A deep dive on loanDepot’s latest earnings

The first is, LoanDepot cleared over $2 billion in profits last year, which is, I mean, geez, if it were any other year, people would be in the streets…it would be a parade float coming by. It’s really just eye-popping numbers. But what’s most interesting is the margins are starting to fall. And so, for the year, they averaged something like…I don’t have it in front of me, but I think it was, like, 4.18, 418 bps for the year. But it’s starting to drop a little bit. It’s now in the threes. And part of that looks like, you know, they’re a public company now. They spend a lot of money on marketing and trying to build up their presence globally speaking. And that costs money.

The second, of course, is when you originate that many loans, you gotta pay, you know? This isn’t a free business. It costs them on average, you know, across the average IMB, around $7,000 to originate alone. And so, the more loans they originate, the more fees they have to pay. It costs money to make money, right. So that’s all happening.

And the refi business is starting to fall, fading a little bit. You know, I don’t think anyone’s out there saying that refis are dead and dusted and we’re just moving onto a full purchase market or anything like that. But it’s slipping, you know? And I think LoanDepot, a retail-focused shop is gonna be susceptible to that. So investors are a little bit weary of companies that are very, very, very refi heavy these days. LoanDepot would be among that list. And so, it’s something to watch for, for sure. But you know, all in all, $2 billion in originations…I’m sorry, $2 billion in profits, record originations, record revenue, they had an incredible year and their stock has been really wild too. You know, it’s been all over the place. It was originally gonna debut at, like, $19 to $20 a share, $21, and then at the last minute, just as what happened in 2015, they said, “No, no, no, wait, let’s wait, let’s wait.” And then, they finally come out with another one. They downsize significantly. You know, they really didn’t raise much at all, I think in the initial day, and they priced it, like, $14 bucks. Really, really, really low. But that’s gone back up as people see a lot of value in it. So it’s been a wild ride for LoanDepot over the last week, and it’s gonna be fascinating in 2021.

Alcynna Lloyd: I just wanna touch on a point that you mentioned about refinances shrinking. What does that say about today’s homebuyer? Have we changed that much from last year or what’s going on there if refis are shrinking?

James Kleimann: You know, I think a lot of it depends on who you ask. The consensus is among experts and observers, that there’s still, I think, somewhere between, like, 16 million or 18 million people who could shave, I think it’s like, 0.75% interest rate on their mortgage if they were to refinance right now. There are a lot of people who are still eligible, but as rates continue to tick up, you know, that interest is going to wane. You’re just kinda like, you’re creating a much smaller pie of people who would take advantage of that. Look, nobody ever thinks that all 16 to 18 million people who were eligible, you know, would actually refinance. But rates are going to tick up. It seems inevitable. And refis are basically all about, you know, it’s a rate-dependent business and if, let’s say, I got a new job, God forbid, we wouldn’t be colleagues anymore, Alcynna, maybe I’d have to move. And I’m gonna buy a house, like, it doesn’t matter if, like, the interest rate is 3 or 3.5 or 4 or 4.25. I’m buying a house. Let’s say I had a few kids, I had twins, you know. I needed to buy a house but I don’t necessarily need to refi my mortgage just because it dropped, like, 50 bps or whatever. So I think that’s kind of, you know, that’s a big part of it, which is you really need to reach, you know, the real estate agents which are still commonly the referral networks. They are the lifeblood of the purchase market and if rates do tick up, say, another 50 bps, you know, those 18 million suddenly becomes 13 million. And it just gets a lot harder for everybody to nail down that business. But most people think by the third quarter, we’re gonna start to see, you know, a real slowdown. But you know, at this point, it’s hard to say.

Alcynna Lloyd: Yeah. Well, we just got out of a news meeting, our news huddle this morning, and while refinances and mortgage rates were some topics that came up as well too, can you share with our listeners some of the topics that we’re also keeping an eye on this week. What is gonna make news go crazy this week?

James Kleimann: You never know in the news industry, which is kind of the beauty and the challenge with it. But I can tell you already that we do have a few features that have been in the works for awhile, that are gonna drop today, tomorrow and I can talk a little bit about that. You guys, I’m sure have heard of a brokerage called Compass. If you are a real estate agent, you have either, you know, shouted from the mountaintops how great Compass is, what a game changer, that this is gonna revolutionize real estate, or just they give you an incredible split and you’re making more money than you used to. And so, you know, why the heck not. Or you’re a real estate agent at a different company and you think that it’s just a bunch of nonsense, and that this is an over-valued, over-inflated company that basically bought market share and ultimately has created a business that is not sustainable. So we’ve got a story that I think is going to certainly generate conversation amongst real estate agents and brokers.

And the story is Compass just bought Lila Delman, which is kind of a little bit of a boutiquey firm based in Newport, Rhode Island. Beautiful town. If you haven’t been, definitely check it out. It’s really cool. Little ritzy, but it’s super nice and the seafood there is fantastic. But that’s an aside. Compass did not buy Lila Delman for its excellent quantity of shellfish and fish. But what they’re getting is, it’s bountiful. Look, they’re getting 120 agents at Lila Delman. This is a firm that’s done really well. Locally, people wanna transact with a player that they know that is part of the community. They’ve been in business for decades and from sources that I’ve spoken to, they didn’t have to pay a lot of money to acquire this kind of firm. And Compass is really fascinating because Compass mostly grew by acquisitions, whether that be acquiring a wholesale brokerages. In New York, where I’m from, they picked up Sterling…Stribling, excuse me. And in California, they got Union and they grew by thousands and thousands of brokers. And in other markets, they just picked up, you know, tons of agents by offering incredible splits, like 90, 95 to 5 or 10, in some cases even more than that, which is…I mean, at that point, you’re not creating a business, you’re creating, like, a marketing enterprise at that stage. But anyway, we can talk about that another Monday morning.

And so, Compass is, you know, they bought so much and then they kinda stopped, you know, a lot of people were like, “Hey, you guys are spending a ton of money. You’re not profitable. What are your margins? How is this gonna work? Eventually, you’ll need to go public, right, you know, because how else are at the investors gonna make their money back. If you’re running a low margin business like brokerage, you gotta figure out a way to replenish that kind of money.” And so then, you hear, “Okay, Compass is going public.” And people think, “Well, that surely means that they’re gonna, you know, not be spending crazy amounts of money on everything.” And that was true for a little bit. We heard that even in locally New York that they had this incredible…in their office, they had this, like, amazing snack bar, wonderful snack bar. And I hear that the snack bar is not as wonderful these days.

Alcynna Lloyd: Oh, wow.

James Kleimann: But look, every business has to do this. This is how the industry operates more healthily. And so, the acquisitions also stopped for awhile. Part of it is because they pretty much picked up every big firm that they could. There just aren’t a lot of big independent brokerages out there that Compass would be, you know, willing to spend the kind of money to acquire. And a lot of people just don’t wanna join Compass. They see them as a threat to kind of the more traditional agent platform, and really kind of the local experience of being with a brokerage that has been in the community for, you know, 50, 100 years, right. So they have kind of like, a natural difficult conditions to meet. The fact that they just picked up Lila Delman in Rhode Island, and then also in New York, they picked up Bold…they’re probably not really known outside of New York, but they’re known for doing a lot of…they have luxury rental apartments in New York, the kind of thing where you would have to sell an organ to afford. Then a year later, your rent goes up. Too bad you don’t have a kidney. Yeah, they also have about 120 agents. They’re a very well known firm locally in New York, and so that gives them a bigger presence in new development. And in New York, you know, brokerage is, like, we could have an entire crazy conversation about the brokerage business in New York, which is fascinating and weird and kooky and difficult and full of rage and hate and loathing. Love it.

But anyway, Compass is, you know, they haven’t really done as well as some of the bigger entrenched powers of new developments, you know, these big flashy new buildings where they charge massive amounts of money for either rental or, you know, like a new condo or whatever. They just haven’t really done as well as Douglas Ellen or Corcoran. So the fact that they’re spending the money to get Bold, and maybe they got a better price because maybe you’ve heard the New York City rental game is not as great as it once was, or depending on your perspective way better, right?

Alcynna Lloyd: Mm-hmm. So where can our readers or listeners find this article? Is it gonna be HW+ or is it gonna be just our regular article on the site?

James Kleimann: Yeah, so the Compass story on Lila Delman, that went up this morning, maybe an hour ago. That is an HW+ story so if you wanna hear about what Compass has been up to, what they’re thinking, what kind of deal…what this represents to the brokerage world and to Compass and what it means going forward, you gotta subscribe to HW+. And so, you could always hit me up and I’ll be happy to give you a little bit of a discount. But it’s worth it. It’s journalism that takes time and effort and money, and I can tell you that you’ll know a lot more about Compass having read it.

Alcynna Lloyd: Yes, and for our listeners that don’t know what HW+ is, it’s a premium membership service. We have all sorts of interesting things in there. We have podcasts, we have these exclusive articles that you probably won’t get anywhere else. So that’s a piece that I’ll definitely be reading, James. And today, as we wrap, this is probably my biggest question, but as February comes to a close, what are some of the biggest and most prominent topics we focused on this month? There was so much going on.

James Kleimann: This is a stumper. Well you know, certainly the rise of Compass, even before we did this piece today on Lila Delman, Matthew Blake, who’s our senior real estate reporter did a big story on Compass and kinda what it means for them to IPO. It’s a really, really good story, and we don’t know when they’re going to go public, but all indications seem to be sometime this year. I think it’s interesting if you look at Compass and you compare it to Really, which is massive, much bigger than Compass, Richard Hathaway HomeServices, again, massive. Much bigger than Compass. Also, kinda quasi-publicly traded and you have to wonder, you know, what Compass could do to really take away market share from them, or are they gonna be taking market share away from, you know, smaller, more independent players. It’s a big question. So I think the real estate world is definitely looking at that. They’re also looking a lot at the iBuyers, you know, which may represent an existential event to even a Compass or Realgy or, you know, they’re really starting to generate a lot of different lines of business that they traditionally not been into, that real estate agents didn’t have to worry about. But now, you know, they have to ask themselves, “Am I gonna be obsolete in 10 years?” I don’t mean to sound hyperbolic, like, look, this kinda questions come up every 10 years anyway. But I think, you know, the amount of money that’s poured into all of the iBuyers and SPACs and Zillow and Redfin and Opendoor, the closer they get to the process, I think the more agents have to worry about kind of that mode around them, and how deep that water is, how many alligators are in there to keep the iBuyers out. And the mortgage companies as well. So I think these are big subjects.

We also did a real interesting look at lumber prices, and not just about lumber prices, but lumber had a wild year, a completely crazy year. And so, Tim Glaze, who’s a reporter at HousingWire, he basically did a piece that looks at, you know, what happens when lumber prices are really high, and then you have, you know, these COVID-related structural logistical problems, like how do you get lumber from, you know, the rail in Canada to the Home Depot locally, or to the home builders in Georgia or Texas or wherever. And what happens when there’s a run on wood basically. What that means is all the other suppliers who have, you know, drywall and all kinds of other materials related to building residential homes, they raise their prices too. And then, so who gets stuck with that? In a lot of cases, some home builders, who had contractual obligations that they couldn’t change things on, you know, they got screwed. But in a lot of cases, in most cases, home buyers, people were renovating their kitchen or whatever, they end up getting the cost. So as much as the piece looks back at 2020, which was a really, really interesting, weird year for everyone, but especially builders, is what happens in 2021. You know, is this gonna get better? We know we have a lot of vaccines here, at least in the U.S., not necessarily in Canada. But will that alleviate all the problems? Are people exploring other means, you know, instead for. wood floor, they’re thinking about, like, poured concrete, for example, or any number of other materials. So that’s a little bit more of a forward looking piece. That was a favorite of mine actually.

And then, you know, we’ve done a lot of coverage on United Wholesale Mortgage. We’ve done a lot of coverage on these big I&Bs that have gone public, and there’s certainly to be a lot more of that coverage. But I think it’s gonna be more focused on what happens in a purchase environment. They’ve done great when the refi business was hot, but Q3, is that gonna remain?

Alcynna Lloyd: All right. Those topics are something I know that our audience is definitely interested in, but home building is gonna be a number one or a top concern for a lot of people this year. And as more IPOs come to the market, I know our audience is very excited to hear more about that. Well, listeners, I’d like to thank you for tuning into another live recording of “Monday Morning Coffee.” I’d like to thank James for joining us today. I hope you guys have a great week and we’ll see you back here next Monday. And until then, you can check us out on HousingWire Daily. You won’t want miss out on all the planned amazing interviews that we have this week. Thanks again, James.

James Kleimann: Thanks.