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Wednesday, Aug 10, 2022

LoanDepot Hires CEO Amid Mortgage ‘Ice Age’

FINANCE: Hsieh taps CoreLogic’s Martell

Anthony Hsieh, who founded loanDepot Inc. in 2010, in less than a decade built the business into one of the country’s largest nonbank mortgage lenders, one with $4.1 billion in sales in 2020.

Last year, he took the Foothill Ranch-based company to Wall Street via an initial public offering, where its shares, priced at $14, at one point nearly reached $40 each and its market cap soared above $4 billion.

Then, he watched the Federal Reserve increase interest rates, causing a 16% drop in sales last year; analysts are forecasting another 36% drop in sales to $2.4 billion for 2022.

Like other publicly traded mortgage firms, loanDepot (NYSE: LDI) has seen its share plunge, dropping more than 90% from its all-time high to a valuation around $700 million as of last week.

The hard-charging chief executive, who previously built and sold two successful companies, decided he needed some help.

“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.

On April 26, Hsieh announced the hiring of Frank Martell as the company’s new CEO and president, while he moved to the executive chairman role.

Martell made plenty of headlines locally last year, as he fought off a proxy battle when he was the CEO of Irvine-based mortgage and real estate data firm CoreLogic, which was ultimately bought and taken private last year for $6 billion by a pair of private equity firms.

“Frank has been at the top of the game for a couple of decades,” Hsieh said.

“At some point, someone like me needs someone like Frank.”

“We have terrifically complementary skills,” Martell added. “I’ve admired loanDepot—it’s a new phenomenon. I’ve watched loanDepot grow into the second largest nonbank originator” in the U.S.

Challenging Period

The exec move at loanDepot comes at a dramatic time in the mortgage industry, which is expected to originate around $3 trillion in mortgages this year, down from $4 trillion in 2021.

Last quarter, mortgage lenders issued about $859 billion in mortgages, a 25% drop from the previous year, according to Federal Reserve Bank of New York data released last week. It was the first quarter since early 2020 and the onset of the pandemic that originations fell below $1 trillion.

Lenders like loanDepot have had to deal with the Federal Reserve raising interest rates to try to stop the worst inflation rate in 40 years. The rate on a 30-year fixed mortgage rose nearly 200 basis points within a few weeks in recent months, Martell told the Business Journal on May 3.

“The Ice Age is here for mortgages,” Hsieh added.

Q1 Sales Drop

Last week, loanDepot reported a first-quarter adjusted loss of 26 cents a share, on revenue of $503.3 million. Analysts expected a 3-cent profit on revenue of $586 million.

In the subsequent trading session, the company’s shares fell 19%.

“Our results reflected the sharp and rapid increase in market interest rates, which led to significantly lower profit margins during the latter half of the quarter,” Hsieh said in a statement on the results. “While we made progress toward our goal of reducing the expense base to align with earlier expectations, our volumes have continued to decline and expense reductions have not kept pace
with the rapidly changing environment.”

It’s an industrywide problem.

Revenue at rival Detroit-based Rocket Companies Inc. (NYSE: RKT), the nation’s largest nonbank mortgage originator, is expected to drop 30% this year to $9.1 billion; its shares have cratered 63% to $8.43 and a $17 billion market cap as of last week.

San Francisco-based Wells Fargo, one of the nation’s largest mortgage originators, announced it is laying off employees due to “cyclical changes in the broader home-lending environment.”

Orange-based lender Owning recently disclosed in state filings it was laying off 189 local workers.

Hsieh said his company still has 10,000 employees and declined to say if layoffs were pending.

“We will continue to evaluate the current market conditions,” he said.

The Beginning

Martell and Hsieh have a history of overcoming problems and winning tough battles.

Hsieh, who was born in Taiwan, immigrated at age 8 with his parents to the U.S. and grew up in Fullerton, earning a business degree at California State University, Fullerton.

At 21, he became a mortgage lender, taking his first loan application on a typewriter. By 25, he became owner of his own company, which he called the world’s first internet-based financial services company; it was sold in 2001 for $51.5 million. At 35, he founded HomeLoanCenter.com, selling it for an undisclosed price to IAC/Interactive Corp.

In 2010, he started loanDepot as “a way to do something.” He didn’t have an idea it would become “a monster of a company.”

Since then, it’s generated more than $275 billion in loans.

After the pandemic hit in 2020, the Federal Reserve slashed interest rates, spewing a frenzy of mortgage refinancing that led to loanDepot generating $4.1 billion in 2020, more than tripling its revenue from the prior year. The Business Journal named Hsieh a Businessperson of the Year in January 2021, in the finance sector.

Martell himself was named Outstanding CFO of a Public Company in the Business Journal’s 2014 CFO of the Year Awards, for his work with CoreLogic. See stories throughout this edition for more on the 2022 CFO Award winners.

After he became CoreLogic’s CEO in 2017, Martell’s strategy was to unload low-margin labor intensive businesses in favor of revenue-generating new technology and new users. The shedding of certain units meant CoreLogic’s revenue declined in 2017 and 2018 and was flat in 2019, at around $1.4 billion.

The low revenue growth was a source of contention during the proxy battle that began in June 2020. That battle ended last June when CoreLogic was taken private at $80 a share, up about 64% from when the proxy battle began.

“It was a great result for the shareholders,” Martell said. “I think it was the right thing to do for the company and the shareholders.”

CoreLogic Connection

U.S. mortgages are worth about $34 trillion, making it the biggest asset class on the planet, Martell said.

CoreLogic has more than 4.5 billion records spanning 50 years, providing detailed coverage of property, mortgages and other encumbrances, consumer credit, tenancy, location, hazard risk and related performance information. The company sells its data to 2,000 lenders and 500 insurance companies; it has more than 1 million end-users. Its software powers more than 50% of real estate

About 60% of CoreLogic’s revenue comes through exposure to mortgages and related agencies, Martell said.

“We have tremendous insight into the industry because all major data players use data from CoreLogic,” Martell said.

While the two local executives knew of each other’s companies, they didn’t become friendly with each other until recent months, Hsieh said.

“Our two companies had done business for a while,” Hsieh said. “I tell everyone we (hired Martell) so we could negotiate better with CoreLogic.”

“I know my skill set,” added Hsieh. “Frank will manage and improve our operations efficiency and continue to find ways to manage our cost structure.”

Wall Street Talk

During the past year, it’s been tough for Hsieh to convince Wall Street about loanDepot’s value.

“I have strong opinions about Wall Street,” Hsieh said. “Our stock price is trading under book value. We’re very strong on our balance sheet.”

The company has announced other personnel moves of late, such as promoting Min Kim to executive vice president of marketing and analytics, and naming Zeenat Sidi as president and chief operating officer of loanDepot’s technology unit, mello, to develop new products like a home equity line where consumers can access their funds in as little as seven days.

In February, the company announced Hsieh, already the largest shareholder, personally invested $16.2 million to purchase loanDepot shares. The company’s paying a dividend whose yields often top 10%.

Chess Game

In the long run, Hsieh is hopeful that this is merely a cycle and investors will see the value of the technology built by loanDepot, which has spent more than $400 million developing its in-house proprietary technology.

“These are all strategic assets that we built,” Hsieh said. “That is an area that the market doesn’t understand yet. Going forward, our assets will start to give us a separation.

“This type of cycle change puts tremendous pressure on other competitors that might not have the right strategy,” Hsieh said.

“The checkers play is how we manage the current market. The chess play is to what we do when the market returns.”

Peter J. Brennan
Peter J. Brennan
Peter J. Brennan has been a journalist for 40 years. He spent a decade in Latin America covering wars, narcotic traffickers, earthquakes, and business. His resume includes 15 years at Bloomberg News where his headlines and articles sometimes moved the market caps of companies he covered by hundreds of millions of dollars. His articles have been published worldwide, including the New York Times and the Washington Post; he's appeared on CNN, CBC, BBC, and Bloomberg TV. He was awarded a Kiplinger Fellowship at The Ohio State University.

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