Here’s why loanDepot is reducing its mortgage bank footprint

Mortgage bank stocks are about as badly off as it gets right now. After feasting on easy refinancing activity in 2020 and 2021, the sector has been battered by rising interest rates. Much of the refinancing activity has simply disappeared, as there is little financial incentive for someone to replace a 3.5% mortgage with a 5.5% mortgage.

Virtually all mortgage bank stocks have suffered in this environment, but the one that has suffered the most is probably loanDeposit (HE D -1.92%). It has just announced a major reorganization of its business model.

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loanDepot went public at the best possible time and has struggled ever since

loanDepot went public during the salad days of the refi wave in 2021. After experiencing a brief post-IPO rally, the stock entered a deep meltdown. loanDepot had tried to compete in the wholesale market, which is extremely competitive.

There are basically three models of mortgage banking. The most common is retail, where a business hires individual loan officers who market their products directly to consumers. This is the general pattern of Rocket companies (RKT 2.96%). The company does all the work of originating the loan and then usually sells it.

The second is matching, where the company buys completed loans, usually from retail lenders. The best example of a correspondent lender is Pennymac Financial Services (IFHP 0.67%).

The last is wholesale, where companies assemble the loan, but work with mortgage brokers, who are free agents. Competition in the wholesale business is tough because anyone can be used by a broker, and these companies compete fiercely on price and service. The leader in this space is UWM funds (UWMC 1.50%)aka United Wholesale.

The company is making major strategic changes

loanDepot started primarily as a retail lender, then ventured into wholesale. The business has seen strong growth in 2020 and 2021. However, it has been hit hard by declining volumes and margins. During the second quarter, loanDepot launched the strategic call to exit the wholesale business, which accounted for approximately one-third of loanDepot’s volume. The company is working on its Vision 2025 plan, which is designed to “respond to current and anticipated market conditions, achieve profitability at the pace of exiting 2022, and position the company for long-term value creation.”

With a focus on retail, loanDepot focuses on the highest margin lending and will drive a greater share of buying activity. The move will involve numerous cost reductions and the company plans to reduce its workforce by 42% compared to the end of 2021.

Table of LDI price to book value

LDI price data on book value by YCharts

Don’t believe the dividend yield

loanDepot posted losses in the first and second quarters of 2022, and during the first quarter earnings call, it announced it was suspending its dividend. Not all investor sites take this into account, so if you see a 17% dividend yield, it’s not real.

LoanDepot is trying to scale and take strategic action in a challenging environment. The company is not in danger of bankruptcy because it has nearly $1 billion in cash and $2.2 billion in mortgage service rights that it can sell. The book value per share is $3.80, so the stock is trading well below the book. The stock reacted positively to the announcement, and it might be worth viewing it as a speculative/value stock that will take some time to recover.

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