Analysis Featured

Buy or refinance 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. 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 tech team develops tools to gather data from applicants in the easiest way possible while also fighting fraud by extracting data from third parties. 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. The mortgage industry is a $14 trillion market but is still stuck in the archaic world of paperwork and high middleman costs. Many prospective homeowners face long lines at  the bank, never-ending phone calls with different points of contact, and seemingly infinite requests for documentation, and they  still wait over 50-60 days to get that elusive approval for their mortgage.

Having experienced all this firsthand, Vishal Garg, founder and CEO, came up with Better Mortgage in March 2015 to disrupt this humongous market and to provide consumers with a hassle-free option for buying and refinancing their homes. Vishal was an asset manager prior to founding Better, and he has been at the forefront of several successful startups (1/0 Capital, Phoenix ABS, MyRichUncle). Vishal is joined by Erik Bernhardsson as CTO and Fil Zembowicz as Head of Product. Prior to joining Better, Erik was the head of machine learning and recommendations at Spotify. Fil is a Harvard University computer science graduate who worked at Google as a product manager before joining Better Mortgage.
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 existing homes were sold in the U.S. This highlights the total addressable market for the New York-headquartered startup.

better

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

Source : http://www.statista.com/statistics/226144/us-existing-home-sales/

The process

Better mortgage is a technology-driven direct lender, targeted on automating and simplifying the mortgage origination method. Better analyzes the applicant and their creditworthiness and matches the worth of the home as compared to its advertised price while simultaneously finding investors who are interested in buying and servicing the loan.

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

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

Better Mortgage is different in this regard; the online rate tool can provide a rate quote in seconds for a variety of loan products. That rate remains the same if the answers provided by the consumer are consistent through processing. 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 automation throughout the process is aimed at  bringing down the cost of homeownership.

Regulation

Headquartered in New York City, Better Mortgage is licensedd in 11 states and is currently operating in New Jersey, California, Oregon, and Washington. They are regulated by the Consumer Financial Protection Bureau (CFPB), Department of Corporations and the Department of Financial Services in the states in which they operate

Mortgage and Refinance Rates

Consumers can go to Better’s simple quick rate tool to look up a custom rate in seconds. They will be instantly matched with competitive rates and are only clicks away from an online pre-approval.

The rates offered by Better  Mortgage to its customers are in-line with most major corporations.

60 % of the Better’s borrowers come from online avenues like Google, Facebook, LinkedIn, LendingTree, Zillow, and the rest of the client base is comprised of “undefined sources” or referrals. They closed $50 million in loan origination last month. The company is aiming to double in size by the year end, and the longterm 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 certainty. Since Quicken Loans is based on a call center model, customers at some point end up talking on the phone whereas Better Mortgage’s entire process can be done digitally.

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, hassle-free process for borrowers.  It seems to me that the capital market side has been perfected by the company. The borrower cost of acquisition and unit economics will be the deciding factor if the company does 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 appraised, inspected, and underwritten at listing. Potential home buyers would then first authorize the real-estate website to connect to their bank account and other financial data APIs in one click and share all relevant financial information. The potential buyer would be able to get approved for a loan size in real time. The website wouldl then filter the properties that match the approved loan size and the buyer would be able to buy a house with one click.

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

Author:

George Popescu
George Popescu

About the author

George Popescu

Serial entrepreneur.

George sold and exited his most successful company, Boston Technologies (BT) group, in 2014. BT was a technology, market maker, high-frequency trading and inter-broker broker-dealer in the FX Spot, precious metals and CFDs space company. George was the Founder and CEO and he boot-strapped from $0 to a $20+ million in revenue without any equity investment. BT has been #1 fastest growing company in Boston in 2011 according to the Boston Business Journal and the only company being in top 10 fastest in 2012-13 as it was #5 in 2012. BT has been on the Inc. 500/5000 list of fastest growing companies in the US for 4 years in a row ( #143, #373, #897 and #1270). After the company sale in July 2014 until February 2015 George was Head-of-Strategy for Currency Mountain ( www.currencymountain.com ), a USD 100 million+ holding company focused on retail and medium institutional currencies, precious metals, stocks, fixed income and commodities businesses.

• Over the last 10 years, George founded 10 companies in online lending, craft beer brewery, exotic sports car rental space, hedge funds, peer-reviewed scientific journal ( Journal of Cellular and Molecular medicine…) and more. George advised 30+ early stage start-ups in different fields. George was also a mentor at MIT’s Venture Mentoring Services and Techstar Fintech in NY.

• Previously George obtained 3 Master's Degrees: a Master's of Science from MIT working on 3D printing, a Master’s in Electrical Engineering and Computer Science from Supelec, France and a Master's in Nanosciences from Paris XI University. Previously he worked as a visiting scientist at MIT in Bio-engineering for 2 years. George had 3 undergrad majors: Maths, Physics and Chemistry. His scientific career led to about 10 publications and patents.

• On the business side, Boston Business Journal has named me in the top 40 under 40 in 2012 in recognition of his business achievements.

• George is originally from Romania and grew up in Paris, France.

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