Investors aren’t ready to buy in to Better’s comeback story

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Digital mortgage lender Better boosted loan production by 45 percent during the second quarter and said it’s on track to originate more than $1 billion in mortgages in Q3 for the first time in two years.

But investors weren’t buying the company’s comeback story Thursday, with shares in Better losing nearly 20 percent of their value after the company posted a $42 million Q2 net loss and said it would execute a 1-for-50 reverse stock split on Aug. 16 to avoid delisting from the Nasdaq Capital Market.

In boosting Q2 loan production to $962 million, Better saw revenue grow by 41 percent from quarter-to-quarter, to $31.4 million.

By keeping expenses flat at $73 million, Better was able to trim its net loss by 18 percent from Q1 and finish the quarter with $507 million in cash, restricted cash, short-term investments and self-funded loans.

“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 lost more than 90 percent of their value last year when the company went public in a merger with a special purpose acquisition company (SPAC), initially fell 33 percent when markets opened Thursday morning after earnings were released. At 32 cents, Thursday’s low was not far above Better’s all-time low of 30 cents, registered on May 24.

While shares in Better rebounded in afternoon trading following the company’s earnings call to close at 39 cents, that represented a 19 percent drop from Wednesday’s closing price of 48 cents.

Better trimming losses

Better, which has racked up $1.8 billion in cumulative losses through June 30, has slashed expenses by laying off thousands of workers.

At the company’s peak in 2021, it employed 10,400 workers with 6,100 located in the U.S., 4,200 in India and 100 in the U.K. By the end of last year, Better had slimmed down to 820 employees, with 335 based in the U.S., an equal number in India and another 150 in the U.K.

In announcing first-quarter earnings in May, Garg said Better was in growth mode again, hiring industry veteran Chad Smith to supervise mortgage operations and shifting to a commission-based compensation structure to hire more experienced loan officers.

While Better has managed to flatten expenses, it’s struggled to grow revenue as elevated home prices and mortgage rates have forced mortgage lenders to fight for a over a smaller pie. If mortgage rates continue to come down from 2024 peaks, many lenders expect business to rebound.

Garg said that while Better has been “intensely focused on reducing expenses and maximizing operating efficiency during the highly challenging macro environment,” it’s also been willing to “lean into certain growth expenses, such as marketing and compensation for larger loan production teams to produce higher volumes.”

While Better slashed vendor compensation expenses, marketing and advertising expenses were up by 87 percent from Q1, to $8.5 million, “and we expect these to further increase in order to support volume growth,” Garg said.

On Thursday’s earnings call, Chief Financial Officer Kevin Ryan said the investment Better has made in AI and other technology should allow it to scale loan volume by a factor of 10 with “very little fixed expense growth.”

Ryan said the most critical number to returning the company to profitability is revenue, rather than loan volume.

“What we’re going to try to do in September is do a investor meeting where we actually lay out that math and create specificity [about Better’s path to profitability], but it will be a combination of volume and gain-on-sale margin,” Ryan said. Ryan will be pitching the company’s prospects next week at investor conferences scheduled for Aug. 14 and Aug. 15.

Better saw Q2 gain-on-sale margin improve to 2.43 percent, which Garg attributed to “increased pricing, while still 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 expecting Q3 originations to exceed $1 billion

Better, which funded $58 billion in mortgages during the 2021 refinancing boom, saw originations dwindle to just $3 billion last year as the Federal Reserve’s efforts to fight inflation sent mortgage rates soaring to levels not seen in two decades.

Better’s refinancing volume dropped 96 percent last year to just $203 million, down from $5.13 billion in 2022.

While Better saw most of its refinancing business evaporate, it also did significantly less business with homebuyers. Last year, Better funded $2.74 billion in purchase loans, down 56 percent from $6.22 billion in 2022. Better’s newly launched home equity line of credit (HELOC) offering generated $67 million in 2023 originations.

During Q2 2024, purchase mortgages accounted for 83 percent of Better’s $962 million in loan production, followed by HELOCs (9 percent) and refinancing (8 percent).

Better said it expects total loan originations will surpass $1 billion in Q3 for the first time since 2022.

Garg said new rules governing how real estate agents work with homebuyers that take effect Aug. 17 should benefit Better, because buyers will be more likely to do online research to find both an agent and a mortgage.

“I think that’s forced consumers to potentially shop around Realtors, and then if they’re going to shop around for Realtors, they’re going to go online,” Garg said. “And when they go online, they come to us.”

With research showing that most consumers haven’t been willing to shop for a mortgage in the past, there’s “potential for there to be significant disruption,” Garg said.

Better is also hiring real estate agents who work with buyers as W-2 employees and helping them obtain a dual license, allowing them to originate mortgages. The program, Better Duo, is being piloted in 27 states and Washington, D.C.

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Email Matt Carter