loanDepot, Inc. 2020 Form 10-K Summary
Business Context and Reporting Period
loanDepot is a technology-enabled residential mortgage originator, seller and servicer, with ancillary title, escrow, settlement, real estate referral and insurance businesses. The filing covers the fiscal year ended December 31, 2020, with comparative results for 2019 and 2018. The company completed its IPO on February 11, 2021, issuing 3.85 million Class A shares at $14.00 per share and listing under the ticker LDI.
- Retail represented 80% of 2020 origination volume and Partner represented 20%.
- Purchase originations represented 28% of volume; refinancings represented 72%.
- The company reported 9,892 employees and 1,871 full-time contractors at year-end.
Financial Performance and Key Metrics
| Metric | 2020 | 2019 | Change |
|---|---|---|---|
| Total net revenue | $4.312 billion | $1.337 billion | +222.5% |
| Income before taxes | $2.015 billion | $32.7 million | Significant increase |
| Net income | $2.013 billion | $34.4 million | Significant increase |
| Net margin | 46.7% | 2.6% | Expanded materially |
| Adjusted EBITDA | $2.085 billion | $124.0 million | Significant increase |
| Adjusted net income | $1.462 billion | $31.9 million | Significant increase |
| Total loan originations | $100.8 billion | $45.3 billion | +122.3% |
| Gain-on-sale margin | 4.27% | 2.81% | +146 basis points |
| Servicing portfolio UPB | $102.9 billion | $36.3 billion | +183.4% |
| 60-plus-day delinquency | 2.10% | 1.05% | Increased |
Revenue growth was driven primarily by higher mortgage volumes, historically low interest rates, improved gain-on-sale margins, increased interest-rate lock commitments and greater servicing-retained loan sales. Gain on origination and sale of loans increased to $4.046 billion from $1.126 billion. Origination income increased 73.1% to $258.8 million, while servicing fee income increased 57.0% to $185.9 million.
These gains were partly offset by a $284.5 million net loss from changes in the fair value of servicing rights, compared with a $119.5 million loss in 2019. Lower interest rates increased refinancing and prepayment speeds, reducing servicing-right values. The weighted-average prepayment speed increased to 14.0% from 13.3%.
Expenses increased to $2.297 billion from $1.304 billion. Personnel expense doubled to $1.531 billion, reflecting higher commissions and headcount. Marketing and advertising expense increased 40.7% to $264.3 million, and subservicing expense increased 97.4% to $81.7 million.
Cash Flow, Debt and Liquidity
- Cash and cash equivalents were $284.2 million at December 31, 2020, compared with $73.3 million at year-end 2019. Restricted cash was $204.5 million.
- Net cash used in operating activities was $2.031 billion, primarily reflecting the working-capital impact of funding $100.5 billion of loan originations and selling $100.2 billion of loans.
- Net cash provided by financing activities was $2.430 billion. Cash and restricted cash totaled $488.7 million at year-end, compared with $117.5 million in 2019.
- Warehouse and other lines of credit totaled $6.577 billion outstanding against $8.1 billion of total capacity, leaving approximately $1.5 billion of additional availability.
- Total debt obligations, excluding warehouse lines, were $712.5 million, including $491.3 million of senior unsecured notes and $221.2 million of secured debt.
- The company issued $500 million of 6.50% senior notes due November 1, 2025, and repaid its $250 million unsecured term loan and $75 million convertible debt.
- Management stated that the company was in compliance with warehouse, debt, selling and servicing covenants at year-end.
Material Changes Versus the Prior Comparable Period
- Originations more than doubled, from $45.3 billion to $100.8 billion, while loans sold increased to $97.5 billion from $43.5 billion.
- Servicing-retained loan sales rose to $87.2 billion from $20.4 billion, materially expanding the servicing portfolio and servicing-right asset.
- Servicing rights at fair value increased to $1.128 billion from $447.5 million, but the related fair-value loss also increased because of higher prepayments and refinancing activity.
- Loans held for sale increased to $6.955 billion from $3.682 billion, and warehouse borrowings increased 89.7% to $6.577 billion.
- Loans eligible for repurchase and the corresponding liability increased to $1.246 billion from $197.8 million, primarily due to growth in Ginnie Mae-serviced loans that were at least 90 days delinquent.
- The loan repurchase reserve increased to $33.6 million from $17.7 million.
- The company paid $643.1 million of dividends and distributions to holders of LLC units and redeemed $97.6 million of noncontrolling interests.
Guidance, Outlook, Risks and Unusual Items
The filing does not provide formal quantitative revenue or earnings guidance. Management described the 2020 operating environment as unusually favorable because COVID-19-related declines in interest rates increased refinancing demand and supported mortgage margins. Management stated that it believed liquidity was sufficient for current operations and that there were no known trends expected to prevent funding operations for the next twelve months, while acknowledging that this assessment could change.
- COVID-19: The company shifted most employees to remote work and faced potential liquidity pressure from servicing advances for borrowers in forbearance. Approximately 2.4% of the servicing portfolio, or $2.4 billion of UPB, was in active forbearance at year-end.
- Interest-rate sensitivity: Rising rates could reduce refinancing volumes, loan values and production earnings; falling rates could increase originations but accelerate prepayments and reduce servicing-right values.
- Funding and refinancing risk: Most warehouse capacity matures during 2021 and is subject to renewal and covenant compliance. Margin calls and reduced secondary-market liquidity could constrain operations.
- Servicing risk: The company relies substantially on third-party subservicers, principally Cenlar. Servicing advances may be delayed or unrecoverable, particularly during elevated forbearance or delinquency periods.
- Repurchase and indemnification risk: Loan purchasers may require repurchases or indemnification for underwriting, documentation, fraud, early-default or other representation and warranty breaches. The reserve may prove inadequate.
- Fair-value risk: Servicing rights, interest-rate lock commitments, loans held for sale and derivatives are valued using models and assumptions, including prepayment speeds, discount rates, pull-through rates and servicing costs.
- Regulatory and legal risk: The company operates under extensive federal and state mortgage, servicing, consumer-protection, privacy and licensing requirements. It is defending two putative TCPA class actions and reported an executive demand letter involving alleged origination noncompliance and employment claims; no loss estimate was provided.
- Corporate structure: The company is a controlled company with multi-class voting stock. The tax receivable agreement requires payment of 85% of certain realized or deemed tax savings and may create substantial future liquidity obligations. Management estimated potential payments of approximately $627 million over 15 years under stated assumptions.
- Unusual accounting and reporting items: Net income includes substantial fair-value and derivative effects. The audit identified valuation of servicing rights as a critical audit matter. The filing does not include management’s or the auditor’s report on internal control over financial reporting because of the SEC transition period for newly public companies.
Important Facts for Investors to Verify
- Whether 2020’s exceptionally high refinance volumes and 4.27% gain-on-sale margin are sustainable as interest rates, competition and housing activity change.
- The renewal terms, advance rates, covenants and maturity profile of the $8.1 billion warehouse capacity, particularly the facilities maturing during 2021.
- The adequacy of the $33.6 million loan repurchase reserve and the potential effect of increasing delinquency, forbearance and Ginnie Mae repurchase exposure.
- The sensitivity of the $1.128 billion servicing-right asset to prepayment speeds, discount rates, delinquencies and servicing costs.
- Future servicing advances, subservicer performance and the company’s planned transition toward a proprietary servicing platform.
- The amount and timing of tax receivable agreement payments, including any accelerated payment obligation following a change in control.
- The outcome and potential exposure from the TCPA class actions, executive demand letter and other regulatory or consumer-protection matters.
- The effect of the controlled-company structure, five-vote Class C and Class D shares, potential exchange of Holdco Units and future dilution of Class A shareholders.