Mortgage banking stocks are about as out-of-favor as you can get right now. After feasting on easy refinance activity in 2020 and 2021, the industry has been battered by rising interest rates. Much of the refinance activity has simply disappeared, as there is little financial incentive for someone to replace a 3.5% mortgage with a 5.5% one.
Virtually all of the mortgage banking stocks have suffered in this environment, but one that has suffered the most is probably loanDepot (LDI 0.86%). It just announced a major reorganization of its business model.
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loanDepot went public at the best possible time, and has struggled since
loanDepot went public during the salad days of the refi wave in 2021. After having a brief rally after the IPO, the stock went into a deep slump. loanDepot had been trying to compete in the wholesale market, which is extremely competitive.
There are basically three models for mortgage banking. The most common is retail, where a company hires individual loan officers who market their products directly to consumers. This is the general model for Rocket Companies (RKT 1.30%). The company does all the work assembling the loan and then usually sells it.
The second one is correspondent, where the company buys completed loans, usually from retail lenders. The best example of a correspondent lender is Pennymac Financial Services (PFSI 1.10%).
The last is wholesale, where companies assemble the loan, but work with mortgage brokers, who are free agents. Competing in the wholesale business is hard because a broker can use anyone, and these companies compete fiercely on price and service. The leader in this space is UWM Holdings (UWMC -0.32%), aka United Wholesale.
The company is making big strategic changes
loanDepot started out primarily as a retail lender and then ventured into wholesale. The company experienced strong growth during 2020 and 2021. However, it has been hit hard by falling volume and margins. During the second quarter, loanDepot made the strategic call to exit the wholesale business, which accounted for roughly a third of loanDepot's volume. The company is working on its Vision 2025 plan, which is designed to "address current and anticipated market conditions, achieve run-rate profitability exiting 2022 and position the company for long-term value creation."
By concentrating on retail, loanDepot is focusing on the highest-margin loans, and it will push for a larger share of purchase activity. The move will involve a lot of cost-cutting, and the company plans on reducing its workforce by 42% compared to the end of 2021.
LDI Price to Book Value data 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 that it was suspending its dividend. Not all investor sites out there are taking this into account, so if you see a 17% dividend yield, it isn't real.
loanDepot is trying to right-size and make strategic moves during a difficult environment. The company is not in danger of bankruptcy, as it has almost a billion in cash and $2.2 billion in mortgage servicing rights it can sell. Book value per share is $3.80, so the stock is trading well below book. The stock reacted positively to the announcement, and it might be worth looking at as a speculative/value stock that will take some time to right itself.
