Buy a house with 1-click

Buy a house with 1-click

  Goldman Sachs, through their principal strategic investment arm, became the first Wall Street Bank to invest in a mortgage originator since 2006. They own around 10% of Better, an online mortgage bank. In December 2015, Better mortgage received $30 million in Series A investment from Goldman Sachs, Pine Brook, KCK Group Ltd, 1/10 capital, […]

Buy a house with 1-click

 

Goldman Sachs, through their principal strategic investment arm, became the first Wall Street Bank to invest in a mortgage originator since 2006. They own around 10% of Better, an online mortgage bank.

In December 2015, Better mortgage received $30 million in Series A investment from Goldman Sachs, Pine Brook, KCK Group Ltd, 1/10 capital, and IA Ventures.

It took the founding team 18 months to turn the idea into a reality; they took over a mortgage bank and completely remodeled it to suit the preferences of today’s digital-first citizens. Better mortgage funded 10,753 loans to date which represents about $5bil in origination.

Better only originates digital mortgages that match conditions of one of their 15+ mortgage buyers. As such everything they originate is being sold immediately. Final investors in these mortgages are yield-seeking lenders ranging from banks to sovereign wealth funds.

Better mortgage comprises of two divisions, one is the technical team and the second is capital markets’ team. The capital market team is responsible for understanding the needs of investors, what they want to own, their underwriting requirements and then use that information to facilitate building the software that helps to match those requirements with consumers and property attributes. The technical team is responsible for gathering data from the applicants in the easiest way possible and also extract data from third parties to fight fraud. Both processes are carried forward hand in hand to complete the approval process.

The market

Real estate is one of the largest tangible assets with total US real estate stock worth $24 trillion. Consumers are spending almost 33% of their incomes on housing. Mortgages is a $14 trillion market but is still stuck in the archaic world of paperwork and high middlemen costs.  Long wait in the banks, talking to a never ending list of executives and officers, providing an infinite number of documents and still waiting over 50-60 days to get that elusive approval for the mortgage, are the most common issues faced by prospective homeowners.

Having experienced all this first hand, Vishal Garg, founder and CEO came up with Better mortgages in March 2015 to disrupt this humongous market and to provide the consumers a hassle-free option to buy or refinance their mortgage. Vishal was an asset manager and was at the forefront of many successful start-ups (Phoenix holding, MyRichUncle). Along with him, Better mortgage team comprises of Eric Bernhardsson (CTO). He was the head of machine learning and recommendations at Spotify.com. Fil Zembowicz, head of products is a Harvard University pass out and was working at Google’s as a product manager before he joined Better mortgages.

The statistic shows the number of existing homes sold in the United States from 2005 to 2015, and a forecast thereof for 2016 and 2017. In 2014, around 4.94 million of existing homes were sold in the U.S. This highlights the total addressable market for the New York-headquartered start-up.

Number of existing homes sold in the United States from 2005 to 2017 (in million units)

Source : 

 

The process

Better mortgage is a direct lender and its business model is technology driven, targeted on automating and simplifying the mortgage origination method. It analyzes the applicant and his credit worthiness and matches the worth of the home as compared to its price for which it is available. Simultaneously it finds investors who are interested in buying the loan and service it. Once the loan is approved, loan appears on the Better mortgage balance sheet, and after that, they offload the loan.

Usually, it takes them 15 days to offload the loan to the investor. After the loan is finalized, the borrower makes the payments to the investor who services the loan till it’s paid off. Investors usually buy single loans; they are able to see the complete data of each individual online, which enables Better mortgages to get competitive rates as compared to their peers.

Property sellers usually pay almost 9% of the property cost as transaction charges for various fees. Also, buyers are not able to lock in on the APR until the commitment day.

Better mortgage is different in this regard; it provides a locked 30-year fix rate when asks for a quote. And, that rate can remain locked if the answers provided by the clients very in the due diligence process. Once that rate is finalized, Better mortgage will provide the funding in an average of 26 days. Even the appraisal process for the property is done online as the system is connected directly with the appraisers. Scheduling an appointment with the appraiser is done through the website as well. The aim is to bring down the cost of home ownership.

Regulation

Better mortgage is regulated in 11 states and they have offices in New Jersey and Connecticut and currently operate in California, Oregon, and Washington. They are regulated by Consumer Financial Protection Bureau (CFPB), Department of Corporations in whichever state they operate in, and Department of Financial Services.

Rates

Depending upon the product, rates can vary. If it is 5/1 product, the rate could be anywhere between 2% to 2.25% or if the product is 90 days LTD (long term debt), the rate could vary anywhere from 7.25% to 8%.

60 % of the borrowers come from online avenues like Google, Facebook, LinkedIn, Lending Tree, Zillow and rest of the client base is comprised of “undefined sources” or referrals. They did loan origination worth $50 million last month. The company is aiming to double in size by the year end and the long-term goal is to have at least 10 % of market share.

Rocket vs Better

In comparison to Rocket mortgage launched by Quicken Loans, Vishal believes that Better mortgage is substantially better in terms of usability, customer experience and on the basis of certainty as well. Since Quicken loan is based on a call center model, so customers at some point end up talking on the phone whereas Better mortgage’s entire process is digital first and easy to use.

Though big banks have an advantage due to their deposit model, 80% of the mortgages are through Fannie Mae and Freddie Mac.  Better mortgage is an approved seller to Fannie as well.

The founder has been able to form an experienced team and bring on board influential investors like Goldman Sachs. The company understands the market need and is leveraging its proprietary technology to create a cheaper and a hassle free process for the borrowers.  The capital market side seems to be have been perfected by the company. The borrower cost of acquisition and unit economics will be the deciding factor if the company can actually become a giant in the industry.

The future

The company envisions a future where all properties listed on a property website would have already been upraised, inspected and underwritten at listing. Potential home buyers would then 1st authorize the real-estate website to connect to their bank account and other financial data APIs in 1 click and obtain all their financial information . The potential buyer will then get approved for a loan size in real time. The website will then select the properties that match the approved loan size and the buyer would be able to buy a house with 1-click.

A lot of challenges remain. But in a fully digital world with property data from Zillow and underwriting technology that takes decisions in seconds, perhaps we are not that far away from buying a property in 1-click.

Author:

George Popescu