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Digital mortgage lender Better increased loan production by 45 percent in the second quarter and is on track to originate over $1 billion in mortgages in Q3 for the first time in two years.
Despite this growth, investors did not respond positively to the company’s comeback story, causing shares in Better to drop nearly 20 percent after the company reported a $42 million Q2 net loss and announced a 1-for-50 reverse stock split on Aug. 16 to avoid delisting from the Nasdaq Capital Market.
By boosting Q2 loan production to $962 million, Better saw revenue increase by 41 percent from the previous quarter, reaching $31.4 million.
By maintaining expenses at $73 million, Better managed to reduce its net loss by 18 percent from Q1 and closed the quarter with $507 million in cash, restricted cash, short-term investments, and self-funded loans.
Vishal Garg | Better
“We are very pleased with the growth and continued progress towards profitability we demonstrated in the second quarter of 2024, through a continued challenging macro environment with persistently high rates,” Better founder and CEO Vishal Garg said, in a statement.
“Our investments in purchase and home equity products, where we see growth being less rate-sensitive, generated sizable outperformance. We also saw strong early performance in sales and operating efficiency through investments in AI and our new commission model.”
Shares in Better, which plummeted more than 90 percent last year when the company went public through a merger with a special purpose acquisition company (SPAC), initially dropped 33 percent when markets opened on Thursday morning after the earnings report. Despite a rebound to close at 39 cents, this represented a 19 percent decrease from Wednesday’s closing price of 48 cents.
Better reducing losses
Better, which has accumulated $1.8 billion in cumulative losses through June 30, has reduced expenses by laying off thousands of workers.
At its peak in 2021, the company employed 10,400 workers, with 6,100 in the U.S., 4,200 in India, and 100 in the U.K. By the end of last year, Better had downsized to 820 employees, with 335 in the U.S., an equal number in India, and another 150 in the U.K.
In its first-quarter earnings announcement in May, Garg stated that Better was once again in growth mode, hiring industry veteran Chad Smith to oversee mortgage operations and transitioning to a commission-based compensation structure to attract more experienced loan officers.
While Better has managed to control expenses, revenue growth has been a challenge due to high home prices and mortgage rates, resulting in intense competition among mortgage lenders. Many lenders anticipate business to pick up if mortgage rates continue to decrease from their 2024 highs.
Garg mentioned that while Better has been focused on cutting expenses and improving operating efficiency in a challenging macro environment, the company has also been willing to invest in certain growth areas, such as marketing and compensation for larger loan production teams to drive higher volumes.
Despite reducing vendor compensation expenses, marketing and advertising expenses increased by 87 percent from Q1 to $8.5 million, with plans for further increases to support volume growth, according to Garg.
On the earnings call on Thursday, Chief Financial Officer Kevin Ryan stated that the investments in AI and other technology made by Better should enable the company to scale loan volume significantly with minimal fixed expense growth.
Ryan emphasized that the key factor in returning the company to profitability is revenue, rather than just loan volume.
Kevin Ryan
“In September, we plan to hold an investor meeting where we will outline the math and provide specific details about Better’s path to profitability, focusing on both volume and gain-on-sale margin,” Ryan said. He will be presenting the company’s prospects at investor conferences scheduled for Aug. 14 and Aug. 15.
Better saw an improvement in Q2 gain-on-sale margin to 2.43 percent, attributed by Garg to “increased pricing while remaining the low-cost provider, and a focus on customer retention through improved service, as well as efforts to optimize for the best execution across our network of loan purchasers.”
Better anticipating Q3 originations to surpass $1 billion
*Q3 2022 through Q2 2024 represent actual loans funded. Better estimates Q3 2024 mortgage originations will exceed $1 billion. Source: Better earnings reports.
After funding $58 billion in mortgages during the 2021 refinancing surge, Better’s originations dropped to just $3 billion last year due to the Federal Reserve’s actions to combat inflation, causing mortgage rates to soar to levels not seen in years.
Refinancing volume for Better plummeted by 96 percent last year to only $203 million, a substantial decline from $5.13 billion in 2022.
While the company’s refinancing business saw a significant decline, its transactions with homebuyers also decreased. In 2021, Better funded $2.74 billion in purchase loans, a 56 percent drop from $6.22 billion in 2022.
Better’s latest offering of a home equity line of credit (HELOC) brought in $67 million in originations in 2023. In the second quarter of 2024, Better saw $962 million in loan production, with purchase mortgages leading at 83 percent, followed by HELOCs at 9 percent, and refinancing at 8 percent. The company is optimistic that total loan originations will exceed $1 billion in the third quarter, marking a milestone since 2022.
Better’s CEO, Garg, believes that new regulations for real estate agents working with homebuyers will benefit the company. With buyers likely to conduct online research to find both an agent and a mortgage, Better stands to gain as a result. Garg sees an opportunity for disruption in the mortgage industry, especially as most consumers have not traditionally shopped around for mortgages.
To further bolster its services, Better is hiring real estate agents as W-2 employees and assisting them in obtaining a dual license to originate mortgages. The innovative program, Better Duo, is currently being tested in 27 states and Washington, D.C.
Overall, Better is positioning itself for growth and success in the changing landscape of the real estate and mortgage industries.