Figure Technologies CEO and co-founder Mike Cagney never intended to build a mortgage lending company. Upon leaving SoFi, Cagney and the founding team at Figure were laser-focused on applying blockchain technology to financial services.
But now, with proof of concept cleared and a large war chest, he intends to buy a mortgage lender to achieve scale. He might even buy a few of them.
Here’s HousingWire’s exclusive story on how Figure intends to revolutionize the mortgage industry with blockchain technology, and the challenges they are yet to face.
First mover advantage
When Cagney and his team founded Figure in 2018, they quickly ran into challenges – the early versions of blockchain weren’t built in a way that could scale and cost effectively deliver value to the financial services ecosystem. With input from technologist Blake Masters, COO at Thiel Capital, they built a new blockchain technology for lending.
“Probably the most significant issue was we had this grand thesis that we could save 90 basis points of expense to originate securitized loans on a blockchain,” Cagney said in an interview with HousingWire this week. “We had a blockchain architecture that we felt was scalable, secure, and did all the things the financial ecosystem needed to do. And we added a way to onboard and offboard currency out of the blockchain.
“What we didn’t have was a bank and originator ready to embrace the blockchain from an asset standpoint. And so nobody wanted to be a first mover to originate a loan on blockchain. And there are a lot of proof of concepts out there where people were doing it in parallel, but the loan still existed off chain and we didn’t think that was really an effective proof of concept.”
Ultimately, Figure “ended up creating our lending business, not so much that we wanted to start another lending business coming out of SoFi, where we just built a relatively big one. But we actually did it out of need, because it was the only way that we could kick off the ecosystem for blockchain adoption,” Cagney said.
With the technology up and running, Figure began originating loans, mostly conventional and jumbo loans. It has loan officers in Charlotte and Reno, though they’re not “LO-focused,” Cagney noted.
Figure approached buy-side accounts and asked them if they wanted to buy their loans. They did, of course. “And we said, ‘Well you have to buy them on blockchain.’ Nobody wanted to do that,” he told Housingwire. “So we said we’re not going to sell them to you unless you buy them on blockchain. And they said, ‘Okay, fine.’ And then they learned it is in fact a much better platform.”
The second challenge emerged when Figure approached the sell-side banks. “We said, ‘Hey, your customers are buying our assets on blockchain, they need warehouses.’ And they said, ‘We will warehouse them but we don’t want to do it on blockchain.’ So we said then you can’t warehouse them. Some of them in the beginning said, ‘Fine, we’ll do it.’ And they realized there was a pretty significant value prop there as well.”
Where’s the packet?
Cagney admits these are still early days for the application of blockchain technology. Banks, including JPMorgan Chase, which is one of his warehouse lenders, are just starting to get comfortable with the technology.
“I think you’re getting more significant adoption, and it’s going to hit a tipping point. And when it hits that tipping point, I think everyone moves in,” he said. “And I think there’s a little bit of smoke and mirrors going on in the sense that, you know, you got the Morgans of the world saying, ‘Oh, we don’t believe in blockchain, you know, blah, blah,’ and then all of a sudden, they do a tri party repo on blockchain.
“And so I think some of this is gamespersonship, where the banks are not necessarily trying to show their hand in terms of how much they’re committed to try to leverage the technology. The technology is massively efficient if used correctly.”
“But in the context of originating a digital mortgage, and being able to trade that mortgage real time with a counterparty without the need for incremental audit, and to be able to deliver that mortgage real time into a GSE, where you’re reducing your equity expenses. It’s mind blowing how much economics there are here.”
Widespread adoption of blockchain would democratize several key elements of the mortgage ecosystem, Cagney argued.
“Think about the custody process – custodian banks have $150 billion in market cap. I can’t tell you how miserable it is to deliver loans to a custodian who then delivers loans to Fannie Mae, how many times they lose the packet, how many times they can’t find the collateral, it’s absolutely insane. That, and the fact that you have to employ a post-close team simply to track this process. Crazy. And then if you think about exchanges, there’s $150 billion in market cap in the top seven exchanges. Blockchain will support a decentralized exchange.”
Snapping up a mortgage company or two
All along, Cagney, who built SoFi into a titan of student lending and branched out into other lending before his controversial departure in 2017, says he would have preferred to have partnered with a mortgage originator. Someone bold enough to modernize their operational infrastructure with what he says is bleeding-edge tech.
“The reality on this one… is we wanted to partner with a mortgage provider to bring this tech in,” he said. “And, in fact, what we did is we built a loan origination fulfilment infrastructure that’s outside of blockchain but completely digital. It has some of the highest productivity numbers in terms of units per production, a key number in the marketplace.
“And so we have an extremely effective tech stack that is integrated into blockchain, but outside of blockchain, and we said, ‘Look, we’re gonna we’re gonna find someone to work with.’ And the reality was, we couldn’t. We now see an opportunity where we can acquire a mortgage company. And one of one of the tailwinds we have on an acquisition is the public market has kind of said, we really like fintech. We really don’t like mortgage companies.”
Cagney has two methods with which to acquire a mortgage company: Figure Technologies, which has raised $1.5 billion in debt and equity, and a SPAC that raised $287.5 million in February.
“Figure absolutely is in the market right now to acquire a mortgage company and we hope to have an acquisition done this year, if not more than one. The SPAC was done to leverage blockchain technology with traditional financial services businesses, to change the trajectory of those businesses. That could absolutely be another lending company or mortgage company. But it could also be a banking and payments company. It could be a marketplace exchange company. It could be a wealth management platform. There’s a lot of potential applications to that SPAC.”
Cagney said if the initial SPAC – which is dubbed Fintech Acquisition LLC and counts Ellington Management among its big investors – is successful, Figure will likely do as many as five in total.
“We think there’s just a huge, very rich target out there in terms of this thesis,” he said.
As for which mortgage companies he would be targeting, Cagney said the lender simply had to have made money in 2020. They don’t need to have tech bonafides. Pen-and-pad mortgage players are just fine.
“The biggest challenge is your underwriters and your processors have done something the same way for 30 years,” he said. “And that now you don’t want them to do it that way. What you’re trying to do is you’re trying to say, ‘Look, I’m changing the workflow, I’m changing how you originate a mortgage, we’re changing how you approach initial underwriting and processing the final underwriting in a way that’s going to make everyone more efficient.’”