Re-architecting the mortgage buying experience

For one of the largest purchases we as consumers will ever make, the homebuying process is shockingly stressful and complicated. One of the most nerve-wracking aspects of buying a home is securing a mortgage. Legacy infrastructure that underpins the US mortgage market creates friction across all stakeholders involved in the process. As commerce technology investors, we look for businesses disrupting large legacy industries. With housing being the largest spend category in the US – accounting for a third of all consumer dollars – we’re excited to announce our investment in Better, a company transforming the way mortgages are purchased.

To secure a mortgage today, a homebuyer pays up to 10% of their home value in fees to middlemen and is forced to wait on average 45 days to be approved for a loan, with 5% of approved purchase contracts never closing.

Portfolio investors buy pools of mortgages in the secondary market and collect the stream of interest income payments and loan principals at maturity. These investors include global banking institutions (like Citibank and Chase) that require the interest on purchased mortgages to offset retail deposits, in addition to regional banks, credit unions, and sovereign wealth funds looking to maintain a portfolio of loans for investment purposes. The process is largely brokered through traditional phone, fax, and paper-based channels. Additionally, under the Community Reinvestment Act (CRA), regional banks are mandated to buy locally-sourced loans, which can be difficult to find due to a systemic lack of data that exists in incumbent loan origination processes.

The cost of originating mortgages through brick-and-mortar branch networks and teams of high-cost loan officers is prohibitively expensive. We’ve seen cases over the past few years of banks leaving the mortgage business altogether after years of losing money on loans originated. Financial institutions are actively looking to lower costs of their mortgage businesses through a number of digital-first channels, the most prevalent of which digitizes the top-of-funnel lead generation and allows customers to input their information online. However, by digitizing only the mortgage wrapper and leaving legacy loan underwriting processes untouched, banks are limiting their efficiency gains.

The Market

The US mortgage market is massive. Consumer demand totals more than $1.5 trillion in annual new loan origination volume and $600 billion in refinances, with more than $10 trillion in mortgage debt outstanding. The market is also highly fragmented with top lenders only accounting for 5–6% share of new originations. While the real estate market has experienced volatility over prior market cycles, it is important to note that economic downturns are not necessarily associated with lower mortgage origination volumes. Looking at the last three recessions over the past 30 years, only the ’08 financial crisis had a corresponding decline in mortgage demand.

Retail banks must complete $1 trillion of third-party mortgage purchases annually to meet their interest obligations on deposit accounts. Regional banks with a mandate to buy FHA and CRA loans are willing to pay a premium for these loans to maintain their beneficial tax status.

For financial institutions looking to offer mortgage products to their customers, originating mortgages themselves can be cost prohibitive. Historically this led to the rise of outsourced private-label mortgage originators such as PHH, a large public company that sold its mortgage underwriting business in 2017 after severe customer churn due to service and cost-related issues. Legacy outsourced providers haven’t used technology to fundamentally improve the origination process, and thereby remain cost ineffective.

How Does Better Solve This Problem?

Better provides the first end-to-end digital workflow tool for mortgage origination, underwriting, and secondary sale on the market today. Vishal Garg, Better’s founder and CEO, experienced this systemic inefficiency firsthand from both the investor and homebuyer perspective. Prior to founding Better, Vishal was a career mortgage trader and founded a startup focused on improving the student loan process.

In the early innings, Better built workflow software that retrofitted existing mortgage underwriters for improved efficiency. Management soon realized that incumbent processes were so manual with deeply entrenched data silos between the lead generation, underwriting, and secondary sale processes, they could only truly solve this problem with a full-stack solution. They decided to build an end-to-end mortgage platform from scratch, with fully digitized workflows that leverage automation and back-end API integrations to speed up previously manual processes. The core of Better’s value proposition stems from its ability to improve loan officer efficiency, resulting in lower dollars per loan (75% below industry average) and processing hours per loan (3x faster approval).

Better provides the first end-to-end digital workflow tool for mortgage origination, underwriting, and secondary sale on the market today.

From the homebuyer’s perspective, using Better to get a mortgage reduces middlemen fees by up to 50% and time to lock a mortgage rate from five days to 48 hours. The transparency provided by Better’s “Pizza Delivery Tracker” for mortgages creates a fresh, trusted brand for consumers. Better’s full-stack mortgage platform digitizes each step of the financing process on the back-end. An intuitive, online platform guides customers through determining their price range, getting certainty around loan terms, and ultimately funding their mortgage, while keeping real estate agents up-to-date on progress. No other mortgage company today has a single system that owns all the data, with customers interacting directly with the system across the entire mortgage process. The level of visibility in Better’s digitized supply chain is made possible through an end-to-end data gathering, underwriting, processing, and packaging system on a single platform. Better’s platform is computer-driven, with automated API calls, eliminating process friction that exists within legacy systems as humans port data and decisioning across disparate systems. Furthermore, Better is riding a millennial tailwind of higher-value purchases being moved online. From a consumer perspective, online mortgages are a relatively new and untapped distribution channel driven by millennial shopping behavior.

For secondary investors, Better creates the first fully digitized capital markets platform for transacting on mortgages based on individual portfolio needs. With over ten thousand data attributes on each loan, Better precisely matches supply and demand for each loan, enabling them to achieve optimal loan-level pricing. This becomes especially profitable for loans with favorable size, prepayment, or region characteristics, which certain investors are willing to buy at a premium. Through end-to-end data validation files provided to secondary buyers, Better originates loans with cleaner data than any other seller on the market. Investors get a more comprehensive view into their counter-parties with each ‘financial DNA profile’ Better captures, as well as with API integrations directly into their systems. Secondary investors are willing to pay a premium for Better’s higher-quality loans, with over 70% of US mortgage buyers represented on Better’s capital markets platform.

For banks and fintech companies looking to offer mortgages to their customers, Better serves as a private-label, outsourced mortgage provider. For banks already in the mortgage business, this allows them to supplement their existing footprint by increasing existing loan officer capacity. For new entrants, Better enables them to profitably offer mortgages, without establishing a physical footprint themselves. Outsourced-mortgages-as-a-service is not a new model, with legacy players including PHH providing white-labeled mortgage origination since 1946, however, Better is differentiated from an improved efficiency and pricing standpoint. Each loan Better originates is lower-cost and resells at a higher price than any incumbent outsourced provider, plus, the frictionless customer experience creates loyalty for further purchases and refinances. Ally Financial, one of the largest digital banks in the US, is a vocal customer advocating for Better’s end-to-end digital mortgage product.

Why Did Activant Invest?

At Activant, our investment thesis centers around commerce technology transforming legacy industries. We are excited to invest in Better, a full-stack platform improving the economics for all key stakeholders in the trillion-dollar mortgage market.

We’ve seen how full-stack platforms can be transformative to legacy industries through our investments in Indigo, a vertically integrated agtech platform creating alignment through the crop-growing process, and Bolt, a horizontally integrated ecommerce checkout, payment, and fraud platform for independent merchants. We feel strongly about investing behind the next generation of shopping experience and leveling the consumer purchase playing field — Better creates a next-generation homebuying experience, with the initial goal of making securing a mortgage as easy as purchasing an item from Amazon.

We’re excited to partner with Better’s outstanding team alongside a strong group of strategic and financial investors. Better was recently honored by Inc. Magazine on its list of 5,000 fastest growing private companies in the United States, as well as in Fortune’s Best Places to Work in NYC and Forbes’ Fintech 50. We are confident that with management’s diverse background across the mortgage, finance, and technology industries, the company is well-prepared for hypergrowth. We are proud to stand behind Vishal’s and his team’s mission to build a company transforming the homebuying experience.