Narrowing gain on sale margins are the result of mortgage lenders needing to shed approximately $1 trillion in capacity as the market moves forward, loanDepot CEO Anthony Hsieh said on the fourth quarter earnings call.

"Keep in mind that GOS is going to continue to adjust according to some of the irrational behavior of competition trying to keep its capacity full without layoffs or workforce reduction," Hsieh said. While labor is an important component in the costs related to gain on sale, the real driver for margin pressure is from marketing and sales, he added.

So while loanDepot sees the current environment as one to attract high producing loan officers as "weaker models come under increasing pressure," Hsieh said without directly mentioning layoffs.

He added that "we're also doing the necessary work to ensure our operations appropriately reflect our expectations for the changing market."

LoanDepot reported fourth quarter net income of $14.7 million, compared with $154.3 million in the third quarter and $547.2 million in the fourth quarter of 2020. For all of 2021, it earned $623.1 million, compared with $2 billion for 2020. The company conducted its initial public offering last February.

At the end of the quarter, gain on sale was at 223 basis points, down from 284 bps in the third quarter and 329 bps one year prior. Pull-through weighted GOS, which is based on weighted rate lock volume, was 281 bps, down from 299 bps in the prior quarter and 346 bps in the year ago period.

Similarly, the seven banks with mortgage origination profitability disclosures had a rough quarter in the sector, performing worse than expectations set by Keefe, Bruyette & Woods analyst Bose George.

"GOS margins fell 24% quarter-to-quarter on average, much sharper than the roughly 10% decline we had modeled," George wrote in a Jan. 30 report.

Those results led George to reduce his earnings per share expectations for the mortgage banks he covers — which does not include loanDepot — by 10%. The KBW report provided a consensus full year 2021 EPS for loanDepot of $1.84. The lender ended the year with EPS of 87 cents.

LoanDepot’s management, for its part, painted a bright picture of the nonbank lender’s future during its quarterly earnings call. While Hseih acknowledged the sources of margin pressure, as they start to lift, the profitability outlook could change instantly.

"This pressure could last another one to three quarters but it will go away within that amount of time, provided that the market stays right around $3 trillion," Hsieh said. "If it shrinks to $2 trillion, $2.5 [trillion], that pressure will continue until the industry gets right sized in capacity."

What sets loanDepot apart is its brand recognition among consumers. Hsieh claimed brand awareness increased 80% last year and web traffic was up 50%. The company's long-term aim is to continue making investments in technology, efficiency, brand and market positioning.

Hsieh pointed to loanDepot's diversified business model as a differentiator for the company, which offers retail, consumer direct and wholesale in addition to participating in joint ventures. Without naming them, Hsieh pointed to Rocket relying on consumer direct and wholesale, and United Wholesale Mortgage only sourcing loans from brokers.

LoanDepot’s originations ended the quarter at $29 billion, with refinancings at $19 billion and purchase at $10 billion. Third quarter volume was just under $32 billion, with $21 billion from refis; the fourth quarter of 2020 finished with $37.4 billion, $27.6 billion of that being refis.

Year-over-year production, however, grew by just over $36 billion; in 2021, loanDepot originated $97.7 billion of refinancings and $39.3 billion of purchase loans. The prior year, it did $100.8 billion, consisting of $72.5 billion of refis and $28.3 billion of purchases.

On the servicing side, income grew to $113.9 million in the fourth quarter from $102.4 million in the third quarter and $64.4 million in the fourth quarter of 2020. The most recent results included a $118.7 million negative adjustment to the fair value of its MSRs, compared with $138.5 million in the third quarter and $34.5 million one year prior.

LoanDepot is bringing its Ginnie Mae servicing function in-house. By doing the servicing work itself, "we leverage the infrastructure and create the scale to increase the earnings contribution from this recurring counter cyclical business line," Patrick Flanagan, chief financial officer, said. "This progress is demonstrated by the cost of servicing our portfolio as a percentage of the unpaid principal balance, decreasing from 3.6 basis points in the fourth quarter of 2020 to 2.3 basis points in the fourth quarter of 2021."

LoanDepot serviced $162.1 billion as of Dec. 31, compared with $145.3 billion three months prior and $102.9 billion at the end of 2020.

In the first quarter, with no material changes to interest rates or the competitive landscape, loan origination volume should end up between $19 billion and $24 billion, Flanagan said. The pull-through weighted average GOS is expected to be between 200 bps and 250 bps because of the increased competitive pressure, he said.