A Crashing Mortgage Industry, Led By Better Mortgage; Uh Oh…

    Better Mortgage Crashed Its Ferrari Into A Wall Yesterday!

    Better Mortgage dominated the refi market for years all the way through COVID by pretty much giving away loans in order to capture market share – like so many tech firms do.

    And … it didn’t work. At all.

    Investors like SoftBank and Goldman Sachs originally fell for Better’s story (tech and model made it the “Ferrari” of mortgage lending) investing $1.5 billion. But, Better lost well over $1 billion in 2021 and 2022 (when times were still good) and almost $90 million in Q1 of this year.

    Better has since cut over 90% of their workforce, but they still continue to bleed.

    Yesterday, they went public via a SPAC with the share price starting at $17.44, but plummeting to $1.15 by day’s end. So what happened?

    Investors seem to have figured out that investing in companies relying on refinances and continually falling rates is a bit risky. Investors also have probably soured on Better’s CEO, who famously called his employees “dumb dolphins” and callously laid off 900 people via a Zoom call.

    If readers want more detail, Forbes just wrote about it in depth: Better.com CEO Who Fired 900 People On Zoom Is Struggling To Keep His Company Afloat.

    Entire Mortgage Industry Is Crashing!

    More tellingly though, Better Mortgage is not alone! The entire mortgage industry is reeling, as volume is down almost 75% from 2021 levels but staffing remains at about 80% of 2021 levels (meaning we have WAY TOO MUCH CAPACITY).

    It seems that the entire industry is maintaining full staff in order to be ready for the next refi boom… that keeps getting pushed out. And, as a result, the losses are staggering.

    Guild Mortgage, for example, lost $33 million in Q1 of this year, and loanDepot lost $60 million.

    On average, it costs between $10,000 to $11,000 to produce a single loan, and the average LOSS per loan was over $500 in Q2 (yes, lenders are losing money to close loans because it is competitive out there).

    I pulled much of this data from this excellent article: Independent Mortgage Banks Still Losing Money on Each Origination in 2023.

    Who Is Making A Profit?

    There are companies still making money, but it is often because they maintain large mortgage servicing portfolios – with overall profits coming from servicing fees.

    A few, however, like our mortgage bank are squeaking out profits by just operating very lean and mean.

    Does Size Matter?

    Yes, but not in a good way. Size can help mortgage banks if it enables them to cultivate better relationships with large investors that buy loans. But many of those investors (big banks) have pulled out of the market, and most mortgage banks are primarily focused on Fannie, Freddie, VA, FHA, and a bit of Non-QM – meaning we are all selling loans to the same people for the same prices.

    Large mortgage banks did have some economies of scale advantages but those have largely been lost to better tech and outsourcing opportunities.

    Size actually hurts many of the large mortgage banks because they have far too much fixed infrastructure, too many middle managers, and an inability to pivot or be nimble.

    JVM is a great example of “nimble,” as we cut costs quickly, we brought on over 20 new investors in recent months (primarily in the non-QM and wholesale space), we successfully pursued niches (non-QM, low down payment, BK takeout loans, etc.) we’d never touched before, we moved into new markets, we opened up digital advertising, we implemented a huge tech application, we ramped up our SEO, we moved much of our labor overseas very quickly and efficiently, and, most importantly, we launched numerous massive sales and marketing campaigns that have brought in an enormous number of new leads.

    I am not trying to impress anyone, as other companies have done the same and I am just trying to make a point: We did everything above in a matter of weeks, while it would take the big guys months or even years to do the same (if they could do it all).

    In other words, “nimble” matters far more than size.

    What Does All Of This Mean?

    If rates don’t fall relatively soon, we will see a much different lending landscape in the near future. And borrowers and agents alike should be careful when thinking about whom they’re hitching their wagons to.

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