loanDepot job cuts – what's behind the 'rightsizing' effort?

Lender reveals cuts and other drastic steps as part of its 'Vision 2025' plan

By Tony Cantu

13 Jul 2022

Mortgage lender loanDepot Inc. is the latest firm announcing major staffing cuts amid market turmoil, revealing plans on Tuesday to eliminate 4,800 jobs – a level representing more than 40% of its workforce.

Details on the cuts were buried toward the end of a “Vision 2025” business plan timed for release with a morning conference call. The planned cuts – referred to as a “rightsize” move in the corporate literature – will reduce staffing levels from 11,300 at year-end 2021 to around 6,500 by the end of 2022, officials detailed in the report – a copy of which was provided to Mortgage Professional America.

“Current headcount is 8,500 and severance and benefits-related payments of approximately $3.5-$4.5 million are expected to be recorded in the second quarter of 2022,” the statement reads. “Other non-operating expenses expected to be incurred in the second quarter related to these efforts include approximately $2.0 million of real estate exit costs and approximately $2.5-$3.0 million of outside service expenses.”

The Vision 2025 plan – of which the massive cuts are a part – is designed “…to address current and anticipated mortgage market conditions and position the company for sustainable long-term value creation,” according to the statement. A pivot to the purchase market is part and parcel of the vision plan, as indicated by the statement, as well as less rate-sensitive cash-out refinances. Other areas of focus include: simplification of the organizational structure with an emphasis on client service, quality, automation and operating leverage, and a continuation of investing in the company’s servicing business and innovative digital consumer lending solutions amid efforts to “…accelerate its ongoing rightsizing.”

President and CEO Frank Martell said in a prepared statement: “In 2020 and 2021, like other mortgage companies, we scaled our organization to meet the demands of unprecedented mortgage volumes, especially refinancing transactions. After two years of record-breaking volumes, the market has contracted sharply and abruptly in 2022. We are taking decisive action to meet this challenge head on. Our Vision 2025 plan has been constructed to aggressively pivot the company for improved profitability. We are investing in the areas of our business we have identified as growth drivers over time, rightsizing our cost structure for current and anticipated market conditions, and positioning the company for long-term value creation.

“As we work to become an increasingly purpose-driven company, we want to be a leader on the key housing issues of our time -- affordability, inclusion and sustainability. Homeownership remains at the core of the American dream, and we plan to leverage our strengths to help make that dream a reality for more American families.”

Added the company’s chief financial officer, Patrick Flanagan: “We are executing our Vision 2025 plan on a foundation of a strong balance sheet and ample liquidity, with a current cash position of approximately $1 billion. We anticipate continued challenging market conditions, with mortgage originations projected to decline by roughly half in 2022 from 2021, including an accelerated decline in the second half of 2022, followed by a further decline in 2023. We continued to reduce our costs significantly in the second quarter. Over the next two quarters, we expect to accelerate these efforts and aggressively drive down our costs in line with our previously stated goal of exiting this year with a profitable operating run rate. After two years of substantial headcount and expense growth that was necessary to support unprecedented origination volumes we are returning to previous levels of staffing and expense.”

The company outlined the four components to the Vision 2025 plan:

Increase focus on purchase transactions while serving increasingly diverse communities across the country: “Home buyer demographics are shifting, and the company plans to build on its strong foundation to continue meeting the needs of first-time homebuyers and underserved communities,” the statement reads. “The country is becoming more diverse, and we will support this trend through the implementation of Vision 2025. For example, 70% of new homeowners between 2020 and 2040 will be Hispanic, according to the Urban Institute’s 2021 report, ‘The Future of Headship and Homeownership’. “As the company pivots to an increasingly purpose-driven organization, it expects to increase its focus on addressing persistent gaps in equitable housing through initiatives that expand access to credit, such as Special Purpose Credit Programs, while advancing the goal of growing its share of lending for purchase transactions and maintaining responsible management of credit risk.”
Execute previously announced growth generating initiatives: “The company expects to launch its unique, all-digital home equity line of credit (HELOC) by the fourth quarter of 2022. With a data and technology-driven application process, this competitive product is designed to give homeowners efficient access to their record levels of home equity in as little as seven days. As one of the 15 largest mortgage servicers in the US, loanDepot will continue to invest in its in-house servicing business to complement its origination strategy and serve its customers through the entire mortgage journey. The company expects to capture additional revenue opportunities over time by leveraging its marketing and customer acquisition expenses across a diverse set of products and services.”
Centralize management of loan originations and loan fulfillment to enhance quality and effectiveness: “The company intends to streamline its organizational structure to better position itself for the rapidly evolving mortgage market, which entails centralizing: All mortgage origination functions will be led by LDI mortgage president Jeff Walsh; all digital lending and mortgage-adjacent products and services will be led by LDI digital products and services president Zeenat Sidi; all loan fulfillment and servicing functions will be led by LDI managing director of operations and servicing Dan Binowitz. The new structure is designed to enable the company to increase its share of lending for purchase transactions, while achieving top-quartile quality, increasing automation, and achieving operating leverage.”
Aggressively right-size cost structure: “The company is focused on aligning its cost structure for current and expected mortgage origination volumes. loanDepot is implementing a program expected to generate approximately $375-$400 million of annualized savings by the end of 2022, through headcount reduction, attrition, business process optimization, reduced marketing and third-party spending, and real estate consolidation. Based on these savings, the company continues to target a return to run-rate operating profitability exiting 2022.”
In addition to the $3.5-$4.5 million in outlays for severance and benefits-related payments expected to be doled out in the second quarter, the company also expects to incur additional non-operating expenses during the second half of the year – payments anticipated to reach $28 million, officials said. Other losses will include charges related to the exit of real estate to the tune of up to $3.5 million and outside service costs expected to range between $7 million and $9 million, officials added. Moreover: “As part of the company’s regular and ongoing reporting process, management determined it was necessary to complete an evaluation of its goodwill and intangible assets during the second quarter and recorded a non-cash impairment charge of $42 million as of June 30, 2022,” officials wrote.

Top loanDepot executives hosted a morning conference call in connection to the Vision 2025 announcement. During the call, CFO Flanagan said most savings will be realized through headcount reductions and simplification and centralization efforts. “And then there is a portion of revenue increases that come through to get us back to run rate profitability that are mostly centered around the HELOC business becoming a meaningful contributor and stabilization in the gain on sale margins of the business going forward.”

President Martell provided context to the drastic Vision 2025 plan during the conference call: “As we all know, the mortgage market is experiencing extraordinary and rapid change in 2022. Coming off two unprecedented years where originations totaled approximately $8 trillion, which were fueled by ultralow interest rates, home price appreciation and supply and demand imbalances, among other factors, the market decline in 2022 has been particularly sharp and abrupt, compared with past cycles. The Mortgage Bankers Association is projecting total originations to be down by approximately 40% in 2022 from 2021 levels. Refinancing transactions, which composed the majority of loanDepot’s origination business in both 2020 and 2021, are projected to be down almost 70%. The purchase market this year is expected to remain largely in line with last year, although volumes are expected to be somewhat below prior year levels over the final two quarters of this year. Looking ahead to next year, the Mortgage Bankers Association is currently projecting lower origination volumes in 2023, compared with 2022 levels.

“Similar to most mortgage originators, loanDepot scaled up its operations to support record 2020 and 2021 volumes,” Martell continued. “Like other market participants, loanDepot is now reducing its costs in the first half of this year to address market conditions as they have evolved. The launch of the Vision 2025 expands the scope and scale of our transformational efforts and cost reduction programs. In the coming months, we expect to take aggressive action to improve profitability and position the company to gain greater share of purchase transactions. We will right-size the business, including headcount reductions, the use of normal attrition, business process optimization, lower marketing and third-party spending, as well as real estate consolidation. The combination of cost management efforts taken in the first half of this year, plus our Vision 2025 plan, is expected to generate an annualized $375 million to $400 million in run rate expense savings by the end of 2022.”

He reiterated the overarching point of Vision 2025: “I want to emphasize that Vision 2025 is far more than a cost cutting exercise. It’s an important next step in our strategic evolution.”

The cuts come after loanDepot went public in February 2021, during which time it raised $54 million in gross proceeds in an IPO that priced at $14 a share. Following the firm’s public debut with a stock symbol of LDI, Wall Street analysts anticipated the cutbacks. “LDI has seen a sharp market fall-off so far in 2022 and needs to sharply reduce headcount and cut costs to properly scale the company to reduced market activity,” analysts at Seeking Alpha, a crowd-sourced content service for financial markets, wrote on July 7.

The company telegraphed its digital push – now a prong of its ambitious Vision 2025 plan – during a March 2022 interview with MPA. Sidi – tasked with oversight of all digital lending and mortgage-adjacent products and services under the Vision 2025 revamping as president of LDI digital products and services – detailed creation of a then-new business unit called mello, which was meant to develop digital-first products and services to complement its core mortgage origination platform. At the time of mello’s creation, Sidi was appointed as the unit’s president and COO.

“The creation of mello as its own operating unit is really the next evolution in our journey as a company,” Sidi told MPA at the time, adding that “loanDepot, over the last 12 years, has really built strength in serving customers in all aspects of their homeownership journey. This move is designed to build on that foundation and recognize that we want to build on that trusted relationship with customers and offer them products and services that extend beyond the homeownership journey and really build customers for life.”