loanDepot, Inc. Q4 FY2021 Earnings Call

Good morning. My name is David, and I will be your conference operator today. I would like to welcome everyone to the loanDepot, Inc. Fourth Quarter 2021 Earnings Call. Today's conference is being recorded. All lines have been muted to minimize background noise. After the speakers' remarks, we will have a question-and-answer session. Gerhard Erdelji with Investor Relations, you may begin your conference.

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 year-end and fourth quarter 2021 results. We are excited to share our financial results and other highlights 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. 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 and pull-through weighted gain on sale margin. 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 Chief Financial Officer, Patrick Flanagan, to provide an overview of our quarter as well as our financial and operational results, outlook, and to answer your questions. We are also joined by our Chief Capital Markets Officer, Jeff DerGurahian; 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?

Thank you, Gerhard. 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. 2021 demonstrated the success of our strategy to increase market share during the period of changing market conditions. This is quite an achievement for a company as young as ours. Just three weeks ago, we celebrated our 12th birthday. We aren't even a teenager yet, but loanDepot is now the second largest independent retail mortgage brand in the country. We’ve grown at a 49% compounded annual rate since our inception and we plan to continue this growth in the long term. Our growth is very intentional. We have built loanDepot to succeed during all market conditions, conditions like those we enjoyed at 2020, or when loanDepot drives revenue. But the conditions we expect to navigate in 2022 give us an incredible opportunity to capture market share. Our business was purpose-built with periods of pressure in mind. Our proprietary tech stack, our intentionally diverse mix of channels, and our sophisticated performance marketing machine mean we control our lead flow, our customer contact strategy, and the point of loan origination. This is a critical competitive advantage, enabling us to pivot and adjust our production as market trends demand. In fact, historically speaking, it's been during the periods of decreasing volume that loanDepot's unique strategy and differentiated assets have resulted in outsized market share growth; those are the periods when we most demonstrate our ability to succeed. We ended 2021 with a 3.4% market share compared to 2.5% at the end of 2020 and grew purchase origination volume by 39% during 2021 as well. Purchase volume growth demonstrated the power of our multi-channel strategy. If we include less interest-rate sensitive cash-out refinance flowing into our purchase volume, growth was 56% year-over-year. While interest rates were increasing and refinance volumes were declining, we invested in growing our end-market retail branches and joint venture partnerships to drive this growth. Our industry is a cyclical one, and the market conditions we face today have been faced before by loanDepot's experienced leadership team, the members of which have collectively navigated many housing and interest rate cycles over the last 35 years. Today, loanDepot is more than a mortgage company or a digital commerce company committed to serving our customers throughout the home ownership journey with a full suite of products and services that meet our customers' needs along that journey. Our investment in building out our in-house servicing platform, including our recently announced Ginnie Mae servicing, allows us to deliver exceptional customer care throughout the customer lifecycle. This deepening of the relationship gives our customers another reason to return to us long after the initial home financing transaction is complete. loanDepot is growing and we remain very true to our public statements about our strategies, abilities, and the ways in which we can do and will deliver for our customers. We have achieved much for such a young age, and while we are proud of our progress, we believe that times like these when the market contracts or when the assets we have will lead our industry. Our 2021 results are only a preview of what's to come as we leverage our brand, develop and apply innovative technology solutions, drive down costs, and add more products and services to help our customers successfully navigate one of the most important financial transactions of their lives. 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. Next week will be the first anniversary of our IPO, and I'm both excited and proud of what we've achieved during the short period of time as a public company. Thanks to the hard work of team loanDepot. During the fourth quarter, loan origination volume was $29 billion, a decrease of 9% from the third quarter of 2021. This was near the high end of the guidance we issued last quarter of between $26 billion and $31 billion. Our Retail and Partner strategies delivered $10 billion of purchase loan originations and $19 billion of refinance loan originations during that period. Our Retail Channel accounted for 77%, and our Partner Channel accounted for 23% of our loan originations. The consistent contributions across both channels signify the strong customer and mortgage broker relationships we've built over time, as well as the effectiveness of our innovative Mello technology platform to underwrite, process, and fund mortgage loans, originated both in-house and with our partners while delivering an exceptional customer experience. Our pull-through weighted rate lock volume of $23 billion for the fourth quarter resulted in quarterly loan revenue of $705 million, which represented a decrease of 24% from the third quarter. Rate lock volume came in consistent with the guidance we issued last quarter of $18 billion to $28 billion. The decrease in revenues is a result of lower rate lock volume and gain on sale margins. Our pull-through weighted gain on sale margin for the fourth quarter came in at 281 basis points. This exceeded our guidance for gain on sale margin that we issued last quarter of between 210 basis points and 260 basis points but was down from the 299 basis points in the third quarter. Our growing servicing portfolio perfectly complements our origination strategy and ensures we can serve our customers through the entire mortgage journey. The unpaid principal balance of our servicing portfolio grew to a record level of $162.1 billion as of December 31, 2021, compared to $145.3 billion as of September 30, 2021. Servicing fee income increased from $64 million in the fourth quarter of 2020 to $114 million in the fourth quarter of 2021. While relatively low market interest rates continue to result in faster prepayment rates, we were able to retain many of these customers as our organic recapture rate for 2021 increased to 72% as compared to 64% for 2020, highlighting the strength of our deepening customer relationships. We are extremely proud of our progress because this growth was against the backdrop of our growing servicing portfolio in-house and relying less on third-party sub-servicing partners. 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 leveraged the infrastructure and created a scale to increase the earnings contribution from this recurring counter-cyclical business line. This progress is demonstrated by the cost of servicing our portfolio as the percentage of the unpaid principal balance decreasing from 3.6 basis points in the fourth quarter of 2020 to 2.3 basis points in the fourth quarter of 2021. This figure represents all servicing costs, including sub-servicing personnel and other G&A costs. We expect this trend to continue as we grow our portfolio, leveraging our investment in this business while also providing a better customer experience. Our total expenses for the fourth quarter of 2021 decreased by 7% from the third quarter of 2021, due to lower variable expenses on the lower loan origination volume and lower marketing expenses reflecting a seasonal decrease in spend. Our focus on efficiency and scale have resulted in total expenses as a percentage of total originations decreasing even as our market share continued to increase in 2021. As we look ahead in the first quarter of this year, and assuming no material changes in interest rates or the competitive landscape, we expect pull-through weighted rate lock volume of between $19 billion and $29 billion, reflecting the recent increase in interest rates and seasonal slowdown in demand. We also expect loan origination volume between $19 billion and $24 billion. We expect first quarter pull-through weighted gain on sale margins of between 200 basis points and 250 basis points, reflecting the increased competitive pressure. Considering the operating environment that we are expecting, we intend to continue paying our regular quarterly dividend currently yielding 6.8% based on yesterday's closing price, providing an attractive current return to our shareholders. Now let me turn it back over to Anthony for some closing comments.

Thank you, Pat. While Pat just laid our expectations for the first quarter, let me take this opportunity to share how we're thinking about 2022. The Mortgage Bankers Association expects mortgage volumes to decrease by 35% this year. This is neither unexpected nor unprecedented. It's a repeat of the numerous cycles I've experienced over the course of my career. What makes this one unique is that this may turn out to be the first sustained market decline since the passage of Dodd-Frank. Many of our competitors have not been tested during both the significant market downturn and a more restrictive regulatory environment. Many of our competitors may find it difficult to grow or even maintain their volumes without significant increases in customer acquisition and marketing costs. At the same time, loan officer compensation structures are less flexible in this post-Dodd-Frank environment. The result is that expense structures are going to be significantly tested. Our diversified origination channels and in-market retail, direct-to-consumer, wholesale, and joint venture partnerships allow us to adapt as the market changes. Additionally, our investment in our in-house servicing platform and growing servicing portfolio proves to be a valuable asset as interest rates increase. Together with our investments in our tech stack and brand, we bring a set of unique and differentiated assets that position us to successfully compete in this unprecedented market environment. These advantages are attractive to have, and we see an enormous opportunity to attract high-performing loan officers to loanDepot as weaker models come under increasing pressure in the months to come. We are also doing the necessary work to ensure our operations appropriately reflect our expectations for the changing market. We're adjusting our capacity to align our cost structure with our expectations for volume. But we will continue to invest in technology to drive operating efficiencies in our in-house servicing platform to drive deeper customer relationships, and our retail and JV origination capabilities to drive purchase volume, and in our brand to drive top of the funnel consideration. We have the capital, liquidity, brand awareness, and employee talent to continue seizing market share even as total market origination volume falls. We believe this will pay dividends when the market improves, as we will be poised to start the next cycle in a dominant competitive position. We are well positioned to demonstrate the long-term value of loanDepot by remaining focused on our strategic priorities while seizing share from competitors that may not be capable of withstanding these challenging conditions. As I noted in my previous comments, the real estate industry will consolidate, and I believe we've already seen that again. There's an excitement and enthusiasm throughout loanDepot as we prepare to demonstrate the power of the company to outperform when the market is challenging. We are looking forward to sharing our success with all of you. I am a strong believer in this company so much so that in the last quarter I personally bought $10 million of our shares on the open market. In my opinion, loanDepot represents an incredible value, and I am confident we will continue to accelerate our growth, increase our market share, serve our customers, employees, shareholders, and communities while outperforming in the long term. We remain focused on our strategy of serving our customers in every stage of the homeownership journey and becoming the most trusted homeowner fulfillment company in the world. With that, we are ready to turn it back to the operator for Q&A. Operator?

We'll take our first question from Doug Harter with Credit Suisse.

Thanks. If I look at Page 16 of your presentation about your expenses, that has had a downward trajectory. Can you just talk about your expectations for the expenses in '22 and beyond in light of a smaller overall market?

Thanks, Doug. Yeah. And this is Patrick Flanagan. So yeah, as you noted on the presentation, we have made steady progress over the last five years, taking our expenses from 369 basis points at the peak of total expenses down to 223 basis points. And we're continuing to focus on adjusting our capacity, vendor consolidation, changes in and reductions in our real estate footprint as a result of capacity adjustments and increasing tax efficiencies. You noted that in contracting markets, sometimes you'll see marketing expenses increase slightly as there's more competition for a reducing number of leads. So although we're not providing specific guidance on the expense levels, our focus is continued efficiencies. What you will also see is that we are going to continue to invest in technology and continue to invest in growing our balance sheet and servicing business.

Could you discuss your comfort level with your current overall expense level in relation to the gain on sale margins anticipated in the first quarter and your expected profitability in the near term?

Sure. Well, as a CFO, we're always working on becoming more efficient, right. And we're very focused on that through the first quarter as we've been throughout the last year to make sure that we adjust our capacity to what the market sizes are. The bigger unknown is where gain on sale margins will be in the face of uncertainty and in origination demand. And I think we're extracting and we're driving the business towards the guidance that we gave on pull-through weighted rate lock and lock margins for the quarter.

Hey, Doug. It's Anthony Hsieh. So let me just compliment as responses by sort of rewinding a bit and talking about total GOS. Keep in mind that the pressure to GOS is a reflection of the shrinkage in the marketplace going from $4 trillion plus last year to $3 trillion. Historically, any time you have a $3 trillion market, it's time for celebration except for this year because you're coming off of a $4 trillion high, which was a record breaker for the industry. Because the industry is trying to push out $1 trillion of capacity, you have this GOS pressure. And keep in mind that GOS is going to continue to adjust according to some of the irrational behavior competition tries to keep its capacity full without layoffs or workforce reduction. Now, I also want to point out the fact that even during a pressured state like the industry you're seeing today, you're still looking at around 300 basis points all in from cradle to grave. And we have to remember, yes, expenses, labor is critically important for any sort of scale players such as loanDepot and our competitors. The majority of costs in that GOS is still marketing and sales. Marketing and sales is where the pressure is not necessarily the fixed expenses. So we need to pay particularly attention to that. Sales and marketing is well over 100 basis points and still climbing. So as that sales and marketing eats up the biggest chunk of the available 300 basis points, and if you're in the wholesale business, you're splitting that 300 basis points where you originated, which is your mortgage broker, so you can really see where the pressure is on both sides. There's a lot of pressure if you're a sales and marketing company, and there's a lot of pressure if you're a funding or a lending company. Regardless, sales and marketing, performance lead management, and marketing, brand recognition, and conversion is going to make a difference.

Great. Thank you.

Okay. Next, we'll go to Kevin Barker with Piper Sandler.

Thank you. Given you're continuing to drive market share here and margins remain under pressure, do you feel like you can continue to sustain positive earnings in the near term, even though there is quite a bit of pressure here especially in the first quarter? I understand that it probably will get seasonally better in the second and third quarter, but do you feel like you have the operating efficiency levers to be able to maintain that profitability and book value growth throughout 2022?

Kevin, it's a great question. And I think we tried to answer that with the guidance we gave you. We think that it's a little bit of a shrinking market with closed volume decreasing between $19 billion and $24 billion in the first quarter and pull-through weighted lock volume between $19 billion and $29 billion. As Anthony was saying, where the pressures come in is, in marketing and sales, but we're very focused on our themes of profitable market share growth. So we haven't provided all of the answers and we understand that. But we're busy adjusting capacity, vendor consolidation, and working on additional tech efficiencies with the goal in mind to profitable market share growth.

How do you weigh the opportunity cost of increasing market share at lower profit margins now against the potential for significantly higher profit margins in the future? In other words, can you provide an estimate of the difference in profitability between now and what you anticipate being able to achieve at a later time, assuming we don't experience another refinancing wave like we did in 2020 or early 2021?

Hey, Kevin. It's Anthony Hsieh. So let me try to respond to your last question. So I would just reiterate that profitability could change instantly as this pressure starts to lift. This pressure could last another one, two, or three quarters, but it will go away within that amount of time, provided that the market stays right around $3 trillion. Now if it shrinks to $2 trillion or $2.5 trillion, that pressure will continue until the industry gets rightsized in capacity. What is important to me? And I've seen this many times over, is for us to continue to build on our assets. As an example, we were the second brand now as a non-bank lender in the country. Our brand listed by 80% last year in brand awareness. Our web traffic increased 50% year-over-year last year as we continue to build out a national brand that is hard to measure in profitability, and we all know there are significant barriers to entry in this marketplace. If you are not a scaled top 10 lender today, most likely there will not be any newcomers in the top 10 for the next five to 10 years. It is over if you're not in the game today. While this market continues to adjust and this trend continues to mature, the total addressable market just gets larger because of household formation, new home sales, average loan volume increases; there's just more opportunity for us around the next corner. So although this quarter, next quarter it's important, and we certainly look at those numbers we manage every day looking at expenses and setting our competition, it's a long-term view that allows us to be disciplined to continue to invest into technology, efficiency, brand, and market positioning.

Thank you for that. It makes sense, and it will create long-term value. I am trying to determine if there is a way to quantify the expected profitability targets from these investments, such as return on equity, return on assets, or any long-term profitability goals you have in mind.

Yeah, it's a fair question, and I get that. The hard part to quantify is the GOS, the return of GOS. So as I talked about before, once that pressure starts to lift, the industry is less likely to motivate itself to sell $1 bills for $0.80, so that GOS will return. And that GOS returns very fast in a very big way and much, much faster than you're able to improve efficiency. Efficiency gains over a long period of time gives you a competitive advantage during a downturn. Profits are recognized in this industry when capacity starts to catch up and volumes return. It's the GOS that fuels profitability, not necessarily expenses. Expenses are your competitive advantage during a market like this.

Got it. Thank you for taking my questions. Thanks, Anthony.

Next, we'll go to James Faucette with Morgan Stanley.

Hey. Thanks a lot, and thanks for taking the time this morning. I wanted to follow up on the GOS question there, Anthony, in your comments. When you look at the market overall, I'm wondering how much are you reacting to what's happening with GOS, et cetera, versus being a player in what's happening there in an effort to try to gain market share and gain that long-term advantage with the customer base? And I ask that because you're now at a size where you would think, or at least I would think, that we'd start to see you be able to influence what those levels are at. And so I'm just trying to think through, like, if you're looking for share and others are how much of an impact that may be having and why do you think that should abate over the course of 2022?

James, we have daily morning huddles on market conditions, competitive pricing pressures, and overall pricing strategy on a daily basis. So we are very close to the vibrations of the roads, if you will. So far, we have not been a participant in creating the market pressures. We study what the market is doing, and we certainly try to maximize our revenue opportunities while making absolutely certain that we're competitive and there is no decay to our conversion. We are a company that very much evaluates our top-line marketing return on investment. We are not a legacy mortgage company where we're just waiting for our loan officers to create business for us. So there is a fine line between being aggressive on conversion, which is pricing, versus making absolutely certain that we maximize what the market gives us. So I would say currently, and it doesn't mean we won't be aggressive and to lead the market, we may. But for now, we also look at the market conditions every morning, and we try to adjust our pricing importantly.

That's really helpful context, Anthony. And then my follow-up question was just with the rising interest rates, and you mentioned cash-out refi. Where does that specifically fit into the strategy? And is that meaningful enough of a segment to contribute to your outlook for 2022? Just wondering how we should think about kind of the changing potential products in the market overall, especially from loanDepot?

We are in historical times. Keep in mind that no cycle in previous history where Fannie, Freddie, FHA, VA own 90% of the funding in our industry. So going back to the last cycle, 60% was non-government agency fundings. So let me say that again. So previous to Dodd-Frank and the financial crisis of 2007 and for the three to four decades prior to that, greater than 50% of those liquidities driven by private mortgage products. Today, after Dodd-Frank, that market has not returned. Non-QM is a very small portion of the industry as we're greater than 90%. So the industry is still somewhat restrictive to the type of credit that we are able to offer through ability to repay in the non-QM rules and Dodd-Frank. So as I said in my opening comments, this is the first significant downturn in pressure that is completely different from cycles before because of our regulatory environment. So the purpose of the loan doesn't change the product of the loan. The product of the loan is still pretty much the same: 90% plus Fannie, Freddie, FHA, and VA. How the consumer utilizes these products is changing simply because of rising interest rates. The rate and term market is starting to disappear, but you have lots of consumption out there from consumers, and the best way to leverage consumer credit is still through a cash-out refinance in the 3% range versus any other type of credit that a consumer can leverage. Now, the amount of volume through a cash-out refinance is going to be much smaller than rate term in 2020, but it's still massive. But if you have ten people, or ten companies chasing after eight consumers, this is what is creating the GOS pressure. But that capacity will normalize, and then GOS will return; it does every time. I can guarantee you that we believe that's going to happen, in our opinion, if the pressure is going to last anywhere from one to three quarters.

Just to add a little more context in addition to what Anthony said, the transition for us and focus on less interest-rate-sensitive consumers is well underway. And for the fourth quarter, for example, the percentage of loans that were purchased and cash-out refi in our total originations was 75%. So we've already made the transition and are continuing.

That's great. Thanks for all the data and input.

Okay. Next, we'll go to Trevor Cranston with JMP Securities.

Thank you. Good morning. I have a question regarding the servicing business. The MSR asset has been growing significantly over the past year, and it is now larger than the company's equity base. Can you discuss your capacity to retain the majority of your MSRs on originations, particularly in relation to the financing you have in place for that? Additionally, you mentioned that the expectation is for the cost of service to decrease over time. Could you provide some context on what level we might expect that to reach in the next year or two? Thank you.

The question about the level of MSRs in relation to tangible net worth is insightful and relates to our capital management strategy. We continuously assess our balance sheet to ensure we maintain healthy levels of liquidity and leverage. The retention rates and construction of the MSR assets play a significant role in how we manage this. Currently, we hold minimal leverage against the MSR assets, allowing us additional capacity to raise cash. We also evaluate market conditions and occasionally sell MSRs through various sales or deals, while strategically deciding what to retain on our balance sheet. We aim to keep loan profiles that provide us the best opportunity to refinance customers and enhance the long-term and lifetime value of those relationships. Therefore, you can expect our leverage and liquidity ratios to remain consistent with their current levels.

Great. Okay.

As far as cost of servicing, we expect continued improvement as we move off of the subservicing platform more towards in-house. I don't have specific guidance to give you on where those costs can go, and it's kind of a combination of the speed in which we continue to transfer servicing in the economic conditions around delinquency levels and the retention rates as the platform scales. But there is more room to get more for sure.

Okay. Got it. And I think you mentioned in the prepared remarks the intention to maintain the $0.08 dividend level. I was curious if you could just share some thoughts around why you guys are comfortable with that given the sort of near-term competitive pressures on earnings and if there's an environment that would potentially cause you to revisit the level that the dividend is currently at? Thanks.

Well, we started our life as a public company with the idea of creating shareholder value through a multitude of tools, and earnings are just one of those, and paying a dividend is another, and we think it's a great opportunity to be a growth company that has and generates cash flow where we're comfortable paying that. And we think that we're an incredible value in today's market, a 6.8% dividend yield based off yesterday's closing price is certainly attractive in today's market. And we continue to evaluate all the tools available to create shareholder value. And when we have the free cash flow like we have, we'll continue to want to maintain that regular dividend. We think it's one of the attractive things about our company.

Yeah. Okay. That's helpful. Thank you.

Okay. Next, we'll go to Arren Cyganovich with Citigroup.

Thanks for that follow-up. The midpoint of your guidance indicates around $540 million in gain on sale, which is a decrease from the fourth quarter level in the first quarter. Last quarter, you made $0.09, and your dividend is $0.08. While I understand that everyone is focused on costs, the answers regarding cost management have not been satisfactory. You mentioned overcapacity in the industry, but it appears that you have some overcapacity issues internally that need to be addressed in order to rightsize your cost structure.

I have mentioned several times that our focus on expenses involves adjusting our capacity and improving efficiencies in technology. We are very aware of the market size, and I would highlight that we have consistently reduced our expenses both quarter-over-quarter and year-over-year. Our experienced management team has navigated these cycles before, and we are well-equipped to adjust our costs while concentrating on factors that drive long-term value and allow us to seize opportunities when they arise in the market. Additionally, loanDepot's focus is on gaining profitable market share, which will remain our priority. Historically, our largest market share gains have occurred in the most challenging markets and during downturns, and that will continue to be our strategy moving forward.

It appears that both you and Rocket actually gained market share during the disruptive environment when the pandemic first hit. This seems to contradict your statements about gaining market share in a tighter mortgage environment. If there is indeed overcapacity and increased competition, it doesn’t seem logical to gain market share when more competitors are vying for a smaller market.

I think it's the strength of our business model that allows us to do that. So the diversified channel with a nationally recognized brand gives us a competitive advantage when it comes to competing with others in the marketplace for a shrinking number of customers and then the growing power of our balance sheet with over half a million customers in our servicing book today. And so I think that the combination of all those things is what makes us attractive. And I would just point back to our history; our biggest gains in market share growth have come in the contracting markets. Our biggest profit comes in expansions of market conditions like 2020, but we had less market share gain in 2020 than we did in times when the market shrinks.

Sorry. Yeah. Hey, Arren. It's Anthony Hsieh. Your question is valid, and I’d like to clarify why loanDepot is quite different. In today’s landscape, especially after Dodd-Frank, we believe we are the most diversified originator available. We have consumer direct, retail, joint venture, and third-party origination through brokers. Our top two competitors have one that is nearly split evenly between consumer direct and wholesale, while the other relies completely on wholesale. Both are reputable businesses and tough competitors. However, our model enables us to draw from a wider range of sources than they can. Consumer direct is particularly challenging to establish since it doesn't depend on pre-existing loan relationships. It requires a sophisticated marketing strategy that generates leads through various online and offline channels, ensuring performance akin to a digital business. Last year, we produced over 10 million top-of-the-funnel leads and aim to maintain that level this year, even amidst a market decline exceeding 30%. This alone indicates that we will generate as many digital leads as last year while the market shrinks significantly, positioning us well to gain market share. We have the scale, the brand recognition, and the performance marketing assets that many of our traditional competitors in the mortgage industry lack.

I appreciate that. One of the reasons we viewed your company positively was this, but the strategy doesn't seem to be connecting with investors. Even companies that focus on wholesale or correspondent lending are trading at higher multiples than yours. There appears to be a gap between your narrative and what investors are prepared to pay. Let that be my final comment.

Yeah. And my response to that is we're obviously disappointed as well. But this is the second inning of a long game here, and we certainly are very disciplined in our approach.

Next, we'll go to Stephen Sheldon with William Blair.

Hey. Thanks for taking my questions. Most of them have actually been asked and answered, but curious what the new product pipeline looks like? I think you mentioned before the potential to add more products and services in 2022. So it'd be great to get some more detail on what that could look like and I guess whether M&A could factor into that at all?

Yeah, hi. This is Jeff Walsh. Thank you for the question. Yeah, we're going to continually look to surgically add products as we have done already as we've seen the kind of the product loan purpose shift in the fourth quarter. We have the capability due to our kind of diversification to be surgical in terms of specific markets as well as specific channels where products can enhance our opportunity for profitable market share growth, and that includes some potential non-QM, but we're going to be very mindful of our operational efficiency and impact that that might have on our expense structure. So we want to have very efficient products in the mix. And in terms of M&A, we always are open to M&A opportunities, but we're curious about M&A, probably we want to be responsible there as well. And there have to be the right deals in kind of a realistic context of value. And we just haven't seen that yet, but hoping to see something in the future for sure.

Got it. Thank you.

And next, we'll go to Mark DeVries with Barclays.

Yeah. Thanks. I was hoping you could give us a sense of where your gain on sale margins trended in January and kind of where that is relative to the guidance range you provided for the first quarter? And also, are you seeing any difference in the levels of margin resiliency across your different distribution channels, or are they all kind of under similar pressure?

In January, I don't have precise information since the month just ended yesterday. We haven't had a chance to analyze it, but we are confident in the range we provided, which is 200 to 250. I can share that recently, we have noticed some improvement in margins across all channels. While we haven't issued specific guidance, this improvement is evident in both the partner and retail sectors that we are beginning to observe.

Okay. Got it.

Mark, it's Anthony Hsieh. I would like to share my perspective on that. Overall, and this year is no different, January appears to be more promising than December in terms of revenue, but it's still too soon to determine if this trend will persist through tax season. Typically, we observe revenues from January to April hold steady, and after April 15th is when mortgage companies usually begin to see increased profits due to seasonality. However, at this stage, it remains too early to make any conclusions. I also want to emphasize that there will be increased pressure on customer acquisition. Relationship selling has been the primary way to reach homeowners in recent decades, but as digital disruption alters consumer behavior, many individuals are now utilizing advertising and branding to choose their mortgage companies. Therefore, originators using direct mail or Google Search face significant challenges in acquiring customers digitally without a strong brand, scale, or a robust performance marketing team. In a year like 2020, everyone succeeded in customer acquisition, but this year, only a select few will excel in this area. Thus, the focus is on the initial stages of acquiring customers, which remains a challenge in any business. We will monitor this closely, and while we won't have clarity until the end of the first quarter, January is reflecting similar trends to previous years.

Got it. And I appreciate it's still quite early, but, Anthony, what are you seeing from your competitors' efforts to start removing capacity? I mean, what's your optimism that we can get to some new equilibrium sooner rather than later?

The current pressures are leading the industry to reduce capacity. The quicker this reduction occurs, the sooner we can expect to see returns on GOS. This is influenced by the 10-year yield. Last year, a brief drop in rates provided the industry with a temporary boost, but capacity adjustments paused during that period. Currently, as the industry sheds capacity, companies are evaluating their needs. Some will reduce more than others, but ultimately, this will align with the expected $3 trillion volume this year. To address your question, much hinges on whether rates decrease. A drop in rates could cause delays, but profits are likely to rebound in the short term. When profits diminish and GOS comes under pressure, we will see renewed capacity management.

Okay. Got it. Appreciate it.

Next, we'll go to John Davis with Raymond James.

Hey. Good morning, guys. Two quick ones. First, just on purchase versus refi. How do you see that playing out this year? Obviously, purchase will be a much bigger percentage of the market, assuming rates stay here or go higher, but how does that impact loanDepot's market share gains as we shift to more of a purchase market? I'll stop there.

So it's Anthony Hsieh, John. This is one of our advantages as we have such a diversified origination strategy. Our end-market loan officer, end-market strategies, along with our joint venture partners, primarily drive purchase business. The refinance business is a nice to have in those channels, but the purchase business is our primary focus. We made the decision to be in this business back in 2012 and made our first acquisition through 2013 successfully integrated, and then we had our second acquisition in the in-market model in 2015 and successfully integrated that. We've grown both of those businesses successfully over the last few years. We continue to be very disciplined and very committed to this business, along with our joint venture business. And then on the consumer direct side, it gives us an opportunity to surgically go after non-interest rate sensitive business, such as debt consolidation, cash-out, and we have seen that shift over the last quarter as well. So it gives us the opportunities to shift because of the different types of origination channel that we have.

Okay. That's helpful. And then just we could ask it a couple of ways, but from a capital allocation perspective, the $0.08 dividend, maybe we can just start with how is that level of $0.08 kind of decided upon at the time? Do you target a multi-year basis, a certain percent of payout and earnings and in the form of dividend there are some sort of payout ratio? Just how should we think about that going forward? And may it make sense to buy back some of the bonds that are trading at similar or higher yields with that capital? Just maybe a little push and pull how you guys think about capital allocation broadly?

Sure. This is Pat, so I can take that. We originally established the dividend in the range of a payout ratio, and we believe it's important to maintain a consistent dividend over time. We understand the yield changes as a result of that, but we're comfortable with returning that level of capital back to our shareholders, and we think we can do all the things that we talked about, which is that we can continue to grow organically, we can continue to invest strategically in the balance sheet, and we can continue to return value to shareholders in the form of regular dividends with the capital base and the business that we've constructed.

So if I read between the lines here, you guys feel comfortable with the $0.08 dividend yield not just for the quarter but going forward as we go through the rest of 2021 and part of 2022 as well. Am I going too far there?

No. We expect to and intend to maintain our quarterly dividends.

Okay. All right. Thanks, guys.

Okay. Next, we'll go to Ryan Nash with Goldman Sachs.

Hey. Good morning, Anthony, and good morning, Pat.

Good morning, Ryan.

Good morning.

There have been many questions about cost profitability and margins, so I'll approach it from a different angle. Anthony, despite the challenges, you appear to have some confidence in improving margins over, I believe, you mentioned a timeframe of one to three quarters. However, considering the competitive dynamics in the industry, especially in the wholesale channel where some players are trying to increase capacity, there is a possibility that prolonged pressure may extend the duration of margin challenges. How do you view these competitive factors? Additionally, if the situation extends beyond one to three quarters, potentially lasting six or eight quarters or longer, what is your backup plan for managing the company's profitability?

Ryan, all great questions and comments. I'll just tell you this, right. I've been doing this since 1986. So the confidence that you hear in my voice is not from any sort of a head fake exercise. I've seen this before, many, many times and this is very early. We also need to understand that as much as I respect all of you, this is a whole new community understanding this industry post-financial crisis. So we're all getting educated together on this particular cycle. This is a very unique industry. It is a phenomenal, very exciting industry. But look, when you have an industry that can adjust 30% year-over-year, you're going to have to work on your manufacturing plan. You're going to have to squeeze the efficiency, and you're going to have to work on your cost. You're going to have to work on your machines and the overall signs of your manufacturing plant. Now that said, the way I look at it, and what I believe is you get rightsized and work on your efficiency in order for you to maintain and penetrate additional market share and you need to survive. But the ultimate, in this business, is your ability to scale when the market comes back, because as soon as it goes down 30% one of these years or one of these quarters, it's going to go up by 20% or 40%, or in the year 2020, we can look at how much volumes went up from 2019 to 2020, and you have to maintain that optionality and be ready to scale. As the first year as a public company in 2020, we priced $2 billion in pre-tax earnings of a company that was organically started just 10 years ago. So not too many companies can be created de novo as an organic start, I mean, 10 years later, priced $2 billion in profitability. And we maintain the optionality. Next time when the market comes back, and it will, and that total addressable market is going to be larger and the barrier to entry is going to consolidate this market and we're going to be ready. Now in the meantime, we need to continue to be very disciplined quarter-over-quarter, week-over-week, morning-over-morning as we look at our pricing structure. But that is a bit of noise for me because I look at cycles and I look at trends, but we have to be ready for the next cycle as this trend continues to develop.

Got it. Appreciate the color.

I want to emphasize the strength of our balance sheet. We had a strong financial year in 2020 and chose to reinvest a significant portion of those earnings into expanding our servicing portfolio. Currently, we have more than 500,000 customers and over $162 billion in servicing. This growth in our balance sheet, along with counter-cyclical revenue sources such as non-mortgage origination sales, helps protect us and makes our earnings potential from the balance sheet increasingly significant.

Got it. That makes sense. And as a follow-up, Anthony, just one comment. I think a lot of us are looking at the economic backdrop potential for higher rates, and I think we're having trouble just seeing how does the cyclical pressures and competitive pressures abate in this type of environment. So maybe any color you can give on that? And then a more specific question for Pat. Can you maybe just tell about the level of revenues or margin to be cash flow breakeven? And maybe can you just remind us of some of the leverage you can use to generate cash flow in the short to medium term? And what's the comfortable level of cash to run it? Thank you.

So, Ryan, let me address that. I want to be clear that I’m going to be direct and transparent in my responses. For example, the highest level of analysts in our industry comes from the Mortgage Bankers Association, which serves as the trade organization. Over the past six years, they have consistently provided guidance in December on what they believe the mortgage origination market will look like for the following year. However, they have missed their projections by about 36% to 40% each year. Forecasting mortgage volume is extremely challenging, and even organizations like the MBA and Fannie and Freddie frequently get it wrong annually. Our approach to managing the business involves maintaining a low-cost structure and having the flexibility to capture market share. That’s why since my return in 2010, we have actively sought out various assets and diversified our origination channels while building our brand. All of these strategies were intentional. As the market continues to evolve, challenges present opportunities for strong companies to position themselves better when changes occur. It’s difficult to predict our expense structure precisely because, unlike a wholesaler, I can’t just state costs based on when a mortgage broker submits a loan, funds it, or underwrites it. We operate as a digital business and continuously evaluate customer acquisition. The ability to acquire customers is both an art and a science and is what gives us our competitive edge as a disruptor, though it’s also challenging to predict. We aren’t trying to be evasive; we simply need to acknowledge that our model is distinctly different.

Ryan, I can provide some numbers. If you refer to the investor deck on Page 16 for the year, we had 223 basis points of expenses, primarily cash expenses. This helps you gauge the cash flow breakeven point without considering the balance sheet, focusing just on originated activities. We have multiple strategies to manage our situation. For instance, if you were retaining all of your servicing, the cash portion from securities or whole loan sales would need to exceed that to achieve cash flow breakeven. However, we don’t retain everything; we keep a portion based on market conditions and our cash needs. One key lever is how much we sell in whole loans and through co-issue deals each month to generate cash flow. We also maintain modest leverage with $2 billion in servicing assets and have two primary options for cash flow: short-term borrowings secured by our mortgage servicing rights, for which credit is readily available, and sales in a robust market. We continuously monitor capital management and evaluate ratios regarding MSRs to manage worth, leverage, and liquidity, while also ensuring we have a minimum level of cash. As a benchmark, we aim to maintain cash on hand plus immediately accessible liquidity equivalent to at least 5% of our total assets. Overall, we're in a strong position.

Thanks, Pat.

And we've hit time. And those with any additional questions should reach out to Gerhard Erdelji. I'll now turn the call back over to Anthony Hsieh for any additional or closing remarks.

Well, thank you all again for joining us and for your questions. We continue to look forward to filling our relationship with all of you over the long term. Thank you, and have a great rest of your day.

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