Harder-Dailey, investor relations officer here at Loan Depot. Today, we will discuss Loan Depot's first quarter 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 section of our filings with the SEC. On the company's investor relations website at investors.loandepot.com under the events and presentations tab.
spk01: On today's call, we have Chief Financial Officer Patrick Flanagan. Again, to provide an overview of our quarter, as well as our financial and operational results, outlook, and also joined by our Chief Capital Markets Officer, Jeff DeGurian, and our Chief Revenue Officer, Jeff Walsh. Over to Anthony to get us started. Anthony? Thank you. Good morning.
spk08: I'm pleased. to be with all of you on the call today. Thank you for joining us. I look forward to sharing my perspective and answering your questions. The results of the first quarter reflected an environment that may turn out to be one of the most challenging that our industry has ever experienced.
spk01: The increase in mortgage rates during the quarter happened much more quickly and sharply than anyone anticipated. when the quarter began and resulted in significant and rapid decreases in profit margins.
spk08: Environments such as these are why we built Loan Depot the way we did, are diversified, be nimble, and adapt to changing market conditions.
spk01: We have pivoted our business to generate more purchase loan volume. Intense competition, lower volumes, and decreasing profit margins are putting pressure on the entire It creates long-term opportunities for Lone Depot to outperform less efficient and less diversified competitors. To accelerate execution on that goal, we recently announced a major addition to our executive management team. Going forward, I will assume the role of executive chairman overseeing company strategy. Prime and has also served on the board of directors of the Mortgage Bankers Association. Frank will drive data management team reporting to him. Along with George Brady, our Chief Digital Officer, Driving Technology and Innovation, and Vinette Sadie, President and COO of our operating unit, Mellow. Frank continues the enhancement of our C-suite.
spk08: The addition of these industry leaders will allow us to accelerate on executing the strategies for the next stage of the company's journey to innovate and to create long-term shareholder value. I am excited for this opportunity, both personally and for the company.
spk01: With that, let me introduce Frank Martel, Loan Depot's President and CEO. Frank. Thank you, Anthony.
spk09: Before I begin, on a personal note, I'd like to thank you and the rest of Team Loan Depot and shareholder value creation in the medium to longer term. Since its founding 12 years ago, Loan Depot has grown rapidly by employing diverse origination strategies, innovative and proprietary technologies that drive customer acquisition, service and satisfaction, and introducing exciting new products and services that meet the evolving needs of the marketplace. Our growing service business and diversified multi-channel origination strategy, as well as our nationwide marketing reach, is unique within the industry. has become the scale leader platform to bolt on profitable solutions and adjacencies, which over time can drive further scale and help reduce sick locality.
spk01: Along these lines, last week we announced the third quarter launch of our Mellow Key Lock solution.
spk09: This all-digital HELOC will let homeowners quickly and efficiently access record levels of home equity while preserving the historically profitable growth opportunities, the recent sharp downturn in refinancing on cost levels as well as productivity. In a few minutes, Pat will provide some detail around our progress in setting the cost structure during the first quarter. As we move forward this year, in line with our goal of achieving a profitable run rate exiting 2022, we will redouble our efforts to right-size our costs in line with market conditions.
spk01: Ultimately, leveraging our operating scale and aggressively driving quality to expand margins and, importantly, provide us with opportunities to participate in data and tech-driven initiatives designed to transform the home ownership. and housing finance experience.
spk09: Despite its current challenges, residential housing is a $34 trillion asset class in the U.S. with enormous opportunities for innovative, customer-focused firms such as Loan Depot. I believe Loan Depot is poised to succeed through leveraging and expanding its unique lending and servicing solutions, driving cross-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 Thanks, Frank, and good morning, everyone. During the first quarter, loan origination volume was $22 billion, a decrease of 26% from the fourth quarter of 2021.
spk01: This was within the guidance we issued last quarter of between $19 and $24 billion.
spk09: Our retail and partner strategies delivered $8 billion of purchase loan originations and $14 billion of refinance loan originations during that period. Our multi-channel origination strategy has allowed us to successfully pivot our production to less interest rate-sensitive purchase and cash-out refinance transactions. This was partly driven by our ongoing investment in our in-market retail channel. Retail loan officers increased by 9% year over year. These ongoing investments allowed us to increase the proportion of our purchase transactions from 19% a year ago to 37% in the first quarter, as well as increasing both cash out and purchase transactions from 43% to 83% during the same period. Our pull-through weighted rate block volume of $20 billion for the first quarter resulted in quarterly total revenue of $503 million, which represented a decrease of 29% from the fourth quarter. Rate block volume came in at the low end of the guidance we issued last quarter of $19 to $29 billion. The decrease in revenues is a result of lower rate block volume and gain-on-sale margins. Our pull-through weighted gain-on-sale margin for the first quarter came in at 213 basis points. This also came in at the low end of our guidance for gain-on-sale margin that we issued last quarter of between 200 and 250 basis points and was down from the 281 basis points in the fourth quarter. Rapidly rising interest rates and shrinking overall market size has caused significant margin compression as the industry accelerates shedding excess capacity. Our servicing portfolio complements our origination strategy and ensures that we can serve customers through the entire mortgage journey. Customer retention is one of our primary focuses in this channel. By controlling the entire customer experience and retaining all of their 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. This is reflected by our preliminary organic recapture rate, which increased to 72% for the 12-month ended March 31, 2022, compared to the final recapture rate of 67% for the same period ended March 31, 2021. The unpaid principal balance of our servicing portfolio decreased to $153 billion as of March 31, 2022, compared to $162 billion as of December 31, 2021. This reduction was primarily due to the sale of $24 billion of unpaid balance during the quarter. We're particularly pleased to note that the prices of these sales exceeded the fair value mark of the assets at the time of sale. Reflecting these sales, servicing fee income decreased from $114 million in the fourth quarter of 2021 to $111 million in the first quarter of 2022. Bear in mind that 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 is designed to protect against volatility in our earnings and liquidity. Our strategy of hedging the servicing portfolio is dynamic, and we adjust our hedge positions in reaction to changing interest rate environments. We have invested in our in-house servicing capabilities and by growing the portfolio and bringing more servicing in-house, including our recently announced Ginnie Mae servicing. We leverage the infrastructure and create the scale to increase the earnings contribution from this recurring countercyclical business line. As of the first quarter, we serviced 67% of our portfolio in-house compared to 44% at the end of the fourth quarter of 2021. This increase was primarily due to the transfer of approximately $33 billion in unpaid balance from our subservicer to in-house, resulting in $2.4 million of deboarding expenses during the first quarter. As part of our balance sheet and capital management strategy, we repurchased $98 million of our senior notes due 2028 at an average purchase price of 88% of par. These transactions resulted in a $10.5 million gain on the extinguishment of debt and will result in annual interest savings of $6 million. During our call with you last quarter, we discussed our outlook for the market this year being between $2.5 and $3 trillion. Now we expect that market will be equal to or less than $2.5 trillion, which means we need to further reduce our expense base to align with those lower expectations and accelerate our pace of reduction. Looking ahead to the second quarter and assuming no material changes in interest rates or the competitive landscape, we expect pull-through weighted rate lock volume of between $12 and $22 billion, reflecting the recent increase in interest rates weighing on demand. We also expect loan origination volume between $13 and $18 billion. We expect second quarter pull-through weighted gain on sale margins of between 160 and 210 basis points, reflecting the significantly higher competitive pressure. Our total expenses for the first quarter of 2022 decreased by $88 million, or 13% from the prior quarter, due primarily to lower variable expenses on lower loan origination volume and lower marketing expenses. We are aggressively managing our cost structure to return to profitability by the end of the year. We expect to increase personnel expenses through the addition of headcount reductions. Despite these further expense reductions, given our expectations for decreasing market volumes and the competitive pressures on margins, we do not expect to be profitable for the fiscal year ending 2022. Given our expectations for lower volumes and gain-on-sale margins, the Board has decided to suspend payment of the regular dividend for the foreseeable future.
spk01: The Board will consider resuming the dividend in the future
spk09: But in the meantime, we believe retaining cash on the balance sheet is a better use for the long-term benefit of IRA to turn it back to the operator for questions and answers. Operator?
spk04: And at this time, I'd like to remind everyone to ask their questions. Please press star 1, the Q&A roster. And our first question will come from Doug Smith.
spk09: Thanks. You talked a little bit about the expense reduction being tied to more variable in the first quarter.
spk01: I guess how should we think about what your expense level as a percentage of volume can be kind of over the intermediate term? Sure, Doug. Hey, thanks for the question.
spk09: So I think when you think about our fixed expenses, the vast majority of our expenses are people-related and continue to work primarily on scaling those to the current operating environment. We haven't, and we don't, on a go-forward basis, but comments where we talked about the goal of returning to monthly profitability. before the end of the year. Great. I appreciate that. And then how are you thinking about the correct size of the MSR portfolio and the benefit of selling for liquidity and increasing your monthly cash flow?
spk01: Sure. And that's a great question. And we look at the balance sheet in when it comes to our MSR book and leverage and then a ratio of the MSRs to our tangible net worth.
spk09: And as I previously stated, we like to manage the company, which is exclusive of our warehouse financials. to tangible net worth in the range of one to one and a quarter to one. And we also like to manage our liquidity so that we have cash on hand and immediately available borrowings on our short-term MSR lines and total assets.
spk01: We had substantially higher levels of liquidity than that.
spk09: And in times of disruption, we tend to build more liquidity and guard that to pool. So we can both decrease the level of MSRs that we book on a monthly basis and And that is one of the strategies that we employ to maintain liquidity, and we can access the bulk sale market from time to time, and we like to stay active in both of those. So I think if you think about our balance sheet going forward within the constraints of those ratios, that's primarily where we think we'll land. And, again, I want to focus on that we believe the right thing of disruptive markets and
spk01: and title margins is to maintain a very healthy amount of liquidity and moderate leverage on balance sheet.
spk09: I appreciate that. Thank you.
spk04: Our next question will come from Kevin Barker with Piper Sandler. Please go ahead.
spk03: Thank you for taking my questions. So you're proactive in selling MSRs. You know, it seems like there's still a pretty robust market for those. And then your debt continues to trade at a fairly sizable discount to accelerate potential sales of MSRs in order to reduce that debt amount and potentially increase cash. Would you consider going down that route?
spk09: Hi, Kevin. Yeah, thanks for the question. And as I said, I think if you look at the strength of the balance sheet at the end of the first quarter, we had a very substantial amount of liquidity. And by managing the amount of MSRs that we sell on a monthly basis, we can offset operating losses and maintain adequate liquidity in the market. We will and continue to look at the bulk sale MSR market from time to time. We've consistently done that throughout the years, and we think it's important to be actively in that market. So we'll look at what the right combination is of co-issue deals and whole loan sales versus selling in bulks. And, you know, we're comfortable with the leverage of where we are, as I said, non-funding debt, the tangible net worth of, you know, one to one and a quarter to one. When we start to exceed one and a quarter and get near, you know, one and a half to one, that's when we usually access asset sales to kind of de-lever.
spk03: Okay. And then how much of your marketing spend is contractual in nature versus variable or discretionary? And then could you also, you know, give us a view on what production volume you've done according to the date relative to your guide?
spk08: Okay, thank you, Calvin. Calvin, in terms of marketing, what I'd like to highlight is, In an upward interest rate environment, your rate of return refinances obviously disappear. And cash-out refinances start to become more of the dominant percentage of folks that are acquiring refinances. This is the first time, I think it's important for everyone to notice that this is the first time post-Dot Frank where the non-bank and the banking sector lacked a second mortgage because of some of the laws that were implemented post-financial crisis and post-Dot Frank. So the marketing flow and the lead flow generated by our brand and our performance marketing machine is still very prevalent. However, the purpose and the motivation of the customers have changed because of rising interest rate environment. So I think this is important for us to explain that, the fact that we have differentiated assets. And we believe, along with this change in consumer motivation, the behavior is still the same. They're still spending money. and the fact that we announced a digital HELOC, the first of its kind, at a scale player, is really going to allow us to monetize that lead flow and for us to continue to leverage our brand. This is part of the benefit for operating a multi-channel strategy and for us to make the necessary investments so that we can control not only the design of products, And utilizing technology where the digital HELOC is not a traditional HELOC. It's a digital HELOC. We expect to close these loans on an average of seven to eight days. So we are adjusting to the market change, which everybody knows it's a rapid change. substantial violent change I encountered in my 36 years. So we're adjusting to that, and that marketing spend will change quite dramatically because our leverage on that marketing investment is going to change as our conversion changes as we add additional products. So the punchline to your question on how do we control the marketing cost, it's highly variable. And it's also highly dependent on the additional products that we add.
spk09: Let me just add on to what Anthony said, just more directly. Our marketing spend is highly variable, and only about 5% of our quarterly run rate in marketing spend is long-term and fixed in nature.
spk03: Okay, so when I think about the operating expenses and your ability to reduce those expenses given the current state of the market, what percent of your operating expenses in the first quarter would you consider variable in nature, and how many of those would you consider fixed? Obviously, I would think you're looking at it from a holistic perspective, but if we hone into that, maybe we can get an idea of how much you can really bring down those expenses relative to you know, some of the headwinds we're seeing across the market. Thank you. Sure.
spk09: So, again, the three major sort of categories of spend that we have high degrees of variability around are people-related expenses that's primarily commissioned, and that lags revenue by a month or so. and it's marketing, and we need to adjust our marketing to the return profiles on those marketing dollars that are spent in relation to what the market conditions are and then how much we have or how much we choose to invest in our technology platform. And then the rest of it is we are aggressively investing you know, managing expenses down, and we're prioritizing our strategic initiatives for the quarter and for the rest of the year. And, again, it's important to note, especially in fast-moving markets, that expenses do lag revenues by a significant portion.
spk03: Thank you for taking my question.
spk01: Good morning. Question on the MSR. So obviously in the first quarter, the hedges value. Can you talk about how you approached hedging it in the second quarter? Is it performed versus fair value increases on the MSR book so far in 2Q? I'm giving the right outlook today. Thanks.
spk09: Yeah. Well, Jeff Degarian, our Chief Capital Markets Officer, is on the line. Jeff, do you want to take that one?
spk01: Sure. Thanks, Pat. Trevor, thanks for the question. Pat mentioned in the opening statement, you know, we're going to adjust the hedge on the MSR book to be at the appropriate level given the interest rate market.
spk09: Sure. where rates are now at the present time. So, you know, we're going to continue to hedge the portfolio to line up with whatever the risk profile that is at any given time. So in general, the hedging levels have been reduced just because of the change in the asset profile here into Q2.
spk00: Okay. So are you
spk01: targeting, trying to offset the entirety of a fair value change instead of an incremental negative impact on profitability of the operating side of the business?
spk08: We're looking to preserve value and liquidity
spk09: that we see that we need to in the overall view of the hedging strategy.
spk01: So it is going to continue to be re-evaluated as time goes on. Okay. Thanks for adding to that.
spk09: Yeah, a significant portion of our MSR financing is short-term, revolving in nature that's subject to mark-to-market and margin calls. And one of the primary reasons besides value preservation for hedging the MSR book is to limit the amount of potential cash streams due to margin calls. It kind of circles back to my earlier comments during prepared remarks about the need and our – and our desire to continue to protect the levels of liquidity for the company.
spk00: Yeah, that makes sense. Okay, thank you.
spk04: And our next question will come from Bob Napoli with William Blair. Please go ahead.
spk06: Thank you very much. I appreciate it. I know you guys have all been through many of these cycles. How do you feel this cycle compares? I mean, I know you said it's the most difficult, but, you know, how quickly is capacity, I guess, in your view, draining out of the industry? How long does it take, do you think, before gain on sale, before GOSS starts to normalize towards long-term historical levels?
spk08: Anthony Shearing Hey, Bob, it's Anthony Shearing. Look, we're predicting, along with NBA and P&E Friday, everyone's predicting volumes this year with a 2 in front of it. It could be as low as 2. It could be mid-2s. In any other year, that would be a healthy market, and there should be a decent amount of profitability as a result of that type of volume. But when you're coming off of two giant years of 2020 and 2021, and mortgage lending is still very much inefficient. This is where the disruption in the future five to ten years is going to become substantial. And there's a tremendous opportunity for the leaders in the space, particularly now with all the barriers to entry to so many different components. that takes a company to a level of scale. So you're adjusting down from four plus trillion to two and a half or less in a matter of seven or eight or nine months. So that is a tremendous and very, very violent change. And the fact that most of the transaction on the refinance market side now Because of the substantial high quality of credit that homeowners have today, they're enjoying interest rates that they do not want to pay off. So the commerce, there's lots of purchasing power. There's lots of need for home improvements. In particular, seeing the lack of inventory on the resale side, lots of homeowners are adding on and improving, and we see this home equity market has very long legs, and it's an area that we're very excited about, but it's going to take a little bit of time to adjust. How long will this take? I think it will take until the rest of the year. In my previous earnings calls, we talked about four or six quarters, and I remain pretty consistent with that. Could the pressure be getting worse? Possibly, but I don't think so. I think we're in the trough. At this point, we're heading into the right time of the season, and I think that the pressure is good. Any time this suggests this happens, It's great for market consolidation. And with us moving forward and Frank being here, allowing myself to focus a bit more on the company with Frank and Pat and Jeff and the rest of the team focusing on the inside of the organization, creating operational leverage, I think we're excited about the future.
spk06: Thank you. And then just the mortgage market is, I guess the good thing about a refi bust and higher interest rates is it sets up the next refi wave, you know, maybe down the road a bit. But the product set for the mortgage industry has changed radically over the last decade or so. Are there opportunities? I know we've seen a number of subprime companies But are there opportunities for higher margin products, and I guess maybe HELOCs are one of those, to expand, or do you just think that there is no interest from the political side to expand the base of types of borrowers into what maybe could be more profitable for the mortgage industry?
spk08: This is interesting. one of our greatest differentiators and why we worked so hard to build assets that allowed us to do exactly that, to build a brand, to build a performance marketing machine, and to have sophisticated capital markets executions. This is why, just to remind everyone, back in 2015 and 2016, we were the first mortgage company to develop assets and introduce a personal loan product into the marketplace and exit that space only when the capital markets and the liquidity um were disrupted through um in 2018. so this market post dot frank is uniquely different from any other market example the last market 60% of loan originations were non-Fannie Freddie FHA VA. So 60% of the funding in the mortgage industry were sort of non-government products or GFC products. Today, we're looking at 12, 13 years post-op Frank. We're still looking at 90% of the funding today, pretty much FHA, VA, Fannie, and Freddie. So the industry must look at new product opportunities to add in that delights our customers and help us lift marketing conversions. Having the assets to drive leads up the top of the funnel and then to add products that and our product mix, along with adding other services, is one of the key differentiators of this organization going forward. So as we look at a digital HELOC, we also are looking at personal loans, looking at other types of products and services that ultimately allows us to increase the ability to capture and convert higher so that we can additionally lever our marketing investments.
spk06: Okay. Thank you. Appreciate the answers. Of course.
spk04: Our next question will come from Aaron Siganovich with Citi. Please go ahead. Hi.
spk09: Thank you. I was curious as to what your view of the mix of purchase and refi, which I would assume is probably mostly cash-out refi in the second quarter.
spk08: So there's one other dynamic that is happening that I like to note, and that is the non-bank market share in the last 10 years has increased significantly at a historical high based on the different that you read, it's well above 50% as a non-bank market share now as compared to previous cycles. As interest rates rise, there are a few things that make the non-bank sort of headwinds.
spk01: One, obviously, is the reduction in the overall volume And then, of course, the pressure on Goss overall the industry. But once interest rates rise, hybrid arms reach a lower interest rate because sticker shock.
spk08: 5% interest rate is still very attractive historically. But coming off of 2% handle just 8, 9, 10 months ago, consumers are looking into hybrids, 7-year arms, 10-year arms.
spk01: And that typically is a bank credit union product. So I think the non-banks will lose some share back to the banks just because of our capital costs and the way that we originate products.
spk08: So it's not just a purchase versus refinance ratio going forward. It's really how to increase product so that the customer has an opportunity to buy from you. We are in a significantly different market today than I ever have witnessed in my career. A lot of this is a combination of the pandemic. A lot of this is the rising appreciation in real estate in the last couple of years. And the fact that the non-bank market share, along with bank market share, has changed significantly. And non-banks are at a disadvantage because of the cost of capital. So we're going to have to be very creative from Lone Depot's perspective. And we believe that we have a tremendous strategy going into the rest of the year, understanding the current environment.
spk09: Let me give you just a couple of numbers. So purchase for the first quarter was about 37% of total originations. And for the second and third quarter, typically we would see a slight increase, and it's a lot just due to the seasonality that second and third quarters tend to be. purchase season, and I think you'll see that our percentage of purchase growth has grown over time as we continue, and we're adding more loan officers in our in-market retail channel today than we are in our direct-to-consumer channel of our retail side, and they typically do more purchase production. So as the market dynamics change, we continue to pivot towards purchase. Okay, that's helpful. Thank you. And then the other question I had was on, I think you made a comment that you should you expect to get back to profitability by year end. Is that an assumption that, you know, gain on sale margins will increase by year end? Or is it an assumption that you'll be able to lower your costs to what is closer to what's being produced, say in the second quarter? So there's a combination of factors that work in there. So we will continue to be aggressively managing our cost structure down to match the market size and market conditions. There is a lagging effect because revenue is recognized at the time of lock, and we incur a significant amount of expenses. trailing months if you think about us as a manufacturing business that work in process takes 30 to 45 days to complete so that there's always a lag in how fast you can cut expenses in a mortgage origination business We also are assuming some contribution from our new HELOC product and continue pivoting to cash out and adding a little bit of additional margin through new products going forward. And we expect... as I mentioned, to do a little higher percentage of purchase business, and our purchase business has been carrying slightly higher margins than the refinance business. But that also will change as the product mix goes forward. So most of it's on the backs of aggressively managing expenses. Okay. And then lastly, you know, the board deciding to cut the dividend, your stock is at, you know, very depressed levels, right? Have you engaged with the board or the board engaged in looking at any kind of strategic review of the company's future? I think the short answer is no, at this point, no. Okay, thank you.
spk04: Our next question will come from the line of Courtney Ballman with Barclays.
spk05: Hi. Yeah. Hey, team. Thanks so much for the time. And Frank, congrats on the new role. Just a really quick couple for me on the balance sheet. I know that you guys bought back about $98 million of the 28th of the quarter, but your total debt balance went up. of the fourth quarter, and now you're at about $1.9 billion at the end of this quarter. I know the 10Q hasn't been posted yet, but I'm assuming that's because you guys tapped the third facility, that $300 million secured facility you entered in December of last year. Did you guys utilize that in the quarter? And, you know, if so, what's the total balance outstanding between that facility and the $268 million facility that was drawn last quarter? And, you know, where does that leave you in terms of unencumbered or unplugged MSRs?
spk09: Hold on, let me catch up and do some quick math here for you.
spk05: yeah take your time actually why don't we uh why don't we circle back after the call so we uh we make sure and give you an accurate number yeah that'd be great thank you um then also just one more um with regard to the funding capacity it seems like you guys had decreases on two of your existing facilities in the quarter in addition to the payoff of the one um just curious if you could provide any color here has there been any additional pullbacks post quarter end um You know, I know you guys had about $5 billion in available borrowing capacity at the end of the first quarter. Any decreases to that?
spk09: So it was by our election to reduce the size of warehouse lines just to meet the current demand level. So it's cheaper for us and reduces the amount of non-usage fees that we pay. So we remain in full compliance and with very good relationship with all of our financing partners, and we have added additional financing partners into our lineup throughout this year.
spk05: Okay, great. That's very helpful. I'll follow up with you guys offline. Thanks so much for the time.
spk04: And our next question will come from James Fawcett with Morgan Stanley. Please go ahead.
spk00: Hi, this is Blake Meador on the line for James. I wanted to follow up on the capital markets topic. So with the Fed expected to taper and begin its balance sheet runoff this year, can you walk us through how forces within the MBS market have impacted LDI and your capital markets execution? And how are those dynamics contemplated within your guidance?
spk09: Sure. Jeff, do you want to take that one? Yeah. Hey, Blake. So, you know, like in terms of the overall hedging strategy, I think you're asking, or just in terms of execution in the capital markets?
spk00: More of execution in the capital markets as you look to sell your new originations into the secondary markets.
spk09: Yeah, I think we continue to be nimble to look for opportunities where we can sell loans to help drive either increased revenue for the company or better efficiency in the sale process. So that's just an ongoing process that we go through all the time.
spk00: I see. That's useful. And then switching gears to another topic, we noticed that you seeded some market share in 1Q. Was that the result of you, you know, aiming to protect your margins and maybe sacrificing a little volume there? And if so, how long do you think this might last? Is that the four to six quarter timeframe that you mentioned earlier? Does that apply here as well?
spk09: Sure, that's a good question. And as we've stated previously on prior quarterly calls, you know, we have focused on profitable market share growth. So in the near term, while we continue to be aggressive in managing our cost structure down, we are fine in kind of treading water or even if there's slight decrease in in market share during the near term. But we believe that upon the completion of sizing our organization correctly, that the investments we've made previously in brand and infrastructure will allow us to, again, take market share in a profitable manner going forward. And as capacity shed from the market over the next few quarters, we would expect that, you know, later in the year that we might be in position to continue that mission.
spk00: That's helpful. Thank you for taking my questions.
spk04: And again, that is star one if you would like to ask a question. Our next question will come from Derek Hewitt with Bank of America. Please go ahead.
spk07: Good morning, everyone. So given the challenging environment, we've already started to see headcount rationalization, but when do you think we're going to see potential industry consolidations?
spk08: Hi, Derek. It's Anthony Shea. The industry is – this is fairly early in the cycle. So as the 10-year yield continues to rise and stabilize, I fully expect this pressure is going to force some additional consolidation. There is lots of firsts in this particular cycle that is new to the industry post . So lots of variables are unknown. It's harder to predict this cycle than previous cycles because of regulatory changes. Lots of changes between different models, lots of changes in consumer behavior, We also have a digital disruption going on. Services and real estate finance should be the same company. So I think you're going to see that come closer together in this cycle as well. I think additional revenue opportunity outside of what we're talking about now in the 2-2 market in non-QM and second mortgages and HELOC is going to start building some momentum.
spk01: So we are very bullish on new revenue opportunities, but certainly companies –
spk08: without the resources to add these products and have marketing control is going to feel much, much more of this pressure. Personally, I believe the longer this pressure period lasts, the better it is for Lone Depot because it allows us to really strategize and continue to invest into our diversified strategy. So the consolidation is starting, and it will continue on for at least the next four quarters.
spk07: Okay, thank you. And then with the new consumer loans, will those new products reside on balance sheet, or are you going to find a partner? Are you going to partner up with another entity?
spk08: I can comment to that, and if DeGarian or anyone else wants to add to my remarks, We are going to sell these assets. We plan to retain the servicing, as we believe that any one of these HELOCs that we put on our servicing book is going to be a refinance when the 10-year yield drops. And, you know, it's... As long as high as the 10-year yield is going to go up, it comes to a point where it's going to drop. And when it drops and we have that HELOC on our servicing book, it becomes a refinance at that point where the customer will consolidate their second mortgage, which is on the HELOC and their first. And, you know, currently, just to share with the marketplace, because we are such velocity marketers, 40% of our customers that are inbound today is asking for a HELOC by name. So despite the fact that there's been very little marketing to society recently, customers are very savvy and starting to ask for HELOC by name, certainly because they don't want to touch the 2% to 2.5% historical low 30-year interest rate that they obtained over the last one to two years.
spk07: Okay, great. Thank you.
spk04: And that will conclude today's question and answer session. Thanks, Martel. I'll turn the call back over to you.
spk09: Thank you, Operator. And, again, thanks to everybody for joining the call today and for your robust and comprehensive questioning. We appreciate that very much. Look, on behalf of Anthony, myself, Pat, and the rest of the Loan Depot team, we remain laser-focused on driving profitable growth factors. resizing and optimizing our cost structure in line with first quartile performance indicators, but also, importantly, as we've discussed on this call, market realities at this point in time. I think these focus areas are the right ones, and together... with the unrelenting focus of a very talented team we believe will be critical to driving shareholder value in the medium to longer term. We are targeting to return to a profitable run rate as we exit the year. And that will involve both growth and focusing on profitability, but also on our cost structure, our productivity, our quality, and our customer delivery. We appreciate and look forward to continuing to build our relationship with all of you and our investors. And we thank you for your time today and wish you all a great day.
spk04: And that concludes today's conference call. You may now disconnect.
Disclaimer