Mounting losses force loanDepot to amend loan agreements

The lender reports it’s now in compliance with warehouse-lending pacts, but may need to seek further waivers in Q3

Mortgage lender loanDepot, based in Orange County, California, has more bad news tucked away in its latest quarterly earnings report filed with the U.S. Securities and Exchange Commission (SEC) — beyond announcing it was shutting down its wholesale division after posting a second quarter loss of $223.8 million, following on the heels of $91.3 million loss for the prior quarter.

As a result of the latest batch of red ink, the lender reports via a footnote in its second-quarter earnings filings with the SEC that it has been forced to amend or obtain waivers of “profitability related to financial covenants” for certain of its warehouse lines of credit. 

Although the changes keep the company in compliance with the financial covenants for now, the SEC filing states that loanDepot expects that it “will need to execute additional amendments or obtain additional waivers from certain of our lending counterparties related to our profitability covenants or other similar financial covenants in the future, including for the third quarter.”

“We generate a sizeable portion of our revenues from refinance and purchase mortgages,” loanDepot’s SEC filing states. “As interest rates have risen, refinancing volumes have decreased as fewer consumers were incentivized to refinance their mortgages. 

“As a result, our revenues have decreased substantially, and we experienced net losses for the six months ended June 30, 2022.”

loanDepot also noted in the 10-Q statement that there is risk its investors require it to repurchase additional loans in the current environment, and because repurchased loans are typically resold at a discount to their repurchase price and unpaid principal balance “we have experienced increased losses on repurchased loans or loans subject to repurchase originated at interest rates lower than currently prevailing rates.”

Prioritizing home equity solutions in a rising rate environment

The 2022 housing market has been underscored by interest rate spikes and refi decline and lenders are working hard to adjust to new borrower trends. HousingWire recently spoke with Barry Coffin, managing director of home equity title/close at ServiceLink, about the ways lenders can capitalize on these trends by revving up their home equity solutions.

The lender wrote in its SEC filing that as of June 30, it had $90.8 million in restricted cash “posted as additional collateral with our warehouse and securitization facilities.”

“Certain of the company’s secured debt obligations require us to satisfy financial covenants, including minimum levels of profitability, tangible net worth, liquidity and maximum levels of consolidated leverage,” loanDepot’s SEC filing states.

In an additional note of caution looking forward, the lender’s SEC filing indicates that it cannot guarantee requests for future loan-covenant amendments or waivers will be agreed to by its lenders, “in which case we would be in default under these agreements.” 

If future loan-covenant waivers or amendments were to be rejected by the lenders, it could create a cascading loan-default event, with potential dire consequences for loanDepot’s ongoing operations.

“Our lenders could elect to declare outstanding amounts due and payable, terminate their commitments, require the posting of additional collateral and enforce their interests against existing collateral, as well as triggering cross-default provisions under other financing facilities,” loanDepot’s SEC filing states.

As of June 30, loanDepot reports that it had revolving lines of credit in place with 14 lenders “providing warehouse and securitization” credit facilities totaling $9.9 billion.

“As of June 30, 2022, we had $4.3 billion of borrowings outstanding and $5.5 billion of additional availability under our facilities,” the lender’s SEC filing states.

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