Mortgage markets were blistering hot last year. Driven by historically low interest rates, homeowners refinanced at a record pace in 2020. According to Black Knight, mortgage originations totaled $4.3 trillion last year, with refinancings making up $2.8 trillion -- the highest level on record.  

Many finance lenders used the red-hot market as an opportunity to go public. Big names like Rocket and UWM Holdings hit the public markets last year, while loanDepot (NYSE:LDI) made its public debut earlier this year.

It's been a good start for loanDepot, which reported solid first-quarter earnings, but investors are cautious as mortgage markets cool down amid gradually rising interest rates. Not only that, but the lender faces intense competition in the mortgage space as competitors aggressively look to grab market share.

Solid earnings and strategic partnerships

Following the housing crisis in 2010, loanDepot saw an opportunity to disrupt legacy lenders using technology, through its mortgage platform called mello. Mello is an end-to-end platform that streamlines the lifecycle of the mortgage loan, including customer acquisition, applications, processing, and servicing. The platform makes user interaction easy, and leverages machine learning for underwriting parameters to automatically determine and validate loans and reduce cycle times.

A couple gets financial advice.

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In the first quarter, loanDepot grew revenue to $1.3 billion, an impressive 171% increase from the same quarter last year. However, compared to the fourth quarter, revenue was up 1.4% -- showing a drastic slowdown caused by a cooling housing market.  

Quarterly originations were up 11% in the quarter from the fourth quarter as well. While the company expected interest rates to rise, management noted that they rose faster than expected in the first quarter. These rising rates mean a slowdown in mortgage originations, especially for mortgage refinancing. Investors shouldn't be too surprised, though, given that Fannie Mae and Freddie Mac projected mortgage originations would drop anywhere from 10% to 25% this year.   

Despite rising interest rates, loanDepot saw refinance loan originations of $33.6 billion in the quarter, an increase of 22% from the fourth quarter and 211% from the first quarter last year. Meanwhile, purchase transactions of $8 billion were down 19% from the fourth quarter but up 80% compared to the first quarter last year.  

In an effort to boost new purchase originations, the lender entered into joint ventures with home builders and a chartered bank during the quarter. Agreements with Schell Brothers, a builder of energy-efficient homes in Delaware and Virginia, and LGI Homes, which operates in 20 states, including California, Texas, Florida, and North Carolina, could drive further mortgage originations given strong demand for homebuilding this year.  

Facing a headwind from slowing mortgage markets

While mortgage originations have been slowing down, loanDepot management is confident in the company's position and looks to capitalize on a period of consolidation in the mortgage market.

The company plans to stabilize earnings with its loan servicing portfolio. In the first quarter, loanDepot's servicing portfolio was nearly $130 billion, up 26% from the fourth quarter. The growth in its portfolio boosted servicing income 28% from the fourth quarter and could provide stability when originations are not as strong. However, servicing represents only 11.5% of the company's revenue, with mortgage loan originations representing nearly 85%.  

2020 saw record activity, and 2021 will likely enjoy a spillover effect from lower interest rates. I like the company's partnerships with homebuilders, which should boost its purchase loan originations, but as an investor I'm cautious when it comes to the mortgage industry -- especially in the residential space. Economists at Freddie Mac project that single-family mortgage origination activity will decline to $3.5 trillion in 2021 and $2.4 trillion in 2022, driven by gradually rising mortgage rates. Not only that, but the lender faces stiff competition from Rocket Companies and UWM Holdings, which are both engaging in aggressive strategies to grab market share as well.

While the company is making progress, the current conditions make me cautious of loanDepot -- and others in the industry for the time being.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.