Better Home & Finance Holding Company (NASDAQ: BETR), parent company of Better Mortgage (“Better”), announced a GAAP-adjusted net operating loss of $54.1 million compared to net losses of $41.4 million in the second quarter and $353.9 million in the third quarter of 2023.
Driven by refinance and home equity product growth across 3,443 units, however, the New York-based, digitally native lender reported third-quarter funded loan volumes of $1.035 billion, up 42% on an annual basis and up 8% from the second quarter’s $962 million in funded loan volumes.
Narrower year-over-year losses and a boost in refinances and HELOCs were not the banner take-aways from Better's third-quarter performance, though, at least not to the company's executives.
For a direct-to-consumer (DTC) lender that funded nearly 150,000 loans totaling nearly $55 billion in 2021, more than 80% of which were refinances, third-quarter purchase volume of $739 million comprising 71% of Better’s quarterly production highlights the lender’s evolving priorities.
"We have to engineer a fundamental turn-around story built around our purchase mortgage business and our HELOC business," Better's CEO and Founder, Vishal Garg, told NMP in an interview discussing the earnings. He compared the profit-trajectory of Carvana to Better's.
"They were a marketplace darling during COVID in 2020 and 2021. Then they had a very rough 2022 and 2023," Garg explains. "They've restructured themselves and now they've grown dramatically and improved metrics across gross profit, contribution margin, and are now on their way to profitability as a business."
Over the next couple of quarters, mortgage rate relief will remain elusive, leaving the mortgage industry writ large in something of a holding pattern. New demand is trapped with sidelined borrowers unable to afford stubbornly high mortgage rates and high home prices.
"We've got to basically do the same thing," he continues. "Improve our gross profit through loan manufacturing efficiency, improve our contribution margin by getting better at attracting customers and converting them through initiatives like Betsy and through diversification of marketing channels, and then continuing to cut corporate costs so they become a smaller and smaller percentage of revenue."
Only roughly 10% of purchase borrowers are transacting direct-to-consumer, Garg says, and 40% to 45% are going to local mortgage banks and brokerages. Third-quarter DTC volumes of $776 million for Better marked an 102% increase on an annual basis and 16% quarterly, to comprise 75% of Better’s third-quarter loan volumes.
"We have pivoted really hard,” says Garg, “from doing 5% of our loan volume as purchase loans to 71% in the past three years. I don’t think any of our direct-to-consumer peers, whether it’s loanDepot, Rocket, have the percentage in purchase. So, I think we’re pretty well positioned from that perspective because you’ll see purchase volume increase, you’ll see HELOC volume increase, and refis are going to be pretty constrained.”
“Purchase is where the market generally is,” says Kevin Ryan, Better's CFO. "This is where customers want to be and we need additional channels to get to those customers.”
Accordingly, in the third quarter Better announced plans to diversify its distribution channels, hiring the executive team from NEO Home Loans to build a distributed retail channel for putting the end-to-end efficiencies of Tinman™, the company’s proprietary technology platform, into the hands of local loan officers.
“We’ve built technology for ourselves to originate direct-to-consumer,” Garg explains. “Then we built technology for B2B partners like Ally [Bank] to help capture market share that the banks have in mortgage origination. Now we’re building technology that can be leveraged by local loan officers, loan officer teams, or small mortgage brokers and independent mortgage banks.”
By expanding the market’s access to Better’s Tinman platform, the company hopes to convert a higher share of the more than 50,000 pre-approval starts the platform initiates every month, a “pretty significant percentage of total home shoppers every year,” says Garg.
Another strategy deployed in the third quarter for converting those leads was Better’s launch of Betsy™, the first voice-based AI loan assistant in the mortgage industry. Living within the Tinman ecosystem Betsy is programmed to communicate with prospective and existing Better clients to answer application inquiries, collect outstanding application data, and chase leads.
Not without controversy, Better’s management has slashed compensation expenses since the market’s flip-flop in 2022. The company cut compensation expenses a further $45 million from the third quarter of 2023 to the third quarter of 2024, in addition to lowering general business expenses and vendor costs.
The company expects fourth-quarter funded volumes to remain in-line with third-quarter volumes “given softer seasonality partially offset by continued growth initiatives” and a focus on “managing toward profitability in the midterm.”
“We’re getting better and better in our unit economics,” explains Ryan. “What are we paying per loan to a vendor? What are we paying per loan and marketing dollars? What are we paying per loan and sales and operations costs? It’s a big focus for us to really improve those economics because then that allows you to lean into marketing harder."
Ultimately, “maintaining cost discipline and efficiency discipline” works in Better’s favor whether the origination environment improves earlier or later into 2025.
Offsetting compensation savings, the company’s total expenses increased roughly $9.5 million on a quarterly basis “resulting from increases in marketing spend, loan production team compensation, and loan origination expenses, as well as the absence of certain nonrecurring expense benefits” from the second quarter," the earnings report read.
As the fourth quarter and first quarter of 2025 unfold, Garg says his eyes are on the widening spread between 30-year mortgage rates and 10-year Treasury yields that continue to widen amidst macroeconomic volatility.
“The election means that there’s regulatory certainty for banks around mortgages and in consumer finance in general,” Garg believes. “I think you’re going to see banks start to step in to take advantage of the fact that their deposit rates are coming down, but the mortgage rates are staying higher up, so the return on mortgages becomes wider.”
That could translate to more liquidity in the market, he says, helping lower rates for customers.
"We decided to lean into thoughtful growth in 2024 from the lows of 2023. I think we gained market share as a result of that, and I think we improved our positioning," Garg says.
