Hello, LOs!
SoftBank-backed Better.com plans to go public later this year via a SPAC merger. That merger puts Better's purported valuation around $7.7 billion – bigger than just about anyone not headquartered in Detroit or Pontiac, Michigan.
Let's talk about Better, what it did in 2020 and its future path.
Like most tech CEOs intent on disrupting a legacy industry, Better.com founder Vishal Garg entered the mortgage space because he had a bad home-buying experience and believed the mortgage process was hot garbage for customers.
"I couldn't find a single mortgage lender able to offer a pre-approval online without antiquated paper and phone-based manual processing," he wrote on the company website. "None could work on my schedule. And none gave me the peace of mind that they were not only the most efficient, but that they also had my best interests at heart. The best company I could find was a glorified call center staffed by nice mid-westerners who made the most of putting a human face on really dumb technology; the worst was a shady dude in the back of a strip mall, confusing and ultimately baiting and switching consumers with a combination of 'points' and 'yield spread premiums.'"
Hard to disagree with some of what he said. The industry lacked innovation for many years.
I think it's fair to say that you couldn't dream up a more perfect environment for Better.com to test its model than the 2020 mortgage market. Interest rates were near-zero; Better grabbed a sizable amount of media attention; and, most importantly, consumers with existing mortgages preferred to do everything online. It led to roughly $24 billion in originations. According to HMDA data compiled by my friends at Polygon Research, Better's mix was 88% refi and just 12% purchase.
Polygon's data shows that the lender grew massively in some key markets – 541% in Pennsylvania, 307% in Illinois, 210% in New Jersey, 78% in California, 156% in Oregon and 128% in Washington. Its average loan size was about $328,000 in 2020, with an average rate of 2.87% and a 68% CLTV.
Better is different than most lenders in that it doesn't pay LOs commissions and it doesn't have any physical presence, even through mortgage brokers. It is completely digital. Its platform includes mortgage, real estate, title and homeowners insurance products.
Given the outsized valuation, I talked to a few folks over the last week about what they think of Better's future and how the lender could win purchase business, the proverbial golden goose.
"The valuation numbers we were handed were nuts," said Henry Coffey, a longtime analyst at Wedbush Securities. "Those numbers are completely inconsistent with reality, or at least with what we're seeing in the public market. I'm sure they have their own thoughts on that."
If you are an investor who believes that Better – built digital from scratch, without the burden of a mishmash of paper products, legacy computer systems and new tech – is the future of the mortgage industry, it's because it offers the potential for scale.
"It's infinitely easier to adapt and build new technologies to fit the needs of customers when you don't spend your days [having] to plug every hole in the boat," said one real estate VC investor who did not invest in Better. "Obviously they'll do better with refinances because that's rate dependent but people are so much more comfortable making big purchases totally online. I wouldn't be surprised if Better is the first to really crack the digital divide with purchase."
Another mortgage executive said they don't see Better being able to make a dent in purchase in the near-term. "I think they're going to buy a lender," the exec said. "They have all that money, refis are coming down, and they need to grow. I could also see them somehow working out a deal with someone like Compass or another real estate-adjacent tech firm."
Coffey noted that it's extremely difficult to win purchase business, especially for lenders who don't have physical footprints or an extremely large network of brokers. The average customer still goes through their real estate agent. It's fundamentally a relationships business.
"The only path I know is Zillow Mortgage powered by Rocket, where someone with a large flow like Zillow… where they go in and form a big, visible partnership with someone and that partnership becomes the basis for delivering purchase money."
So, LOs – what do you think? Could a 100% digital lender with no retail or wholesale presence make those critical connections with real estate agents or directly with consumers? How comfortable are homebuyers in doing a purchase mortgage totally online? Hit me up anonymously at jkleimann@housingwire.com.
James Kleimann
Managing Editor, HousingWire
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