An amended S-4 filed by Aurora Acquisition Corp. with the Securities and Exchange Commission last week gave the mortgage industry a glimpse into how its partner Better.com fared in the second quarter. And it wasn’t great.
The digital mortgage lender, which plans to go public via a special purpose acquisition company (SPAC), reported a net loss of $86 million in the second quarter.
The loss was primarily driven by a “decrease in overall funding activities in the mortgage market” that resulted in a “significant” decline quarter-over-quarter of the company’s gain on sale margin.
According to the filing, Better’s gain-on-sale margin declined from 301 basis points in the first quarter to 160 bps in the second, which in turn resulted in a drop in revenue of $171.8 million.
Better also expects this trend to continue, telling investors in the filing that gain-on-sale levels will remain “depressed through 2021 relative to the levels of the quarter ended March 31, 2021.”
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“Given the substantial changes in macroeconomic conditions and in our industry, similar financial projections, as well as the underlying assumptions, would be materially different if prepared today on the basis of the current market conditions and would project lower revenue, net income and gain on sale for us,” the lender added.
The company’s financial results could cast doubt on how it will fare in a more purchase-heavy market, especially since the company has predominantly relied on refis to drive business.
The filing revealed that refi loans made up 85% of funded loan volume for Better.com in last six months, while purchase volume was close to 15%. The average lender is closer to a two-thirds refi-purchase mix.
Better.com said in the S-4 filing that if purchase loan production comprises more of the market that their “market share would be materially and adversely affected.”
Other factors that could weigh down on the digital mortgage lender’s GOS include increased competition, the reduction in overall refis as a result of higher interest rates, and slower growth of new home purchase activity, the filing said.
A spokesperson for the company said they are facing “the same headwinds as everyone in the industry” and that they are ” investing heavily in growing our business and providing fantastic service to our customers.”
In May, Better.com entered into an agreement to merge with Aurora Acquisition Corp., a blank check company sponsored by Novator Capital. Better said at the time that the transaction reflects “an implied equity value for Better of approximately $6.9 billion and a post-money equity value of approximately $7.7 billion.”
Unlike traditional IPOs, SPACs usually have fewer regulatory demands, greater speed to capital, and lower fees. They have been criticized for performing poorly for investors, and for company insiders and founders having conflicts of interest that aren’t properly disclosed to investors.
CEO Vishal Garg, who founded Better in 2016 as an entirely digital lender, called the merger “the beginning of an amazing chapter in Better’s history.”
Since the company’s inception it has grown at a stunning rate. Data published by the company shows that it funded $24.2 billion in mortgage originations in 2020. Better has also made strides in real estate and insurance. The company claims that the platform placed $7.7 billion in title insurance and $1.4 billion in homeowner’s insurance, while their real estate arm made $691 million in transaction volume.
Better’s workforce of loan originators is entirely in-house and does not work on commission, a rarity in the mortgage world. Better.com said its labor cost was 57% lower than the industry average and its loan officers close 16.2 loans per month, compared to the industry average of 7.1 per month. The firm is currently licensed in 47 states and Washington, D.C.
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