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FintechIPO / M&AMortgage

“It’s math:” How mortgage tech companies are fighting for survival

Rightsizing of the mortgage market to force consolidation, scale back in tech investment

Digital mortgage, technology
With a deadly combination of low housing inventory, reduction in refis and surging mortgage rates, consolidation in mortgage tech is expected. 

Businesses and entire industries tanked during the pandemic, but it created an ideal environment for mortgage tech companies, some of which rode the wave to banner years and historic growth. With interest rates hitting all-time lows, lenders doubled their origination volume to more than $4 trillion in both 2020 and 2021, hired more staff and ramped up investment in technology to close loans faster.

As the market has shifted, however, with mortgage rates rising in 2022 faster than forecast and lenders quickly cutting costs, some tech providers now are left vulnerable. That has led to a reckoning in the mortgage industry, which is in the midst of a rightsizing that has already resulted in layoffs at numerous firms. Layoffs at mortgage tech companies appear inevitable, along with other cost-saving measures, including diminished investments in technology.

With a deadly combination of the tight housing inventory, reduction in refis and surging mortgage rates, consolidation seems to be the natural path. 

“Rising tide raises all ships, but subsequently lowering tides drop off ships,” said John Hudson, executive vice president at Mortgage Financial Services

“With less volume out there, it’s only a matter of numbers and math. Less loans equals less revenue across the board. You’re going to see some that’ll survive and some will simply not make it. You’ll be seeing a lot of mergers and acquisition activity in the mortgage tech space this year,” Hudson added. 

The downturn in a highly cyclical mortgage industry is nothing new for solutions providers  with experience navigating the ups and downs in the market. And the well-prepared could ultimately benefit from current conditions if they seize the opportunity to absorb vulnerable newbies lacking sufficient capital to weather the storm. As such, a strategic merger or acquisition is emerging as one opportunity to outmaneuver the shrinking mortgage market. 

Strategic M&As

Intercontinental Exchange (ICE), the corporate parent of the New York Stock Exchange, earlier this month announced its intent to acquire Black Knight in a deal valued at $13.1 billion. The merger of the two biggest suppliers of mortgage loan software signals the potential creation of a dominant player in the mortgage tech industry. 

Of the $387.2 million in revenue Black Knight made in the first quarter of this year, 57% came from the servicing software and about 66% of ICE’s first quarter revenue of $1.9 billion came from its origination technology, according to their earnings reports.  

“From a client perspective, a fully integrated soup-to-nuts digital offering for mortgage origination and servicing should significantly reduce the cost of originating and servicing a mortgage,” according to an analyst who spoke on the condition of anonymity. 

Executives from each company have suggested the businesses are complementary — ICE focuses on tech solutions for originators and Black Knight’s business model is dependent on servicers and the secondary market. 

The deal isn’t expected to close until 2023 as executives must persuade regulators the acquisition doesn’t hinder competition

Several mortgage analysts said smaller mortgage tech providers will be challenged by the giant ICE-Black Knight conglomerate during a market downturn in which revenues are plummeting, a number of smaller competitors, such as loan origination system (LOS) provider LendingPad, see an opportunity to push an alternative product to lenders.

“There’s been a fair amount of discontent among lenders with loan origination systems,” said Dan Smith, vice president of sales and strategy at LendingPad. Focused on customer support and offering the latest tech stack that is easily configurable for lenders, LendingPad doubled in sales volume in a little over a year, said Smith, who declined to share specific numbers. 

In July, LendingPad plans on rolling out ComplyIO, an automated compliance engine that scans data to see if a loan that is near closing complies with all the state and federal rules and regulations. The company said it will be offered both as part of an LOS and a standalone product.

A handful of vendors made strategic acquisitions and acquisitions for capitalization in the fall of 2021.

Seattle-based proptech firm Porch Group acquired point-of-sales software company Floify for $90 million in October and North Carolina-based publicly traded fintech firm nCino bought mortgage tech vendor SimpleNexus in a $1.2 billion deal the next month. 

At the time, Porch said Floify’s brand would remain intact and investments were planned to help make the homebuying and moving process easier. The firm’s software —  which it says streamlines the loan origination process by allowing document sharing and communication between loan officers and real estate agents —  helped to close more than 77,000 mortgage applications per month, according to Porch. 

nCino noted SimpleNexus operates a “per-seat subscription-based revenue model, enabling the company to generate financial results that are more predictable, recurring and not based on mortgage transaction volumes.”

“I think they were looking toward the future,” said Tammy Richards, CEO of LendArch, a mortgage tech consulting firm.

Period of ‘spend nothing’ 

It’s hard to assess how private mortgage tech companies are performing in a shrinking mortgage market, but layoffs suggest difficult days.

Tomo, a fintech startup that aims to be a “PayPal for the mortgage industry,” laid off 44 employees, almost a third of its employees in late May. 

Founded in October 2020 by former Zillow executives who envisioned a way to accelerate the mortgage approval process, the Tomo notched a valuation of $640 million after raising $40 million in Series A funding in March.

Tomo wasn’t immune to the rapid rise in interest rates despite its focus on the purchase mortgage sector.

“We are dialing back our market expansion plans and will focus on building tech enabled mortgage experiences that deliver faster, less costly and less stressful experiences for homebuyers and the real estate agents that serve them in our existing footprint,” said Greg Schwartz, chief executive officer at Tomo, said in a LinkedIn post announcing the layoffs. 

​​Publicly traded Blend Labs, which debuted on the New York Stock Exchange in July 2021, also announced its intention to issue pink slips to 200 workers, about 10% of its workforce, by the second quarter in 2022. 

Blend has attracted a bevy of investors who were impressed by its market position. The company powers mortgage applications on the websites of major lenders such as Wells Fargo and U.S. Bank.

But the firm, which hasn’t turned a profit since going public, reported increased operational losses of $69.7 million in the first quarter of 2022. Blend brought in more than $71 million in the first three months of 2022, but more than half of its revenue came from title insurance and settlement services provider Title 365 in the challenging origination environment. 

Co-founder Nima Ghamsari believes Blend will weather the storm. Blend is focused on long-term growth, investment in technology and diversifying its revenue model. But some analysts, speaking on the condition of anonymity, said the layoff announcement was a clear sign Blend and other tech firms are struggling in the downmarket.

“My own view is that those folks have a better shot at long term survival simply because they can tap capital elsewhere to help survive,” said Brian Hale, CEO at Mortgage Advisory Partners. “Companies that come into this down trough, who were not as well capitalized, could either be consolidated or could be eliminated.”

New tech companies, often products of the refi-boom that attracted loans with low rates, may find it harder to raise money. 

“They had a massive ability to attract loans with low prices, low rates, which equals low revenue,” Hale said. “They had no second act when the dance stopped.” 

Jerry Halbrook, chief executive officer at Volly and former president of the origination technologies division for Black Knight Financial Services, agrees: “I think the bigger worry is really with the new entrants which haven’t really gone through a lot of cycles.” Halbrook said. “I suspect the ever-rising valuation of fintech companies is over for a while.”

It would be a mistake to pull back from platform investments, experts said, but some smaller tech firms have already given up on them.

“Inside every one of those small companies right now, it’s going to be a period of ‘spend nothing’ until we know how deep the water is,” said Hale, of Mortgage Advisory Partners. 

It’s all about that niche

It’s the well-capitalized players like Blend and Roostify that have a better chance of surviving, some mortgage tech analysts said. 

Roostify, the digital platform for mortgage lenders that competes with Blend, raised $32 million in venture funding in January 2021, bringing its total funding to $65 million. 

The cash injection helps the company provide tech to about 200 lending institutions on its platform, including two of its investors, J.P. Morgan Chase and Santander Bank (the latter of which recently exited the mortgage business). According to Roostify, the company handles $50 billion in loan volume every month. 

Although it’s not yet profitable, the artificial intelligence and machine learning capabilities embedded into Roostify’s point-of-sale system platform make it competitive, Roostify CEO Rajesh Bhat told HousingWire. 

For example, its product Roostify Beyond gives instant feedback to applicants who upload incorrect or illegible documents, without having to talk to the lending team directly, ultimately helping lenders process mortgage applications with greater speed, Bhat said. 

“We believe this is fairly differentiated (from other companies’ products) and really focused on the collaboration between the loan officer, the processor and the consumer. So it’s like middle-office, later stage workflow. It is predicated on having robust integrations with the loan origination systems.”

Small solutions providers offering unique services and products in a shrinking mortgage market are also well-positioned to survive. 

Dru Brents, chief executive officer of PreApp 1003, says its mobile responsive, all-in-one platform BrokerPlus provides a niche for broker companies. 

“As far as I know, we are the only single login mobile responsive, all-in-one platform that includes the customer relationship management system, E-signatures, point-of-sale system, loan origination system and the pricing engine,” Brents said.

Companies sign on to use BrokerPlus because it can replace multiple systems in a streamlined, cost-saving platform, he said.

“They are eliminating multiple tech stacks and they’re using our platform, so it saves them money. It’s really meeting the needs of every piece of technology that a broker would need,” he said. 

Since the company launched in 2015, PreApp 1003 has “thousands of paid subscribers” and continues to see “significant growth,” although Brents would not cite specific numbers.

“We’ve never received investments. We’ve always been self-funded. We build and we test.”

Reaping investments

Despite myriad products rolled out during the two-year refi boom, the level of adoption remains low throughout the industry.

“I’m not so sure that’s a bad thing. The market really needs to absorb what’s already been built in terms of new technology,” said Volly’s Halbrook. 

Many mortgage analysts and consultants noted new tech is needed to build modern, efficient and automated processes.

“Our whole industry right now is yearning for a new model, [a] more automated approach, including our customers who are going to be those Gen Zers, who were born with phones in their hands, and are going to really deserve and want an automated approach,” said Richards, from LendArch.

Loan officers say the products that will last leverage technology that provides value to customers without a lot of effort. 

That technology includes a marketing platform that automates valuation model technology, and an application platform to which applicants can upload mortgage documents to speed up the loan process. 

“But those companies that haven’t invested in tech are going to have a hard time through this market,” Richards said. “Because if you have implemented your tech properly, you should be receiving efficiencies and expanded capacity, that reduces your cost.”

Comments

  1. I am a HUGE fan of PreApp 1003/Broker Plus! Every broker needs to check it out.

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