When Zillow acquired Mortgage Lenders of America last summer, it led to a lot of industry speculation as to what its future aspirations were related to the financing side of real estate transactions.

The need to hypothesize is no longer necessary. As laid out in its annual 10-K filing with the U.S. Securities and Exchange Commission, significant expansion of mortgage originations is a critical component to Zillow’s strategy to transform their organization.

New (former) leader, new vision

Zillow announced a change at the top of their org chart back in February – co-founder and former CEO Rich Barton would be taking back over as CEO, replacing fellow co-founder Spencer Rascoff. Barton founded Expedia in 1994, co-founded Glassdoor in 2007 and has served as Zillow’s executive chairman since stepping down as CEO in 2010 to let Rascoff take the helm.

Barton will lead the planning and execution of a fairly substantial metamorphosis of the company. Currently, the vast majority (96% in 2018) of Zillow’s revenue comes from the sale of advertising products and services for real estate, rental and mortgage professionals. But their recent 10-K filing makes it F2clear, their three-to-five year plan calls for dramatic expansion to their Zillow Offers home buying/selling platform and their mortgage origination business.

Moving further down the funnel

This quote from the 10-K filing says it best:

“On October 31, 2018, we completed the acquisition of MLOA, a licensed mortgage lender,” the filing stated. “This acquisition is consistent with our strategy of moving further down funnel and closer to the real estate transaction to create better consumer experiences. The total purchase price for the acquisition of MLOA was approximately $66.7 million in cash.”

In the event that doesn’t make it clear, the word “mortgage” appears 340 times in the filing. Zillow plans to grow mortgage revenue by roughly 30% to 40% in 2019 versus 2018, when they generated just $80 million in that bucket. More broadly, Zillow’s stated three to five-year plan is to grow annualized revenue of their “homes segment” to $20 billion (yes, billion with a “b”) through the purchase of 5,000 homes a month through Zillow Offers and to originate 3,000 mortgage loans per month.

These 3,000 loans per month at the average national new mortgage loan amount of $260,000 would total $9.4 billion in annual mortgage originations, making Zillow Home Loans one of the largest retail mortgage originators in America.

Walking the tightrope

What Zillow is clearly doing is positioning themselves for the evolving state of real estate transactions and financing. It’s a fine line they’re walking, as their strategy of controlling more of the point of sale of both real estate transactions and real estate financing flies in the face of the profitable Premier Agent, Mortgage Marketplace and Zillow Rentals services that produces the vast majority of their current revenue. Even before Zillow Offers and Zillow Home Loans, an inherent tension existed between Zillow and many of the real estate agents and mortgage loan originators that provide that revenue. But as they say in hockey, Zillow is skating to where the puck is going, not where it’s at currently.

Zillow goes out of their way to lay out the risks of this inherent challenge in the recent 10-K filing in the “Risks Related to Our Business and Industry” portion of the report. Within that section, they lay out their current reliance on advertising income and the pressures to that model from competitors, emerging technology, and its reliance on maintaining relationships with real estate brokerages, real estate listing aggregators and multiple listing services.

There’s also a section of that risks segment titled “Our Entry into the Mortgage Lending Business Could Fail to Achieve Expected Results and Cause Harm to Our Financial Results, Operations, and Reputation.” After cycling through the regulatory and general “constantly change” aspect to the mortgage industry, they end that section with this statement:

“Our recent entry into the mortgage lending business may also cause a negative reaction within the mortgage industry, including among some of our mortgage advertisers, which could harm our reputation, results of operations and financial condition.”

It’s already started. The real estate agent community is already in general disbelief over Zillow’s access to the MLS and the threat it poses to the traditional Realtor model. This threat has been challenged in court and sets up an eventual showdown of some sort between the National Association of Realtors and Zillow.

Also, in early January, the National Association of Federal Credit Unions sent a letter to House Financial Services Committee Chairwoman Maxine Waters, D-Calif., and Ranking Member Patrick McHenry, R-N.C., calling on lawmakers “to continue to scrutinize the growing fintech sector” to ensure a level playing field between fintech’s and regulated financial institutions.

NAFCU’s underlying point was a valid one – mortgages originated by Zillow and other fintech lenders should be regulated just as intensely (if not more intensely) than credit unions given their connection to other aspects of the real estate transaction, the amount of customer data they preside over, and the fact that they’re not subject to the same cybersecurity examinations depositories are under as part of the Gramm-Leach-Bliley Act.