New York-based digital lender Better.com has shifted its strategy ahead of its initial public offering (IPO).
Following a merger with special purpose acquisition company (SPAC) Aurora Acquisition Corp, Better Home & Financing Co. is expected to begin trading on the Nasdaq Stock Exchange on Thursday under the ticker symbol “BETR.”
Better is partnering with other businesses to offer services such as homeowner’s insurance and to provide access to a network of real estate agents, rather than offering these products and services directly to borrowers. The change resulted in Better’s exit from its real estate business.
“Our overall model has changed from being a one-stop-shop, where we do everything in-house, to being a one-stop-shop where we do the things in-house that we’re the best at,” Vishal Garg, Better’s CEO, said in an interview. “For things like homeowner’s insurance, title insurance, and realtors, we’ve now just become a marketplace. We match the consumer to the product with a partner capable of delivering the best product to them.”
And what is Better.com best at?
According to Garg, the company has developed a one-day mortgage product that provides a commitment letter within 24 hours. It is possible, said Garg, because of Tinman, a platform that interacts directly with the customer — meanwhile, in other platforms in the market, a human extracts information from borrowers, he said.
Better wants to sell this platform to other companies, becoming a “mortgage-as-a-service” company or a white-label provider of mortgage tech, Garg said. When asked how relevant this business will be, Garg refers to Amazon, a company that drives two-thirds of its sales from third-party sellers. “We aim for a similar mix.”
It took Better two years to go public. The transaction will result in an infusion of up to $750 million from sponsors Novator Capital and SoftBank. The business combination closing, announced Wednesday, unlocks approximately $565 million of fresh capital, including a $528 million convertible note previously committed from affiliates of SoftBank and additional common equity from funds affiliated with NaMa Capital (formerly Novator Capital).
The company went from a $500 million profit and 11,000 employees in 2020 to only 950 employees by June 2023. It incurred an $89.9 million loss in the first quarter of 2023. During this period, Better faced the deterioration of the mortgage market due to surging rates, along with the fallout from bad press after Garg laid off employees via Zoom in December 2020.
Garg said the company has come a long way from that episode. “I’ve gone through extensive coaching and professional development,” he said. “Better is a much more mature company, and I’m a much more mature and empathetic leader than I was.”
Garg offered his views on the company’s IPO strategy in an interview with HousingWire at Better’s New York office.
This interview has been condensed and edited for clarity.
Flávia Nunes: Better took nearly two years to go public, with Aurora’s shareholders’ merger approval extended three times. What happened, from your standpoint?
Vishal Garg: I can’t comment on the process at the SEC. But all I can say is that it was worth it. In that time, the market, the industry and the consumer changed dramatically. We went from the lowest interest rates on record to the highest interest rates on record in the past 20 years, from great housing supply to the most constrained housing supply in many years. We’ve just worked hard to address all of these challenges head-on.
Nunes: The transaction will infuse the combined entity with $750 million in new capital. How will Better use these resources? And what role will SoftBank play?
Garg: The first thing is: we’re going to be very prudent because we’re still in a very bad macroeconomic climate for mortgages and housing in general. Secondly, we are going to continue to invest in our technology and drive products, like One Day Mortgage, that are innovative and groundbreaking and drive the adoption of those products across the industry.
[SoftBank] will be a significant shareholder—no seats on the board. Being public means I have to answer to a whole new set of shareholders, which we’re happy to welcome, and other than that, we will drive innovation and growth.
Nunes: How is Better prepared for the scrutiny of being a public company?
Garg: We’ve had a lot of scrutiny from external sources. We passed our first CFPB exam with really great results. We have been subject to multiple Fannie Mae audits, all with great results. We generally have viewed our ability to have a technology platform where the technology makes the decisions rather than people making the decisions, and technology creates tasks for the consumer rather than people creating paths for the consumer. That technology platform has helped us maintain best-in-class compliance and regulatory audits. We’ve made a substantial investment in those systems, and we continue to believe they’re going to help yield great results as we’re a public company.
Nunes: Better was a very efficient refi shop during the Covid years when rates were historically low. How can Better succeed in a purchase market?
Garg: It took us six years to do $100 billion of refinances and to build an industry leader in refinances. Over the past two years, we’ve had to pivot very hard so that 90% of our business is purchase mortgages. To do purchase mortgages, we knew it was not enough to just be cheaper, because Better could save consumers money on their mortgage versus the MBA [Mortgage Bankers Association] average, but we had to be faster and easier to use.
We’ve done that through products like One Day Mortgage, which are helpful to a consumer if they’re buying or shopping for a home because literally the same day that they enter into a purchase contract, they can get a commitment letter on their mortgage. We believe that the innovation, which we launched earlier this year, has yet to really play itself out in the mortgage industry. As we get widespread adoption of One Day Mortgage, we will be able to grow our purchase volumes dramatically, [much] in the same way that we did our refinance volumes.
Nunes: But how is Better building relationships with real estate agents, financial planners, and other professionals, who can help you get more customers and win in the purchase market?
Garg: The bulk of leads are actually generated from the internet. We’ve been able to consistently get that cost of acquisition down, such that the internet is now a viable source of customer acquisition for us. We’ve always been very good at direct customer acquisition and reaching consumers directly. We’ve always had the ability to get consumers from direct advertising.
But more recently, we have partnered with Realtors. As you know, we took our in-house BRE [Better Real Estate LLC.] operation, deprecated it, and launched a partnership operation with Realtors. We’re partnering with Realtors, we’re helping Realtors win new business and get new business by referring Better’s customers who don’t have a Realtor to those realtors, and then also helping realtors understand the power of One Day Mortgage and how it can speed up the mortgage process.
Nunes: What is the rationale behind the change at Better Real Estate, pivoting from in-house licensed professionals to a partner agent model?
Garg: We had to shut down our in-house division, and with that came the associated layoffs. When we had agents, we were not large enough to provide the consumer full coverage [geographically]. Honestly, our in-house platform was not nearly as efficient as some of the best agents in the country.
Our overall model has changed from being a one-stop-shop, where we do everything in-house, to being a one-stop-shop where we do the things in-house that we’re the best at. With One Day Mortgage, we are the best at delivering a fast response to a consumer along with an industry-leading price.
For things like homeowner’s insurance, title insurance, and realtors, we’ve now just become a marketplace. We match the consumer with a partner capable of delivering the best product to them. So, we ended [Better Real Estate] for the sake of efficiency and savings for the consumer. We partner with best-in-class agents, insurance companies and title companies.
Publicly, we’ve gone from over 11,000 people to about 1,000 people. Along that journey, we have become much more efficient.
Nunes: Better rolled out the “One Day Mortgage” in January. What is the share of clients getting a mortgage commitment letter within 24 hours? What are the challenges for the product?
Garg: I’ll be able to tell you that soon. All I can tell you is One Day Mortgage has been an amazing lever for our customers, and customer adoption has been off the charts.
The biggest challenge initially was reengineering the entire process of tasking out to the consumer, getting their income, getting their assets, and figuring out which of their debts they might be paying off. All of those things are processes built to begin in the old mortgage process to be weeks long because of the overall process of 60 days that it took to close a mortgage.
Now, if you say to a consumer, ‘I’m going to give you a commitment letter in one day,’ all of those sequential processes have to be parallel processes. [So this] can’t be done by humans. The machine has to do all of them.
The other thing we have to do is use technology to predict which customers can qualify for One Day Mortgage based on just the data that’s in their pre-approval. The first job is predicting which customers might be able to be qualified for this pathway, and the second step is then delivering the product within 24 hours.
Nunes: How has the company changed internally to offer One Day Mortgage?
Garg: We had to build an underwriting and processing operation that was 24/7, which is unheard of in the mortgage industry. We had to have the machine provide a lot of the steps —more of the steps than are traditionally done. Most mortgage companies use technology to collect data. We’re using technology to decide the data itself [that should be fed into it]. Our rules engine Tinman can]do all of that work of getting to a commitment letter and reduce the number of human touches involved. We have offices in New York, Charlotte, Irvine, and India.
Nunes: Last August, Better partnered with Palantir to create the proprietary loan platform you mentioned, Tinman Marketplace. What makes this technology competitive?
Garg: The Tinman platform fundamentally differs from the traditional mortgage industry platform. The traditional mortgage industry platforms —like Encompass or Empower Pro — are more built around capturing data and storing data that humans extract. So, a human underwriter might extract from looking at someone’s paystub, what their income is, and then type that into Empower Pro or Encompass, and then use that along with other things to calculate the consumer debt-to-income ratio or other things.
Tinman interacts directly with the consumer; captures the data directly from the consumer; puts it into the calculation engine; figures out what their debt-to-income ratio is going to be; figures out which investors that the debt-to-income ratio is compatible with; routes it into those investor engines; and gets the appropriate pricing. If there’s anything that needs to change, it then automatically displays that to the consumer. So, it’s a very different process than a human entering and taking out data and then coming back to the consumer.
Nunes: How do you review the data customers are providing for accuracy?
Garg: We’ve built one of the largest training data sets in the industry. Anytime we have a rule change that we put into the system, we run it against all the loans that we’ve done previously to see if that rule was applied today, whether it would be consistent or not. This gives us a lot of comfort versus actual human underwriters. Our error rates are substantially lower than that of the rest of the industry as a result. I can’t disclose the error rates.
Nunes: Does Better.com want to be more like an originator or a “white-label” platform, just like Blend?
Garg: Before the pandemic struck, we were on our way to doing that [white-label platform]. We had Ally Bank and American Express. With the pandemic, a lot of those efforts took a backseat. Now, you will see us leverage Tinman to be the mortgage platform of choice all the way to closing for a variety of banks. Now you hear a lot of the banks are getting out of the mortgage industry because it costs them too much to originate. We plan to offer the platform to many other financial institutions, mortgage lenders, and Realtors to use for mortgages as a service.
Nunes: How relevant will the white-label platform be compared to Better’s origination business?
Garg: If you think about a concept like Amazon, Amazon drives two-thirds of its sales from people who are leveraging the Amazon platform, third-party sellers, rather than running it through their own distribution warehouse. So, we aim for a similar mix.
Nunes: What is your strategy with origination channels?
Garg: Right now, we have direct and partnerships, like Ally and Amex, large-scale private white-label partners. We have not done correspondent or TPO [third-party mortgage origination] yet. We are considering it. We have had conversations [with brokers], but I can’t give more details. If the consumer desires a local expert and wants to be handheld every step of the way locally, then a broker might make a better option than what we traditionally deliver today. So we’re thinking about that.
Nunes: What does the path to profitability look like?
Garg: First, we are in the worst mortgage market ever, in a very bad housing market, with a low housing supply. A lot of the issues that we are having today are a result of the macroeconomic environment. That being said, we have to continue improving our conversion rate, which will lower our customer acquisition cost and improve our efficiency,resulting in lower processing costs.
Today, we are about 45 basis points cheaper than the industry average as of Q1. On a $400,000 mortgage, we’re about $1,800 a year cheaper. [We plan] to maintain price competitiveness. That means that we have less money to pay for all the things, and that requires us to be even more efficient in customer acquisition and the processes.
We always guaranteed to the consumer that we would either beat their rate or give them money. We’ve been involved in the price war. As many of the big players in the industry take a step back, that will improve profitability for everyone.
But I can’t say [when Better will be profitable].
Nunes: Would you consider M&A?
Garg: To date, we’ve done three acquisitions, primarily in the U.K. We would be interested in acquisitions here in the U.S. that help us expand our footprint or the range of products that we offer to customers.
Nunes: When the layoff through Zoom happened in December 2020, the board ordered you to take a month-long break from your role, and you went through a mentoring process. Where are you and Better in the journey to recover from that episode?
Garg: Better is a much more mature company, and I’m a much more mature and empathetic leader than I was. I’ve gone through extensive coaching and professional development. With respect to where Better is, the consumers love Better, and we continue to have amazing customer experience scores, and customers come to our doors every day. While there was no other way that we could have done what we did with respect to the layoffs over Zoom, we believe that we’ve learned a lot from it.
Nunes: Where is the mortgage market in the current cycle? Are we close to a market turn?
Garg: I don’t know when the next refi boom will happen. There was a story in Bloomberg about the economist of Goldman Sachs thinking that the first-rate cut is coming in June of 2024. But it’s completely unpredictable. We’ve never had an inflationary environment like what we’ve just had and coming out of it.
Now that inflation is going down, we’ll see what happens — whether we have a hard or soft landing. What is going to be exciting for Better is that One Day Mortgage works well for purchase. One Day Mortgage works extraordinarily well for refinance.
Nunes: What have you learned from the last refi boom?
Garg: We grew our headcount way too quickly. We underestimated how high the rate increases were going to be. This time, we’re going to do a much better job.