Executives with Better Home & Finance Holding, the parent company of digital lender Better.com, are optimistic about their origination business becoming a disruptor in the industry, despite facing substantial losses and more significant downsizing.
In the third quarter, the company reported a loss of $340 million. A substantial portion of that is attributed to a mark-to-market derivative related to its merger to go public in August. During this period, it funded $731 million across 2,067 loans, marking a 36% volume decline compared to the same period the previous year.
Better made its NASDAQ debut in August following a merger with special purpose acquisition company (SPAC) Aurora Acquisition Corp.
The firm currently has no plans to raise additional capital, having garnered $565 million from the SPAC transaction. As of Sept. 30, 2023, Better had $584 million in cash and short-term investments and $424 million in total warehouse capacity.
Vishal Garg, Better's CEO and founder, expressed confidence in the company's ability to invest in technology and innovative products, despite challenges in the mortgage market. During an earnings call he noted that while others were pulling back, Better was positioning itself for future growth.
Better's loan volumes declined significantly, from $57 billion in 2021 to $11 billion in 2022, with the spike in mortgage rates and reduced refinancing opportunities. In Q3 2023, as mortgage rates reached 8%, the company's volumes fell further to $731 million, down from $900 million in Q2 2023 and $1.1 billion in Q3 2022.
The gain-on-sale margin also dipped, reaching 1.94% in Q3 2023 and 2.21% in the first nine months of 2023, compared to 2.34% in the first half of 2023. Consequently, revenues dropped to $16 million in Q3 2023 from $19 million in Q3 2022.
To combat these challenges, Better initiated aggressive cost-cutting measures, including layoffs, reducing total expenses by 45% year-over-year in Q3 2023.
Better aims to capture 1% of incremental refinance volume in 2024 and 2025, which, at the current gain-on-sale margin, could generate an additional $103 million in revenue over the next two years.
Regarding future growth, Better plans to leverage automation to scale up its operations and become more productive. It claims to provide borrowers with a commitment letter in an average of eight hours since the launch of the One Day Mortgage program in Q1 2023.
Looking ahead, Better anticipates a funded loan volume of $500 million in Q4 2023, with an improvement in adjusted EBITDA compared to Q3 but still expects a loss.
Despite the challenging market conditions, Better remains optimistic about its path to profitability, aiming to achieve it with some market improvements. However, the current 8% interest rates pose a significant hurdle, leading the company to prioritize cost reduction.
“Similar to the first half of 2023, in the third quarter of 2023 we continued to navigate through a very challenging market environment with consumers experiencing the highest mortgage rates seen in the past 20 years," Garg said. "Securing additional capital during the third quarter gives us confidence to continue investing in our technology and innovative products, such as digital HELOC and One-Day Mortgage. While we have been seeing others in the mortgage market pull back, we believe these investments position us strongly when some of these macroeconomic adversities lessen."
