Frank Martell - President, Chief Executive Officer Patrick Flanagan - Chief Financial Officer Jeff DerGurahian - Chief Capital Markets Officer Jeff Walsh - LDI mortgage President Gerhard Erdelji - Senior Vice President, Investor Relations

Good afternoon and welcome everyone to loanDepot's Third Quarter 2022 Conference Call. All lines have been placed on mute to prevent any background noise. [Operator Instructions]. I would now like to turn the call over to Gerhard Erdelji, Senior Vice President, Investor Relations. Sir, please go ahead.

Good afternoon, everyone, and thank you for joining our call. I'm Gerhard Erdelji, Investor Relations Officer at loanDepot. Today, we will discuss loanDepot’s third quarter 2022 results. Before we begin, I would like to remind everyone that this conference call may include forward-looking statements regarding the company's operating and financial performance in future periods. All statements other than statements of historical fact are statements that could be deemed forward-looking statements, including but not limited to guidance to our pull through weighted rate lock volume, origination volume, pull through weighted gain-on-sale margin and expenses. These statements are based on the company's current expectations and available information. Actual results for future periods may differ materially from these forward-looking statements due to risks or other factors that are described in the Risk Factors sections of our filings with the SEC. A webcast and a transcript of this call will be posted on the company's Investor Relations website at investors.loandepot.com under the Events and Presentations tab. On today's call we have loanDepot President and Chief Executive Officer, Frank Martell and Chief Financial Officer, Patrick Flanagan to provide an overview of our quarter, as well as our financial and operational results, outlook and to answer your questions. We are also joined by our Chief Capital Markets Officer, Jeff DerGurahian and LDI mortgage President, Jeff Walsh to help address any questions you might have after our prepared remarks. And with that, I'll turn things over to Frank to get us started. Frank.

Thank you, Gerhard. On today's call I look forward to sharing my perspectives on the market conditions, our results and our outlook. The loanDepot team has made significant progress on many fronts over the past quarter as we executed against our previously announced Vision 2025 strategic program. As you may recall, Vision 2025 which we formerly launched in July has four pillars. Pillar number one focuses on transforming our originations business to drive purchase money transactions with an expanded emphasis on purpose driven lending. Pillar two calls for aggressively rightsizing our cost structure in line with current and anticipated market conditions and internally sets targets to achieve first quartile opting performance. Pillar three covers investing in profitable growth generating initiatives, which for this year focuses on launching our innovative digital HELOC solution. And finally, pillar four relates to optimizing our organizational structure. I will focus the balance of my prepared remarks today on significant progress we have made against each Vision 2025 pillar. Pat will provide additional context and related financial metrics during his remarks. In the third quarter we substantially narrowed our operating losses in line with our previously announced goals for Vision 2025. Our net loss of $137 million in the third quarter was down from $224 million in the second quarter as we aggressively lowered internal and third party expenses and exited the wholesale channel. For the quarter we reduced our sequential cost base by $126 million or 22%, which more than offset a $34 million or 11% decline in revenues. Despite this expected seasonal dip in housing activity as Pat will discuss a bit later, we expect to continue to narrow our opening loss in the fourth quarter as we realize the flow through benefits of actions already taken, as well as new actions planned during…

Thanks, Frank, and good afternoon, everyone. During the third quarter loan origination volume was $10 billion, a decrease of 38% from the second quarter of 2022. This was near the high end of the guidance that we issued last quarter of between $5.5 billion and $10.5 billion. Third quarter volume consisted of $7 billion in purchase loan originations and $3 billion in refinance loan originations, primarily cash out refinances. Our strategy to emphasize less interest rate sensitive mortgage products has resulted in an increase in the proportion of purchase transactions from 34% a year ago to 70% in the third quarter, as well as increasing the total cash out and purchase transactions from 71% to 98% during the same period. Our pull through weighted rate lock volume of $9 billion for the third quarter resulted in total revenue of $274 million, which represented an 11% decrease from the second quarter. Rate lock volume also came in within the guidance we issued last quarter of between $5.5 billion to $10.5 billion. The decrease in revenue is a result of lower volume driven by increasingly volatile interest rates. The average 30 year mortgage rate increased 100 basis points during the third quarter from 5.7% to 6.7%. For context, we began 2022 with the average mortgage rate at 3.2%. Our pull through weighted gain-on-sale margin for the third quarter came in at 203 basis points, also within the guidance we provided. Turning now to our servicing portfolio, customer retention and revenue diversification remain key areas of focus. The unpaid principal balance of our servicing portfolio decreased to $140 billion as of September 30, 2022 compared to $155 billion as of June 30, 2022. This decrease was primarily due to the sale of $19 billion in unpaid balances during the quarter. As of the…

Thank you. [Operator Instructions] Your first question comes from the line of Doug Harter with Credit Suisse. Your line is open.

Thanks. Can you talk about your outlook for cash and liquidity? You know you built it up the past couple of quarters. How are you thinking about MSR sales going forward? How are you thinking about debt pay downs? Just if you could update us on that, that would be great.

Sure, thanks Doug. As noted, we have a very strong liquidity position which we believe is helpful as we work through the resizing of the company and return to profitability, and we think that we remain – a lot of optionality to both invest and continue and invest in the pillars of vision 2025 and it also allows us the opportunity to really optimize the capital structure. At this point we're not anticipating selling any bulk MSRs in the fourth quarter. We think that the mix of servicing sales at the time of origination and retention are appropriate to maintain you know an exceptional amount of liquidity and allow us to take advantage of any opportunities that present us in the market going forward.

And as you mentioned, you know sort of as you look to work on the capital structure, any thoughts about trying to repurchase some of the outstanding unsecured notes?

That you know remains an option for us as I said. There's a lot of opportunity for us to manage the balance sheet. You know we are very focused on maintaining a substantial amount of liquidity as we work through the restructuring, but we'll take a look as we always do at the right, you know the right construct in the liability side of the management – of the balance sheet.

Okay, thank you.

[Operator Instructions] Your next question comes from the line of James Faucette with Morgan Stanley. Your line is open.

Hi, this is Blake Netter on the line for James. Thanks for taking my questions. So starting off with our new HELOC product, as you all know fixed income investors have been looking for some pretty decent spreads relative to a year ago. What I'm wondering is, how much demand is there for HELOC originations today and what kind of volumes do you think you can do? And if spreads tighten, would that increase your ability to originate more?

Hi! This is Jeff Walsh. You know we see HELOC as a significant opportunity in 2023 based on a couple of factors, just as far as what we know from our already spent dollars on leads purchased through first mortgage origination and kind of sizing of the market in general. So yeah of course, narrowing would always help in terms of volume, but we do see it as a significant opportunity in 2023.

Got it, thanks. And then next, looking at your MSR portfolio, how should we think about the sensitivity of your servicing filter rising rates. It looks like you had a negative fair value mark during the quarter and I'm just wondering if you can talk about some of the drivers behind that?

Jeff, can you get it?

Yeah. This is Jeff DerGurahian. You know with the rise in rates and given the age of the portfolio and the coupon of the portfolio, there's not a lot of sensitivity right now in terms of price moves for given moves and rates, and so you know I think that's going to be a return game until we are able to add more originations at the current rate levels to the book.

Got it! Thank you.

And I think there’s a markup in the fair value in the fourth quarter, not a markdown.

Okay, thanks for the clarity.

I’m sorry, in the third quarter – excuse me, in the third quarter.

Your final question comes from the line of Trevor Cranston with JMP Securities. Your line is open.

Hey, thanks. A follow-up question on the HELOC opportunity. You know I think about 30% of your volume in 3Q was refi and you said most of that was cash out. I guess where mortgage rates have moved up to today, you know do you expect sort of that cash out refi business to be sticky or should we sort of think about that as volume that likely moves over potentially towards the newer HELOC product? And I guess as a second part of that, could you give us any sort of sense of you know kind of roughly where you would expect margins to come in as you start bringing the HELOC product on? Thanks.

We don't expect the first mortgage business to be materially impacted by HELOC. It is although a similar customer, a different customer from a credit standpoint and others. So there's still you know a significant opportunity for cash-out refinance. This is in the market, as well as HELOC. You know we see that we have HELOC opportunity in the market that we're missing today. So we know that that's out there exclusive of our first mortgage business, so you know – well it might impact a small amount. We don't see it as significant in terms of margins pattern, okay.

Yes, on margins we're still looking at the market and we're early days in that. And as we expected gain on sale margins overall to increase in the fourth quarter, mostly due to focusing on higher margin products and annexing wholesales as we mentioned. That’s a – that’s the big determinant. We think that HELOC expands the conversion of our marketing dollar spent and they are generally smaller loan balances and the need for smaller amounts of cash out. So we look at it as net – as a net gain, not cannibalizing the first morning side.

Okay, got it. Thank you.

Your next question comes from Kyle Joseph with Jefferies. Your line is open.

Hey! Thanks for having me on and I think you just kind of answered my question, but I was looking at your guidance and at the midpoint it looks like you're expecting margins to be you know even higher than they were on the retail side in the quarter. So is this just a mix shift and then a complete exit or correspondent that’s driving that improved outlook there.

Yeah, that's generally it, some mix shift and exiting a wholesale.

All right, that's it for me. Thanks for answering my question.

Your next question comes from Doug Harter with Credit Suisse. Your line is open. Doug Harter, your line is open. There are no further questions at this time. I will now turn the call back over to Mr. Frank Martell.

Great! Thanks Brent. Just one quick comment on HELOC. I think you know we do expect it to be a significant contributor and a profit generator for us in 2023. We're excited about the initial reaction we have in the market. I would just stress to say a digital solution, we think it's unique in terms of the engagement with the customer and we think the turnaround times are very fast and the access to capital is quicker than most of the competition in the market. So we are – we're excited about that product as a contributor to our financial results in 2023. I just want to close todays call by reiterating that our vision 2025 plan is having its intended effect. We made tremendous progress both structurally and from an operational point of view. Our goal is to continue to narrow our operating losses through the reduction of expenses, but also importantly and increasingly investing in revenue generative and diversification strategies as we continue to skip the overall lending after the company toward purpose driven, where we can access the groups of homebuyers that will be the future of home buying. It’s just a more diverse and a younger set of cohort that will be coming in and bidding the primary buyers in the future. So we think we are going to develop the products and services that fit their usage patterns as we go forward. We will continue to drive the company forward and leverage our financial strength. We have plenty of cash to see us through the challenging time period over the next 12 to 18 months, and we think we're well positioned for the future, and so I want to just thank everybody on behalf of Pat and the rest of the team, and we look forward to continuing to keep everybody up-to-date on our progress, both in the short term and the longer term as we drive shareholder value.

Ladies and gentlemen, thank you for participating. This concludes today's call. You may now disconnect.