Better.com is struggling to deal with the waning influence of refis in the mortgage market, with preliminary results published by their SPAC partner revealing that the digital lender expects a net loss between $85 million and $100 million in the third quarter. And the forecast looks even worse for the fourth quarter, documents show.
According to an S-4 filed by Aurora Acquisition Corp. with the Securities and Exchange Commission last week, the digital lender expects further declines in the fourth quarter, that will likely “exceed third quarter losses.”
The filing noted that the fluctuations in interest rates – which affect refis more than purchase business – and a recent reorganization of Better’s sales and operations teams has put pressure on the company’s net income and will continue to do so for the foreseeable next quarter, as the company attempts to find footing in a purchase market.
In the second quarter, the company also reported a net loss of $86 million. At the time, the company’s spokesperson said that Better was impacted by “the same headwinds as everyone in the industry.”
Meanwhile, the New York-based lender predicts that its gain-on-sale margin will be in the range of 1.87% to 1.97% in Q3, up from 1.62% in the second quarter of 2021.
The lender remarked that the catalyst for the increase in GOS was mainly spurred by a temporary improvement in the interest rate environment and improved industry-wide lender economics at the beginning of the third quarter (likely the FHFA killing the adverse market fee).
Additionally, the filing noted that increased purchase loan and jumbo loan origination activity helped to propel the company’s GOS. Better.com disclosed that its funded loan volume growth ranged between 10% to 15% in the third quarter, up 4.6% from the first quarter of 2021.
Looking ahead, Better expects its GOS to compress during the fourth quarter of 2021, “due in part to competitive price in a market where volumes are expected to contract.”
Total net revenue for the third quarter is expected to come in somewhere between $310 million to $320 million, a 22% to 26% increase from the second quarter, the filing noted.
Meanwhile, to keep up with a slight uptick of purchase volume, the Better’s total expenses grew between $392 million to $402 million in Q3 from the prior quarter, a rate of 24% to 28%, Better said.
Better.com remarked that money was allocated to supporting “more labor-intensive purchase loan volume, higher sales and operations personnel-related expenses, higher marketing and advertising expenses due to increased customer acquisition spend, and higher technology and product development expenses resulting from continued investment in our platform.”
In the filing, Better warned its investors that “its high rate of growth and profitability in 2020 and the first quarter of 2021 were partially driven by interest rates being at historic lows and the increased use of online services.”
“You should not rely on the revenue growth of prior periods as an indication of Better’s future performance or prospects,” Better said. “Many factors may contribute to declines in Better’s growth rate or failure to achieve or maintain consistent profitability.”
Some of the factors include: fluctuations in interest rates, greater market penetration, increased competition, slowing demand for its product offerings, changes in demand for online services as pandemic-related restrictions continue to ease, increased costs required to maintain or a failure to capitalize on growth opportunities, the company said.
However, Better is betting that the reorganization of its sales and operations teams will be fruitful for its business in the first half of 2022.
The digital lender moved in the third quarter to provide their customers with a single point of contact instead of multiple touch points in the hope that it will “increase opportunities for cross-selling additional products and services” and “create opportunities for increased automation of non-customer facing tasks,” the filing said.
In May, Better.com entered into an agreement to merge with Aurora Acquisition Corp., a blank check company sponsored by Novator Capital. Better said at the time that the transaction reflects “an implied equity value for Better of approximately $6.9 billion and a post-money equity value of approximately $7.7 billion.”
Though other independent mortgage banks are increasingly servicing their own loans, Better sells their mortgage servicing rights.