Executives at the online mortgage lender LoanDepot are not sticking their heads in the sand despite calling off an initial public offering this month.
Chief Financial Officer Bryan Sullivan said the Foothill Ranch, Calif., company still expects to generate strong growth, though it might not be the "hyper growth" it had expected from selling 30 million shares to the public. LoanDepot's IPO was scuttled Nov. 12 when the market's likely price fell far below the $16 to $18 per share sought by the company, which aimed to raise as much as $510 million.
Anthony Hsieh, the chairman and Chief Executive of LoanDepot, wrote in a blog post last week that IPO market conditions were unfavorable. "While an IPO continues to be an option, perhaps one day in the future, it's not a necessity," Hsieh wrote.
LoanDepot, a nonbank founded in 2009, doubled home loans in the third quarter from a year earlier, to $7.3 billion, according to its registration statement with the Securities and Exchange Commission. The company also originated $126.6 million in personal loans in the third quarter. In the first nine months ended Sept. 30, LoanDepot funded $21.7 billion in loans, up 144% from a year earlier.
Henry Coffey, an analyst at Sterne Agee CRT, said the future of the mortgage business depends on lenders' ability to originate home purchases as rising interest rates dampen refinances.
"LoanDepot seems to have a very well-thought-out business plan," Coffey said. "They are building a purchase-money business with technology and they have a lot of people out in the field."
Sullivan, who joined LoanDepot in 2013, is a former lead portfolio manager at Pacific Investment Management Co. and had been a senior member of the special situations group at Goldman Sachs.
In an interview this week, he talked about how consumers are cautious about getting home equity lines of credit, a process he likened to "breaking rocks," and why he considers LoanDepot a disruptor in the traditional mortgage market. The following is an edited transcript:
LoanDepot postponed its IPO two weeks ago. Is there anything you want to clarify about your growth going forward?
Bryan Sullivan: We went out on the road and had really good feedback from investors but [the IPO price] came out in a range which was below what we put out and the company just decided it wasn't the right time to do that. But we got strong feedback from the business. We run a very profitable business and so the ability to go raise capital and hyper-grow the business was attractive, but it wasn't going to be at the expense of valuation. We have the luxury of generating profitability, so we can still grow the business.
What are your growth targets?
We have not put out growth targets. Historically we focus on profitably growing the business and trying to capture market share in consumer lending, whether it's personal loans or secured real estate, home loans and second liens. We started from zero and we have 2% of the market. It's still highly fragmented so there is opportunity for us to take share from banks but also from smaller competitors as the home loan space becomes excessively complex. We have the scale to do that.
We're trying to do it from both ends where banks are pulling back and where smaller players are struggling to compete.
We're still coming down from lows in the lending area. Consumers have started to show more confidence. We still have some capacity in the market to grow originations because consumers have been locked out of home equity, so we're trying to break rocks there in offering opportunities there that aren't touched by the banks.
What do you mean by "break rocks" in home equity?
It's like breaking rocks. Through the crisis you had home equity product that caused a lot of pain, and it really wasn't underwritten properly, or at all. You still have some legacy issues on home equity. So, there are companies that sit around and say, 'Do I really want to step back into that?' We are very comfortable lending to a borrower because of their willingness to repay. You would think that a borrower should be comfortable. But there is still that fear walking into an investment committee meeting saying you're going to buy home equity loans.
On a relative value basis, this is a good risk-adjusted return. If you don't believe home price appreciation is increasing, then I would say not to do it. But if you think home prices will have some mild upward trend and inflation is coming back, then it means wages should be going up. But there are still battle scars from the old days. We spend a lot of time with warehouse lenders and investors trying to help [explain] that.
You're saying consumers are cautious about the second lien and home equity lines of credit that you launched earlier this year?
We've seen fits and starts. [We're] making sure the plumbing is working correctly because it is a secured loan. Launching personal loans was a lot easier.
[Consumers] are a little bit cautious because it's still a mortgage loan process so there's more that you have to do. We're working on things to make it easier and make the user experience a little less cumbersome.
The perception in the head of the consumer is it's going to be a process not really worth going down because they don't know if they'll get [the loan] at the end of the day. Relative to first-lien rates of 4% to 4 1/8%, we're charging between 6.5% and 8.5% coupon. It's significantly less than a personal loan with a 15-year amortization so the monthly payment is considerably less than for a personal loan, and if they want to use it for tax deductibility, net-net it's a much less expensive option for the consumer than a personal loan. We're close to the industry [on personal loan rates] at between 12% and 14%, and that's for [borrowers with FICO scores above 700].
Describe your strategy on personal loans. Is it primarily about cross-selling personal loans to your mortgage customers? Or are personal loans more attractive to the company right now than home equity products?
We have set up a platform here that enables borrowers to make a decision on their own or with help from us. So when you go to our website you put your need in — not what you want the loan to be. We give the borrower choices based on what their need is, and we tell them that they could fit into these different buckets. So on personal loans, they can come in and call us or go online for a personal loan if they are unsure. We have technology that enables the consumer to make an informed choice, or do it self-service. Personal loans are a product inside our platform; it's not necessarily a separate business.
The vast majority of your business is mortgage lending but it sounds like you don't want to be thought of as a mortgage lender. Do you still consider yourself a marketplace lender?
Absolutely. I'm not sure why all of a sudden the terminology came about. There are a few tech-enabled ones. We are and we've always been connecting consumers with [investors]; we don't hold any risk.
A lot of the allure in marketplace lending involves companies calling themselves disruptors to traditional banks. Is that how you see it?
I think some of that is true. I don't know who's been more disruptive to the consumer lending space than us since we've grown from nothing and we have technology that's enabled us to do all that. We've been connecting consumers to investors the entire time. If this was easy to do there would be several LoanDepots that would have started since 2010.
Quicken Loans appears to be mimicking LoanDepot's strategy of moving into consumer loans. What is your view of that?
Sure. Quicken is the most logical [company] to do it. They obviously have a very good platform on the home loan side and their ability to offer other product. I don't know if it's going to go to the Quicken brand or another brand. Outside of them I'm not sure there's a lot of people that think about it the way we do or that have real scalability.