loanDepot, Inc. Q2 FY2021 Earnings Call

Good morning and welcome to loanDepot's Second Quarter Conference Call. All lines are muted to minimize background noise. I will now hand the call over to Gerhard Erdelji, Senior Vice President of Investor Relations. Please proceed.

Good morning, everyone, and thank you for joining our call. I'm Gerhard Erdelji, Investor Relations Officer here at loanDepot. Today, we will discuss loanDepot'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 loanDepot, Founder, Chairman, and CEO, Anthony Hsieh; 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, Jeffrey DerGurahian; our Chief Analytics Officer, John Lee; and our Chief Revenue Officer, Jeff Walsh, to help with any questions you might have after our prepared remarks. And with that, I'll turn things over to Anthony to get us started. Anthony?

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 loanDepot was purpose-built for this moment in time. This is precisely what a diversified, at-scale marketing powerhouse like loanDepot 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 loanDepot 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 toward proven leaders as markets shift. 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 at 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 end market and partner teams. Our ability to nimbly and successfully low 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 so with the Lead Championship series approaching later this year, we expect to substantially grow our brand recognition without additional cost. Disruption in the market today is all about better serving the home buyer or seller with easy-to-navigate bundled 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 loanDepot assets to create a bundled service for our customers that most of our competitors simply cannot touch. To that end, we recently announced the launch of the loanDepot Grand Slam powered by mellohome. As most of you know, a constellation of important companies sit underneath the loanDepot umbrella. We provide real estate services through mellohome and mortgage services through loanDepot. In addition, we also provide title, escrow, and closing services through our Act and CUSA companies, and insurance services through mellohome. This strategy has been executed for many years with strategic acquisitions and organic builds. The loanDepot 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 customers throughout their entire homeownership experience via multiple touchpoints completes the flywheel effect and increases our top-of-funnel velocity. Today, loanDepot is more than a mortgage company. We're a digital commerce company committed to serving our customers throughout the homeownership journey. And so we are uniquely positioned to provide exceptional value and a reason they return to us long after the initial home financing transaction is complete. The loanDepot Grand Slam represents a significant step toward our vision to become the most trusted homeowner fulfillment company in the world. There's an energy and enthusiasm here at loanDepot. 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?

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 our continuous hard work and commitment of Team loanDepot. 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. So 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 refinance loan originations during that period. Our retail channel accounted for 81% of our loan originations and our channel partner 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 mello technology platform to underwrite, process, and fund mortgage loans originated to 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 that's 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, results of which we have expected 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 purchased loan originations during the quarter, adjust our pipeline composition to load balance our operational capabilities. So, our growing servicing portfolio perfectly complements our origination strategy 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. This 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 now 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 good progress because of 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 through a smaller decline than net income, reflecting the strength of our core business. As we look ahead to the third quarter and building on our growth strategies that Anthony have 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, and our strong July production volumes, 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.

Thank you, Pat. So, 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 loanDepot has accomplished and as confident as I am about what loanDepot and our affiliated companies will deliver, we will never be a company that is satisfied or one that rests on our laurels. We remain very 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 homeownership journey, providing our customers with robust choices and an expansive set of products and services through our proprietary technology, powerful data, analytical capabilities, and exceptional service, how we will continue to win. loanDepot is uniquely suited to reimagine the home buying and selling experience, and thanks to its top-of-the-funnel marketing and customer acquisition power, diversified loan origination strategy, proprietary technology, and ancillary services. Our assets and capabilities are some of the most sophisticated and diverse in the industry today. We also 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 will continue to focus our long-term vision in 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?

Your first question comes from Doug Harter from Credit Suisse. Your line is open.

First off, 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 because of the combination of factors, including expanding our product offerings. And we're confident in that range that we quoted, and we've seen a significant recovery in July and that 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 talk about how you're seeing consumer response to these lower rates and thoughts as to whether we're starting to see refi burn out at this level of rate, kind of putting that into context of where we are today?

Doug, it's Anthony. So I think there's a couple of questions there. First, with interest rates reducing a bit over the last month or so that we have seen an increase in refinance demand. But more importantly, the company has shifted some of our marketing toward our 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 just a substantial amount of interest level from our customers. And we are talking to more customers than ever in our eleven and a half year history. We are seeing that more leads being developed by our brand and our marketing team in our eleven and a half year history. So there's really plenty at our 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 then ultimately, margins will return. The margins that you're seeing today is very temporary. It always happens during a time of change, and we're very bullish on the top of the funnel. The customer demands are still very, very active.

Great. Thank you, Anthony.

Of course.

Your next question comes from the line of Ryan Carr from Jefferies.

Hi. Good morning, guys. Thanks for taking my question. First one is on the guidance. You're guiding up on gain-on-sale for 3Q. I'm just curious, so can you touch on the competitive trends you're seeing in the retail channel and that kind of caused those two key dynamics? And so 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.

Yes, this is Jeff Walsh. We're observing that in the retail channel, we are able to maintain our margins. As we notice a shift in our pipeline towards purchases, there's been a 31% increase in purchase volume quarter over quarter and an 87% increase year over year. Due to the nature of these purchase transactions, our margins are higher. We believe we are well-positioned to capitalize on both purchase and refinance markets. Regardless of market conditions, our diversification enables us to benefit from either opportunity, and we are certainly seeing this positive margin dynamic in the retail sector.

Hey, Ryan, it's Anthony. Let me just add on to Jeff's comments and provide some context. So this is the start of a trend change and the industry is trying to sort out where the margins should rest on a go-forward basis. And what I'm seeing today is the first 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 of 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 Countrywide vacated a 22% market share when it fell. So that land grab here and the race for substantial category-leading lenders to mass market share, and we're seeing some behavior that's interesting, but our decouple margin is not sustainable. So we're watching that pretty carefully.

Thank you. I have a quick follow-up regarding expenses. Where do you expect to see the majority of your expense reductions? You mentioned these would take effect in the latter half of this year, but what about in 2022? Additionally, what do you anticipate for pre-tax income as a percentage of volume for next year in a more normalized environment?

Yes, Ryan. In the latter half of this year, you can expect to see expense savings mainly in personnel costs. This is primarily driven by changes in variable cost components. As we mentioned during our IPO process, rolling out additional technologies, especially in our fulfillment teams, enables us to lower variable costs, particularly on the fulfillment side. We are reducing overtime spending as we manage the pipeline backlog and optimize staffing between sales and processing roles. You will see the ongoing implementation of technology into next year as we remain focused on improving business efficiencies. While we haven't offered specific guidance for 2022, we are committed to managing costs and enhancing efficiencies to mitigate volatility related to expense fluctuations during changes in interest rate cycles.

Thanks very much.

Your next question comes from the line of Manu Srivareerat from UBS. Your line is open.

Good morning, guys. I'm on for Brock Vandervliet this morning. How is 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 last quarter. Any thoughts on whether it's the banks who were getting share or whether that's a function of other factors in the industry?

Manu, it's Anthony. So we've grown our volume compared to last year six months to this year year-to-date six months. We've grown our volume at loanDepot by 110%. And we've grown on the average of 46% for the first 10 years of our history. We've grown market share substantially in the last six 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 nonbanks. And I think the non-bank community, you're going to see consolidation continue to happen. The massive capacity buildup of nonbank 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, as well as continue to be very aggressive on the lookout for any acquisition opportunities.

Thank you for that insight. Anthony, many people questioned your statement from last quarter about no one being willing to sell a dollar bill for 90 cents. So my question is, how long do you think this excess capacity in the industry might last? Are we looking at quarters or possibly a year down the line?

It depends on where the 10-year will rest. So we certainly got some of that back. And as a result of it, mortgage volume kind of increased because of lower volumes. But we've had some challenges on the purchase market because of a lack of inventory. So, we like the fact that there is pressure. So selling dollar bills for $0.90 is a good thing for these 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 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. And the 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, I think 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 our 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 way to go.

Got you. I appreciate the insight and the guidance as well. Thank you for your time this morning.

You're welcome.

Your next question comes from the line of Kevin Barker from Piper Sandler. Your line is open.

Good morning. Thanks for taking my questions. In regard 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 2.20 gain-on-sale margin. Could you clarify that?

Kevin, that is on funded loan origination, not pull-through a lot.

So you have it going from $228 million, up to the $245 million to $295 million, right?

That's correct.

OK. And then the retail gain-on-sale margins went down 75 basis points quarter over quarter on the funded volume, which just seems like a heavier drop than what 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? And was there something with hedging or pull-through that may have impacted it?

No. I think what that reflects is the difference between funded loan volumes that were carried over from the previous quarter into the current quarter's locks. In the press release, when we present the pull-through weighted gain-on-sale margin at 2.64, I'm not sure if we provide the channel breakdown. However, there was less variability when examining the locks that occurred during the quarter. I believe these timing differences are what make it appear artificially low, or lower than expected.

OK. 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 2.64?

So, we'll circle back and get back to that. I don't have that handy but I can say that the trend we're seeing now as we've overcome the majority of the pipeline backlog. So the level of blocks that you see in the quarter should be representative of what the funded volume results in. And so you're going to see the difference between pull-through rate locked gain on sale and funded gain on sale become tighter.

OK. And then on the cost-cutting initiatives, is there any way that you could size up whether it's on an absolute basis or that as a percentage of your total origination volume that we should sort of expect that with total operating expenses?

We're continuing to grow and to add headcount and add loan officers, so I would expect the overall dollars of expenses in the quarter to increase. But this cost to acquire and the cost to manufacture will be representative of the operating leverage we're creating through the technology and change in our workflow.

OK. Thank you for taking my question.

Your next question comes from the line of Trevor Cranston from JMP Securities. Your line is open.

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 outside. So, I was wondering if you could 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 the growing cash-out business and how much of a growth opportunity you think there is going forward? Thanks.

We're looking that up right now, Trevor. I'm not sure if we have that information readily available, but we can certainly get back to you. We don’t have all the details for you, but 56% of the volume this quarter was cash out and purchase. We can definitely provide you with some of those details offline.

And I think we couple those cash out and purchase together as they're less interest rate-sensitive portions of the business.

Got it. Okay, that makes sense. Appreciate the comments. Thank you.

Your next question comes from the line of Stephen Sheldon from William Blair. Your line is open.

Hi, thanks for taking my questions. It sounds like you're continuing to see strong lead volumes. So I wanted to ask, I guess, how much of that is being driven through loanDepot's organic channels versus relying on your third-party leads? And are you getting enough lead volume organically where you're not needing to rely on third-party sources, especially now with some of the increasing brand awareness that you've noted or so have you opened up more on the third-party side to kind of supplement the strong lead volume you're generating organically?

This is John Lee. I'll address that. That's a great question. We're experiencing significant growth in organic lead volume as our top-of-funnel reach positively affects our digital marketing and other direct response channels. Our organic lead performance has actually outpaced the first half of 2020, increasing by 60% compared to the same period last year. Additionally, we're seeing a substantial rise in website visitors, which is up 200% quarter over quarter. Therefore, both our organic marketing and brand marketing are making a noticeable impact at the top of the funnel. Most importantly, this increased brand awareness is translating into more transactions for the company.

I want to add to that. The question was about how much of it is organic and how much is third-party. We measure this by looking at the return on investment of our marketing dollars across all channels. With third-party lead performance, we've seen an increase in conversion rates due to brand recognition. As we build our brand and enhance our marketing spend, we're experiencing a synergy effect where we're generating more leads organically because of brand awareness, and our lead partners are seeing higher conversions for the same reason. It's important to note that as a digital company creating momentum in commerce, we incur embedded marketing costs when introducing adjacent products and services. By targeting the same core customer base—homeowners and homebuyers—we can further enhance our marketing effectiveness and achieve better returns on our marketing investments. This is a key distinction between loanDepot and many of our traditional mortgage competitors, who lack these assets in their business model.

Got it. That's really helpful. As a follow-up, 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 the kind of gradual via geography or more of a national rollout? And if it then becomes highly utilized by consumers, how should investors think about the potential financial implications?

So this is the future, and we've been diligently working on adding related products and services and expanding these assets for many years. This product will be available on October 1st. We have 4,000 of the top-performing real estate agents across the country participating through mellohome, which is our sister company. Our title should now be available in approximately 40 states.

Yes.

As we roll that out as well as rolling out mello 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 that are coming to us, and they do not yet have a real estate professional. They are looking to buy a home, they're looking to get prequalified, and this gives us a substantial opportunity to utilize our brand and allow that customer to come through us to initiate the transfer or introduction to a mellohome participating real estate agent. And as a result of it, the bundled service, which has a guaranteed low price component to our consumer, they will never pay more by utilizing the loanDepot Grand Slam. 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 then fuel some of their moving costs or some of the cost to improve the property, but they have a bundled service and a single-branded approach that encompasses all of those adjacent products and services together.

Great. Thank you.

Your next question comes from the line of James Faucette from Morgan Stanley.

Hey, good morning. My question maybe it seems a little bit odd given what's going on in the market, etc., but if we take a step back, the market is still quite good. You're obviously making adjustments to the realities of kind of the current economics. But to your point, Anthony, there'll be some point of normalization where things will kind of settle back into probably something that's more sustainable economically, and you're still making a fair amount of money in 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.

Hi, James. Thanks for the question. We focus on capital planning and maintaining appropriate levels of liquidity to operate our business. We continually measure ourselves against internal metrics. At the same time, we are always considering the best ways to return value to our shareholders. This includes investments in expanding our origination franchise, which we are committed to doing. The challenge lies in capital allocation, specifically how much to invest in growing our servicing assets. As we mentioned before, we are actively exploring opportunities in the M&A market on both the mortgage and non-mortgage sides. We also plan to consistently pay dividends on a quarterly basis. Additionally, if we find ourselves with excess capital, we will explore various methods to return value to shareholders, as demonstrated by our special dividend earlier this year. We will keep evaluating these options, while our primary focus remains on enhancing shareholder value.

I appreciate that. Anthony, you've been involved in this industry for a long time, more than anyone else on this call. Can you share any experiences that might draw parallels to the current situation? Specifically, what actions did you take with your companies, such as loanDepot or others, in similar circumstances? I'm interested in any insights from your experience that could inform your current decision-making.

James, we have been through similar situations before. Everything is quite predictable, with very few surprises. My responsibility as founder and CEO is to ensure that our team remains focused on our strategic path and not be distracted by temporary trends we are currently observing, which are also predictable and will eventually revert. This situation is fleeting; the main distinction between this cycle and those I've experienced before is the impact of digital disruption. Consumer behavior is evolving. We must continue investing in technology and our brands, as these are the key differentiators that will persist during this disruption, creating exciting opportunities for companies that understand how to innovate for the future. We need to stay concentrated on our mission and not let temporary margin fluctuations sidetrack us. So far, nothing I’ve encountered in this cycle feels fundamentally different.

Appreciate that. Thank you.

Your next question comes from the line of Mark DeVries from Barclays.

Thank you. Were there any material differences in this quarter in your retail gain-on-sale margins than in the end market business versus direct-to-consumer?

So, I'll take that. Yes, I don't believe, Mark, that we have separated this out in our revenues by direct lending versus end market. But I will say that these two markets are decoupled and that is not sustainable. And they will come closer together as the market continues to really adjust through this cycle.

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 in direct-to-consumer?

No. You can hear the background here. What’s happening right now involves several factors, but the wholesale market remains highly competitive, which will continue to create pressure within the industry that we recognize. Less than 20% of our originations come from our partner channel, and of that, I believe only half is from our wholesale channel. As we monitor the situation, we are certainly seeing pressures from how wholesale is pricing and from customers reporting that they have received current bids or offers from mortgage brokers. However, this has not yet had a significant impact on the overall retail margins.

Let me just add that the competitive landscape is influenced more by purpose than by channel. As we noted, the customers who are less sensitive to rates, such as those looking for cash-out refinancing and purchases, showed a different trend in the second quarter. Most of the pricing pressure was seen in the rate and term refinancing, regardless of the channel of origination. This is one of the reasons we are focused on expanding our product offerings and continuing to grow in the purchase market. We believe that having all four channels and the flexibility to adapt to market changes gives us a competitive advantage.

Okay, that's helpful. I wanted to clarify a few comments you made about Grand Slam. Did you mention the word free in relation to the home warranty? Is the premium also being covered? Are you talking about a commission-free sale of the home warranty? How is that going to work?

We are grouping that in and providing that product free of charge to our Grand Slam customers. So it is free.

Okay, got it. And so, that's effectively part of the rebates that you alluded to?

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. As a mortgage lender, this return on marketing formula works for very well for us. So if you add in title revenue, closing revenue, the 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.

Okay, great. So that could come through both a free home warranty policy in addition to rebate?

That's correct.

There are no further questions at this time. Anthony Hsieh, I turn the call back over to you.

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.

This concludes today's conference call. You may now disconnect.