The past year has been a bonanza for mortgage banking initial public offerings. Industry heavyweights such as Rocket and United Wholesale were the best known names. The most recent initial public offering has been loanDepot (LDI 4.19%), which recently reported its fourth-quarter and full-year earnings. Is the stock a buy?
A newcomer with a heavy focus on data
loanDepot is a relative newcomer to the business, getting its start in 2010. The company is a primarily retail-focused mortgage originator that has invested heavily in technology, primarily via its proprietary platform, mello. The platform spans the entire mortgage process, from customer lead generation to servicing. loanDepot utilizes data analysis and machine learning to source leads and to recapture loans the company is servicing. The company attributes much of its success to its technology platform, which includes a database of 40 million unique individuals and 10 billion data points. The goal is to optimize lead conversion and to glean competitive insights.
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Has loanDepot cracked the cyclicality problem?
loanDepot claims that its business model will permit it to grow through all mortgage market cycles. This is a bold claim since the mortgage business is highly cyclical. This cyclicality is why mortgage originators trade at mid-single-digit price-to-earnings (P/E) ratios during boom times.
loanDepot attributes this to its focus on both a retail strategy and a partner strategy. The retail strategy includes both consumer direct and mortgage loan officers. The partner strategy involves joint venture and referral partnerships with some of the nations' leading homebuilders, realty brokerage firms, and independent mortgage brokers.
Big increase in volume and margins
loanDepot originated $37.4 billion in loans in the fourth quarter, an increase of 38% compared to the third quarter. For the full year, loanDepot originated $100.8 billion, an increase of 122% from 2019. The retail channel accounted for 79% of the volume, while the partner channel accounted for 21%. For the year, gain on sale margin came in at 4.27%, compared to 2.81% in 2019. Full-year 2020 revenue rose 230% to $4.3 billion, and net income came in at $2 billion.
loanDepot also holds a $103 billion unpaid principal balance mortgage servicing book. Mortgage servicing is a popular asset for mortgage originators because it is one of the few financial assets that increases in value as interest rates rise. This is because the mortgage servicer earns a fee (typically 0.25% of the mortgage loan balance) as compensation for processing the monthly mortgage payments, ensuring that the mortgage-backed security investors receive the principal and interest they are owed, ensuring property taxes are paid, and dealing with the borrower if the loan goes delinquent. As of Dec. 31, 2020, 2.1% of the servicing portfolio was delinquent by 60 days or more. The latest 90-plus day delinquency numbers out of the Mortgage Bankers Association is much higher, so loanDepot's servicing book looks solid.
The investing verdict
According to Inside Mortgage Finance, loanDepot is the second-largest retail-focused non-bank mortgage originator and the fifth-largest overall retail originator. So, is loanDepot a buy?
I can't recommend the stock quite yet because I don't feel comfortable with the share count. I am waiting for the company to release its Form 10-K, which hopefully will have the necessary information. So far, the company doesn't have any analyst estimates either, which is probably due to the share count issue. I find the data analysis and machine learning aspect interesting, and I look forward to being able to determine what sort of multiple loanDepot currently commands.
