If there’s anyone who can sense a turn in the economy, it’s Frank Martell.
As the chief executive since 2022 of loanDepot Inc., he witnessed firsthand the impact of rapidly raising interest rates. He had to lay off about 7,500 employees – or two thirds of his workforce – as revenue plummeted by about 75%.
“It was very hard,” Martell told the Business Journal. “Obviously nobody likes to reduce that number of people; the human cost was difficult. I think the team did yeoman’s work being respectful and providing great financial support.
“It was just a lot of tough situations, but you know everybody in the industry was reducing. We were probably the most aggressive, but we were also the most heavily weighted to refinancing, which was the sector of the market that really completely collapsed in the first quarter of 2022.”
Nowadays, Martell is back in the hiring mode and analysts are expecting sales at the Irvine-based mortgage provider to climb 15% to $1.1 billion in 2024 followed by a 23% acceleration this coming year to $1.38 billion (NYSE: LDI).
LoanDepot in November surprised Wall Street by turning a profit sooner than expected in the recent third quarter.
“We’ve come out of this long shock wave where the market collapsed in 2022,” Martell said. “The company’s really gotten through that and now we’re much more in growth mindset.
“I believe that broadly speaking this coming year will be more favorable than this past year in terms of activity. I think you have to be optimistic.”
‘Ice Age’ for Mortgages
Anthony Hsieh, who had previously started and successfully sold two mortgage companies, founded loanDepot in 2010. The company rode the interest rate drop in 2020 when sales more than tripled to $4.1 billion.
LoanDepot went public in 2021, with the stock nearing $40 each and a market cap that topped $4 billion. By the beginning of 2022, it had grown to 12,000 employees.
In 2020 and 2021, there was about $8 trillion in mortgage activity – more than half of the $14 trillion mortgages outstanding.
“A 30-year fixed rate at 3% for a credit worthy person is free money,” Martell said. “The government was very stimulative because COVID pulled forward a lot of volume.”
By 2022, when the Federal Reserve began raising its benchmark rate to combat the worst inflation rate in 40 years, the industry suffered the worst mortgage volume in 50 years.
Mortgage rates quickly doubled to 7% for a 30-year fixed loan.
“That shut down the market,” Martell said. “Out of all the cycles in the housing market, this was shock and awe because it was so quick.”
LoanDepot’s revenue in 2022 dropped to $1.1 billion, about a quarter of the 2020 sales. The shares likewise declined to below $2 each and a $600 million market cap.
That year, Hsieh stepped aside as CEO, saying the mortgage industry had entered “an ice age.” He also acknowledged changes were needed at the top.
“As a builder and founder and a lifelong entrepreneur, you need to bring someone in that has the skill set that I do not have, someone who has experience of dealing with public companies,” Hsieh told the Business Journal in an exclusive interview in 2022.
Hsieh retained the chairman role while hiring Martell, saying “someone like me needs someone like Frank.”
Martell himself had just completed a bruising proxy battle as the chief executive of CoreLogic Inc., a provider of residential real estate data previously based in Irvine. Martell brushed back a takeover attempt at $65 a share by activist investor Bill Foley and was able to successfully sell the company in 2021 to two private equity firms for $80 a share, valuing the company at $6 billion.
Martell in 2013 won a Business Journal award for CFO of the year award while in that role for CoreLogic.
Q3’s Surprise Profit
The third quarter saw revenue climb 18% to $314.6 million, which topped analyst expectations. Just as important, it reported net income of $2.7 million, which also surprised Wall Street; a year ago, its loss was $34.3 million.
Martell attributed the results to increased productivity and a “little bit of improvement in the market.” He also noted the company reduced its annualized non-volume expenses by over $730 million.
Martell also credited a plan he implemented three years ago called “Vision 2025” that included new offerings, a next-generation digital underwriting engine and an in-house servicing business.
The company in November unveiled a new marketing strategy called “Project North Star” to focus on the first-time home buyer and develop a lifetime relationship where the buyer may also come back for other loans like refinancings, equity loans and reverse mortgages.
“We don’t want to have to find that customer every single time they want to do something. We want to have that relationship.”
The Fed Slows Down Cuts
In mid-December, loanDepot’s stock slumped after the Federal Reserve said it may cut interest rates only twice this year instead of four times as previously expected. At press time, the shares traded around $1.92 and a $626.2 million market cap.
In the Business Journal interview conducted before that Fed announcement, Martell was prescient, saying “My prediction is they’ll bring down the rates, perhaps not as fast.”
He said the pace of inflation is key. He noted that the spread on mortgages has widened because of sentiment on debt levels, for consumer, private corporations and the federal government.
Still, the Mortgage Bankers Association recently forecast 2025 mortgage market volumes at $2.3 trillion, which is up from a forecast of $1.8 trillion for 2024.
“We’re in that climb back-up mode, which is very exciting after a couple years of tough, tough market conditions,” Martell said.
Cyberattacks “Most Serious Issue of Our Time”
Frank Martell has a warning on cybercrime.
“It’s probably one of the most serious issues, if not the most serious issue of our time,” said the chief executive of loanDepot. “When people think about a cyberattack, they think somebody in a garage, which isn’t what’s happening.
“Cyber criminals are a global phenomenon, and a lot of these criminals are well-funded. They’re very clever, and they also use third parties to gain access to systems.”
In early 2024, cyber thieves hacked their way into the system of loanDepot, which generates about $25 billion a year in mortgages. The company has spent hundreds of millions of dollars to develop its system, which it calls Mello.
After the hack was found, the company reacted quickly to shut down the penetration. It called in authorities, including the FBI. The crooks were “very sophisticated” where both foreign and American gangs worked together, Martell said. The American hacker believed to be involved was caught for another hacking crime, Martell said.
A loanDepot filing said it warned 16.9 million customers that their information may have been compromised and it offered credit monitoring and identify protection costs.
“If you have to go through this, my philosophy is the best thing to do is what is right. We were very quick to notify these 17 million folks.”
As is typical, class action lawsuits followed; the company has reached a tentative agreement pending approval from a judge.
LoanDepot recognized $22.8 million of expenses related to the cybersecurity attack, net of insurance recoveries, which included an accrual of $25 million in connection with class action litigation. The company received about $35 million of reimbursements from its insurers
In the past, the crooks often sold the hacked information onto the black market. Nowadays, the crooks try to sell the information back to the company as a ransom, Martell said.
“The primary thing is they will encrypt your system, and you have to pay for the encryption key to unlock your system.”
A second threat is to take as much data as they can and then try to sell it back to the company.
A third threat is to “melt your system,” which isn’t as prevalent, he added.
Martell says he often speaks about cyber threats at conferences.
“It’s unfortunate how prevalent this is. Almost everybody in the U.S. has been hacked.”
— Peter J. Brennan
Martell: Mortgages ‘One of the Most Complicated Industries on Planet’
Here are excerpts from the Business Journal’s interview with Frank Martell, CEO of loanDepot, one of the nation’s largest nonbank provider of mortgages.
Artificial Intelligence
The company is using artificial intelligence to better understand their customers.
Theoretically, it sounds logical to believe AI may speed up the time for mortgage approval, which is currently running 20 to 35 days. However, government agencies that buy mortgages, such as, Fannie Mae and the Veterans Administration, have checklists of requirements that take time and human labor to verify, Martell said, noting that loanDepot is annually processing about $25 billion worth of loans.
“You cannot fully automate your way. You got to have somebody looking at all of that. There’s still a human component.”
Industry Stats
There is $34 trillion in home equity in the U.S.
“The home equity loan solution is a significant growth area for us.”
The median age of home buyers nowadays is 56 years old. The age of first-time home buyers, which used to be around 31 years old, has crept up to 39 years old.
“That reflects people getting married later, obviously having kids later, but also the fact that it’s so expensive,” Martell noted.
Tech Disruption
Martell is doubtful about tech companies entering the industry.
“I’m used to people telling me how they were going to disintermediate the realtors and blow up Zillow and everyone was going to take over the world.
“It hasn’t happened because of the very fact that this is one of the more complicated industries on the planet.”
The Two Other Big Industry Problems
Besides relatively high interest rates, the mortgage industry is facing two large problems: lack of new home construction and the availability of existing homes for sale.
In America, where there are 125 million existing homes, about 5 million to 6 million are typically sold in a year.
However, that number has fallen to around 4 million in the past couple of years. It’s the lowest volume of existing and overall home sales since 1995.
Stock Options
The company began offering stock options last year.
“We made everybody an owner here last year by giving stock to every single employee. We are going to build a little bit of skin in the game.”
OC as Mortgage Hotbed
He plans to stay in Orange County, saying it’s “a nice area” with great amenities.
“Over the last couple of years since I’ve been here, we brought a lot of the leadership team here that were domiciled outside the outside of California, so we’ve actually been building the corporate center here.”
Besides loanDepot, Orange County has been home to several large mortgage companies like New American Funding and Kind Lending. Martell said the mortgage talent probably started in the early 2000s with the subprime companies, which spectacularly fell apart in the 2008 financial crisis.
“There’s just a lot of mortgage talent in this area. Orange County is a great place to live and an amazing a place to call home, so I think that attracted a lot of people.”
