Mortgage refis are dead. Can Blend weather the storm?

Even in boom times, Blend lost money. Now the mortgage industry that it hitched its wagon to is contracting

Nima Ghamsari, CEO and founder of mortgage fintech Blend Labs.

Blend Labs CEO Nima Ghamsari is a betting man. In his early 20s, he bet that online poker could cover his tuition at Stanford and then some. He was right. In 2008, as the financial crisis was unfolding, he landed a job at secretive big data startup Palantir, where he learned that the $10 trillion mortgage industry was still in the Stone Age technologically. As founder of Blend Labs, Ghamsari bet that he could convince hundreds of lenders to process their mortgage loans with his bleeding-edge technology. Right again. 

But can Ghamsari play a winning hand when his software business is inextricably tied to the success of the mortgage industry, which is expected to contract by 35% or more in 2022? We’re about to find out.

In its fourth quarter earnings report released last week, Blend executives spit out some ugly numbers – overall, the company lost $169.1 million in 2021, including $71.5 million in the fourth quarter. Blend’s net loss more than doubled from $74.6 million in 2020 during the refi-boom and with the market headed into a correction, executives warned investors revenue would plummet. The company expects the figure to decline 31% to between $230 million and $250 million in 2022 from $363 million last year.

“With rapid changes in U.S. interest rates, rising inflation and associated reductions in 2022 loan industry forecasts that commenced in the fourth quarter of last year and has continued into this year, loan originators are now dealing with razor-thin margins and trying to adapt to a new normal,” Ghamsari told analysts and investors on the fourth quarter earnings call. “It is clear that this rapid reversal in industry loan volume expectations has impacted our outlook for 2022 revenue growth.”

The stock that debuted in July 2021 at $20 a share has fallen to about $4.64, cutting Blend’s market capitalization from $4.4 billion to just over $1 billion, not unlike other mortgage world stocks that have been sucking wind over the past six months. 

Still, Ghamsari expressed optimism that Blend would capitalize on a choppy market in 2022. Blend grew its estimated mortgage market share from 10% to 15%, he told analysts last week. With major deals to nab clients like Mr. Cooper, he expects market share to increase to about 20% in 2022. That hasn’t jolted the company’s stock performance, however.

“The headwinds are already too large this year for those market share gains to overcome that,” said Ryan Tomasello, an analyst at Keefe Bruyette & Woods. “It’s a stock that’s in short-term mortgage jail.” 

Blend declined to make executives available for an interview.

The company’s lackluster fourth quarter results – and its 2022 forecast – reflect a cyclical shift to higher mortgage rates from the anomaly boom market during the pandemic affecting all mortgage-related stocks. The mortgage industry originated more than $8 trillion over the past two years out of the $12 trillion outstanding mortgages in the country, resulting in a hangover after a big refinance rush.  

“The mortgage pie is half or slightly more than half of what it was for the last two years,” said Brian Hale, CEO at Mortgage Advisory Partners. “This is tied to interest rates, mortgage volume, and the lack of opportunity to make mortgages. The big rush that happened over the last two years has clearly subsided to more normalized levels.”

While Blend ended 2021 with 343 banks on its platform including 34 of the top 100 financial service firms and its customers also processed about 25% of mortgages, the mortgage tech company faces serious growth challenges. Blend operates a usage-based billing model, so its clients pay more as they use the platform more. It’s projecting that its clients will process far fewer loans in 2022 as a result of higher mortgage rates depressing refis. 

Blend also burned through a stunning amount of cash in the months leading up to its initial public offering in July 2021. It’s still spending heavily, according to company filings with the Securities and Exchange Commission

The firm’s net cash loss from financing activities grew more than 80-fold to $633.9 million last year from $7.9 million in 2020 driven by the acquisition of Title 365 in a $422 million deal. The increasing mortgage rates are now forcing Blend to pull back “very hard” on hiring and hinted layoffs in title insurance, reviewing its overall cost structure in part to offset the decline in mortgage originations. 

With a fixed pie of the market, software as a service companies like Blend will rush to cut costs and diversify their business to weather the storm, said Hale. In the long run, the firm sees title insurance as just one component of a platform providing end-to-end services to lenders and consumers. 

The extent to which Blend can add mortgage customers, grow software adoption, and the ability for Blend to continue diversifying revenue beyond mortgage into home equity, personal loans, auto loans, and account openings are crucial factors for Blend, said industry observer Julian Hebron, founder at The Basis Point.

In a year of major potential consolidation in the mortgage industry, Blend is betting its software will help its reach in meeting consumer demand at a lower cost in a downturn market. 

The company is not only capitalizing on technology for its mortgage businesses including Blend Income and Blend Close, but also plans on investing in the consumer banking sector for Blend Builder, a tool that lets customers customize the components they wish to use with a drag-and-drop interface, expanding its footprint in the broader fintech market. 

In 2021, Blend processed more than 1.8 million transactions for mortgage lenders, representing 38 percent growth from the previous year. Meanwhile, consumer banking transactions totaled just 300,000 last year, from 87,000 in 2020. 

“It’s a tough day to be in the mortgage business if you’re a public company,” said Hale. “People are looking for new strategies, new technology, evolutions, new platforms, new workflows.”

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